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EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.tv493034_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.tv493034_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.tv493034_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 March 31, 2018

 

¨ 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.

1,434,136 shares of common stock, $4.00 par value, outstanding as of April 30, 2018

 

 

 

 

 

 

Village Bank and Trust Financial Corp.

Form 10-Q

 

TABLE OF CONTENTS

 

Part I – Financial Information  
   
Item 1.  Financial Statements  
   
Consolidated Balance Sheets March 31, 2018 (unaudited) and December 31, 2017 3
   
Consolidated Statements of Operations For the Three Months Ended March 31, 2018 and 2017 (unaudited) 4
   
Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2018 and 2017 (unaudited) 5
   
Consolidated Statements of Shareholders’ Equity For the Three Months Ended March 31, 2018 and 2017 (unaudited) 6
   
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2018 and 2017 (unaudited) 7
   
Notes to Consolidated Financial Statements (unaudited) 8
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 57
   
Item 4. Controls and Procedures 57
   
Part II – Other Information  
   
Item 1.  Legal Proceedings 58
   
Item 1A. Risk Factors 58
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 58
   
Item 3.  Defaults Upon Senior Securities 58
   
Item 4.  Mine Safety Disclosures 58
   
Item 5.  Other Information 58
   
Item 6.  Exhibits 59
   
Signatures 60

 

2

 

 

Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
March 31, 2018 (Unaudited) and December 31, 2017
(in thousands, except share and per share data)
 

 

   March 31,   December 31, 
   2018   2017 
Assets          
Cash and due from banks  $16,276   $17,810 
Federal funds sold   -    - 
Total cash and cash equivalents   16,276    17,810 
Investment securities available for sale   48,302    49,711 
Loans held for sale   5,372    8,047 
Loans          
Outstandings   387,727    368,709 
Allowance for loan losses   (3,343)   (3,239)
Deferred fees and costs, net   652    699 
Total loans, net   385,036    366,169 
Other real estate owned, net of valuation allowance   1,017    1,788 
Assets held for sale   610    610 
Premises and equipment, net   12,905    12,982 
Bank owned life insurance   7,307    7,268 
Accrued interest receivable   2,522    2,600 
Other assets   9,472    9,989 
           
   $488,819   $476,974 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $114,088   $104,138 
Interest bearing   307,410    307,486 
Total deposits   421,498    411,624 
Federal Home Loan Bank advances   12,300    12,300 
Long-term debt - trust preferred securities   8,764    8,764 
Subordinated debt, net   5,539    - 
Other borrowings   3,328    1,584 
Accrued interest payable   176    93 
Other liabilities   2,984    3,275 
Total liabilities   454,589    437,640 
           
Shareholders' equity          
Preferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2018 and 5,027 shares issued and outstanding at December 31, 2017   -    20 
Common stock, $4 par value - 10,000,000 shares authorized;  1,434,136 shares issued and outstanding at March 31, 2018 and 1,430,751 shares issued and outstanding at December 31, 2017   5,682    5,672 
Additional paid-in capital   53,084    58,055 
Accumulated deficit   (24,394)   (24,693)
Common stock warrant   732    732 
Stock in directors rabbi trust   (998)   (1,010)
Directors deferred fees obligation   998    1,010 
Accumulated other comprehensive loss   (874)   (452)
Total shareholders' equity   34,230    39,334 
           
   $488,819   $476,974 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Operations
Three Months Ended March 31, 2018 and 2017
(Unaudited)
(in thousands, except per share data)

 

   Three Months Ended 
   2018   2017 
Interest income          
Loans  $4,488   $3,958 
Investment securities   263    163 
Federal funds sold   26    11 
Total interest income   4,777    4,132 
           
Interest expense          
Deposits   631    566 
Borrowed funds   135    73 
Total interest expense   766    639 
           
Net interest income   4,011    3,493 
Provision for loan losses   -    - 
Net interest income after provision for loan losses   4,011    3,493 
           
Noninterest income          
Service charges and fees   457    453 
Mortgage banking income, net   823    1,143 
Loss on sale of investment securities   -    (9)
Other   53    63 
Total noninterest income   1,333    1,650 
           
Noninterest expense          
Salaries and benefits   2,943    3,009 
Occupancy   330    267 
Equipment   215    183 
Cease use lease obligation   -    (125)
Supplies   57    56 
Professional and outside services   720    786 
Advertising and marketing   79    89 
Foreclosed assets, net   (69)   (192)
FDIC insurance premium   77    69 
Other operating expense   508    452 
Total noninterest expense   4,860    4,594 
           
Income before income tax expense   484    549 
Income tax expense   72    134 
           
Net income   412    415 
           
Preferred stock dividends and amortization of discount   (113)   (158)
Net income available to common shareholders  $299   $257 
           
Earnings per share, basic  $0.21   $0.18 
Earnings per share, diluted  $0.21   $0.18 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2018 and 2017
(Unaudited)
(in thousands)

 

   2018   2017 
         
Net income  $412   $415 
Other comprehensive loss          
Unrealized holding losses arising during the period   (537)   (53)
Tax effect   113    18 
Net change in unrealized holding losses on securities available for sale, net of tax   (424)   (35)
           
Reclassification adjustment          
Reclassification adjustment for (gains) losses realized in net income   -    9 
Tax effect   -    3 
Reclassification for (gains) losses included in net income, net of tax   -    6 
           
Minimum pension adjustment   3    3 
Tax effect   1    1 
Minimum pension adjustment, net of tax   2    2 
           
Total other comprehensive loss   (422)   (27)
           
Total comprehensive income (loss)  $(10)  $388 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Shareholders' Equity
Three Months Ended March 31, 2018 and 2017
(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, 2017  $20   $5,672   $58,055   $(24,693)  $732   $(1,010)  $1,010   $(452)  $39,334 
Preferred stock redemption   (20)        (5,007)   -    -    -    -    -    (5,027)
Preferred stock dividend   -    -    -    (113)   -    -    -    -    (113)
Restricted stock redemption                            12    (12)        - 
Issuance of common stock   -    10    (10)   -    -    -    -    -    - 
Stock based compensation   -    -    46    -    -    -    -    -    46 
Net income   -    -    -    412    -    -    -    -    412 
Other comprehensive loss   -    -    -    -    -    -    -    (422)   (422)
                                              
Balance, March 31, 2018  $-   $5,682   $53,084   $(24,394)  $732   $(998)  $998   $(874)  $34,230 
                                              
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   -    -    -    (158)   -    -    -    -    (158)
Restricted stock redemption                            24    (24)        - 
Issuance of common stock   -    13    (13)   -    -    -    -    -    - 
Stock based compensation   -    -    21    -    -    -    -    -    21 
Net income   -    -    -    415    -    -    -    -    415 
Other comprehensive loss   -    -    -    -    -    -    -    (27)   (27)
                                              
Balance, March 31, 2017  $20   $5,642   $57,966   $(20,915)  $732   $(1,010)  $1,010   $(268)  $43,177 

 

See accompanying notes to consolidated financial statements.

 

6

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2018 and 2017
(Unaudited)
(in thousands)

 

   2018   2017 
         
Cash Flows from Operating Activities          
Net income  $412   $415 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   185    185 
Deferred income taxes   72    132 
Write-down of other real estate owned   -    346 
Valuation allowance other real estate owned   -    (331)
Loss on securities sold   -    9 
Gain on loans sold   (1,029)   (1,376)
Gain on sale of other real estate owned   (78)   (218)
Stock compensation expense   46    21 
Proceeds from sale of mortgage loans   33,772    44,633 
Origination of mortgage loans for sale   (30,068)   (35,807)
Amortization of premiums and accretion of discounts on securities, net   29    21 
Decrease in interest receivable   78    82 
Increase in bank owned life insurance   (39)   (39)
Decrease (increase) in other assets   560    (147)
Increase in interest payable   83    3 
Decrease in other liabilities   (324)   (609)
Net cash provided by operating activities   3,699    7,320 
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   -    (2,055)
Proceeds from the sale of available for sale securities   -    1,993 
Proceeds from maturities, calls and paydowns of available for sale securities   843    399 
Net increase in loans   (18,867)   (2,816)
Proceeds from sale of other real estate owned   849    1,621 
Purchases of premises and equipment   (108)   (113)
Net cash used in investing activities   (17,283)   (971)
           
Cash Flows from Financing Activities          
Redeemption of preferred stock   (5,027)   (688)
Payment of preferred dividends   (113)   (2,916)
Net increase in deposits   9,874    5,331 
Net increase in Federal Home Loan Bank advances   -    5,000 
Net increase (decrease) in other borrowings   1,777    (3)
Issuance of Subordinated debt, net   5,539    - 
Net cash provided by financing activities   12,050    6,724 
           
Net increase (decrease) in cash and cash equivalents   (1,534)   13,073 
Cash and cash equivalents, beginning of period   17,810    11,796 
           
Cash and cash equivalents, end of period  $16,276   $24,869 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $683   $636 
Supplemental Schedule of Non Cash Activities          
Dividends on preferred stock accrued  $-   $158 

 

See accompanying notes to consolidated financial statements.

 

7

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2018 and 2017

(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 three month period ended March 31, 2018 is not necessarily indicative of the results to be expected for the full year ending December 31, 2018. 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, 2017 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 March 31, 2018 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.

 

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and all subsequent amendments to the ASU (collectively “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO.  The Company's revenue is comprised of interest and non-interest revenue. The majority of our revenue generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, investment securities, bank owned life insurance and gains on sales of loans held for sale.  The Company completed its overall assessment of revenue streams and related contracts affected by the guidance and adopted ASC 606 on January 1, 2018 with no impact on total shareholders' equity or net income.

 

The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASC 606. The following discussion of revenues is within the scope of the new revenue guidance:

 

·Debit and credit interchange fee income - Card processing fees consist of interchange fees from consumer debit and credit card networks and other card related services. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

 

8

 

 

·Service charges on deposit accounts – Revenue from service charges on deposit accounts is earned through deposit-related services, as well as overdraft, non-sufficient funds, account management and other deposit related fees. Revenue is recognized for these services either over time, corresponding with deposit accounts’ monthly cycle, or at a point in time for transactional related services and fees.
·Service charges on loan accounts – Revenue from loan accounts consists primarily of fees earned on prepayment penalties. Revenue is recognized for the services at a point in time for transactional related services and fees.
·Gains/Losses on sale of OREO - The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

 

The accompanying consolidated financial statements and notes reflect certain reclassifications in prior periods to conform to the current presentation. As of March 31, 2018, the Company began netting commissions paid to generate mortgage banking revenue against the related revenue balances. Prior to 2018, these commission expenses were shown separately under noninterest expense on the Consolidated Statement of Operations. Accordingly, the balances associated with the mortgage banking segment for the period ended March 31, 2017 for “Gain on sale of loans”, “Service charges and fees” and “Other income” under noninterest income, and “Commissions” under noninterest expense have been restated under “Mortgage banking income, net” within the Consolidated Statements of Operations to conform to this presentation. Management believes this will better represent actual mortgage banking income generated from this activity.

 

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.

 

9

 

 

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 March 31, 
   2018   2017 
Numerator          
Net income - basic and diluted  $412   $415 
Preferred stock dividend   (113)   (158)
Net income available to common  shareholders  $299   $257 
           
Denominator          
Weighted average shares outstanding - basic   1,432    1,428 
Dilutive effect of common stock options   -    - 
           
Weighted average shares outstanding - diluted   1,432    1,428 
           
Earnings per share - basic  $0.21   $0.18 
Earnings per share - diluted  $0.21   $0.18 

 

Applicable guidance requires that outstanding, unvested share-based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

 

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 1,708 and 2,008 shares were not included in computing diluted earnings per share for the three months ended March 31, 2018 and 2017, respectively, because their effects were anti-dilutive. Additionally, the impact of warrants to acquire shares of the Company’s common stock in connection with the Company’s participation in the Troubled Asset Relief Program is not included, as the warrants were anti-dilutive.

 

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Note 4 – Investment securities available for sale

 

At March 31, 2018 and December 31, 2017, 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         
   Par   Amortized   Unrealized   Unrealized   Fair   Average 
   Value   Cost   Gains   Losses   Value   Yield 
March 31, 2018                              
US Government Agencies                              
One to five years  $21,400   $21,550   $-   $(422)  $21,128    1.44%
Five to ten years   172    173    -    (1)   172    1.80%
More than ten years   2,142    2,145    -    (11)   2,134    2.10%
    23,714    23,868    -    (434)   23,434    1.50%
Mortgage-backed securities                              
Five to ten years   3,203    3,268    -    (97)   3,171    1.72%
More than ten years   17,968    18,098    1    (500)   17,599    2.39%
    21,171    21,366    1    (597)   20,770    2.29%
                               
Subordinated debt                              
Five to ten years   4,050    4,100    10    (12)   4,098    3.08%
                               
Total investment securities  $48,935   $49,334   $11   $(1,043)  $48,302    1.97%
                               
December 31, 2017                              
US Government Agencies                              
One to five years  $21,400   $21,561   $-   $(276)  $21,285    1.44%
More than ten years   2,411    2,415    -    (17)   2,398    1.74%
    23,811    23,976    -    (293)   23,683    1.47%
Mortgage-backed securities                              
Five to ten years   3,400    3,472    -    (43)   3,429    1.72%
More than ten years   18,518    18,655    1    (145)   18,511    2.39%
    21,918    22,127    1    (188)   21,940    2.28%
Subordinated debt                              
Five to ten years   4,050    4,103    11    (26)   4,088    3.08%
                               
Total investment securities  $49,779   $50,206   $12   $(507)  $49,711    1.96%

 

There were no investment securities pledged to secure deposit repurchase agreements at March 31, 2018 and December 31, 2017.

 

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

 

   Three Months 
   Ended March 31, 
   2018   2017 
         
Gross realized gains  $-   $- 
Gross realized losses   -    (9)
           
   $-   $(9)

 

The Company sold approximately $2 million of investment securities available for sale at a loss of $9,000 for the three months ended March 31, 2017. 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.

 

11

 

 

Investment securities available for sale that have an unrealized loss position at March 31, 2018 and December 31, 2017 are detailed below (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 
March 31, 2018                              
US Government Agencies  $6,084   $(144)  $17,350   $(290)  $23,434   $(434)
Mortgage-backed securities   19,204    (545)   1,511    (52)   20,715    (597)
Subordinated debt   1,012    (12)   -    -    1,012    (12)
                               
   $26,300   $(701)  $18,861   $(342)  $45,161   $(1,043)
                               
December 31, 2017                              
US Government Agencies  $6,153   $(76)  $17,530   $(217)  $23,683   $(293)
Mortgage-backed securities   20,227    (160)   1,651    (28)   21,878    (188)
Subordinated debt   1,021    (26)   -    -    1,021    (26)
                               
   $27,401   $(262)  $19,181   $(245)  $46,582   $(507)

 

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 March 31, 2018.

 

12

 

 

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):

 

   March 31, 2018   December 31, 2017 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $4,256    1.10%  $5,361    1.45%
Commercial   29,028    7.48%   25,456    6.91%
    33,284    8.58%   30,817    8.36%
Commercial real estate                    
Owner occupied   90,007    23.21%   85,004    23.06%
Non-owner occupied   76,483    19.73%   70,845    19.21%
Multifamily   10,152    2.62%   9,386    2.55%
Farmland   259    0.07%   270    0.07%
    176,901    45.63%   165,505    44.89%
Consumer real estate                    
Home equity lines   23,213    5.98%   22,849    6.20%
Secured by 1-4 family residential                    
First deed of trust   58,126    14.99%   57,919    15.71%
Second deed of trust   9,019    2.33%   7,460    2.02%
    90,358    23.30%   88,228    23.93%
                     
Commercial and industrial loans (except those secured by real estate)   41,315    10.66%   36,506    9.90%
Guaranteed student loans   43,896    11.32%   45,805    12.42%
Consumer and other   1,973    0.51%   1,848    0.50%
                     
Total loans   387,727    100.0%   368,709    100.0%
Deferred loan cost, net   652         699      
Less: allowance for loan losses   (3,343)        (3,239)     
                     
   $385,036        $366,169      

 

The Bank has a purchased portfolio 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 $34,218,000 and $29,615,000 at March 31, 2018 and December 31, 2017, respectively.

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due as long as the remaining recorded investment in the loan is deemed fully collectible. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all principal and interest amounts contractually due are brought to current and future payments are reasonably assured.

 

13

 

 

The following table provides information on nonaccrual loans segregated by type at the dates indicated (dollars in thousands):

 

   March 31,   December 31, 
   2018   2017 
Construction and land development          
Commercial  $42   $43 
    42    43 
Commercial real estate          
Owner occupied   894    183 
    894    183 
Consumer real estate          
Home equity lines   133    135 
Secured by 1-4 family residential          
First deed of trust   831    1,000 
Second deed of trust   67    67 
    1,031    1,202 
           
Commercial and industrial loans (except those secured by real estate)   128    870 
Consumer and other   6    22 
           
Total loans  $2,101   $2,320 

 

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 net worth and paying capacity of the obligor or of the collateral pledged, if any; and
·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.

 

14

 

 

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 
March 31, 2018                         
Construction and land development                         
Residential  $4,256   $-   $-   $-   $4,256 
Commercial   27,308    1,678    42    -    29,028 
    31,564    1,678    42    -    33,284 
Commercial real estate                         
Owner occupied   84,028    2,541    3,438    -    90,007 
Non-owner occupied   75,968    -    515    -    76,483 
Multifamily   9,979    173    -    -    10,152 
Farmland   259    -    -    -    259 
    170,234    2,714    3,953    -    176,901 
Consumer real estate                         
Home equity lines   22,137    931    145    -    23,213 
Secured by 1-4 family residential                         
First deed of trust   53,965    2,616    1,545    -    58,126 
Second deed of trust   8,659    179    181    -    9,019 
    84,761    3,726    1,871    -    90,358 
                          
Commercial and industrial loans (except those secured by real estate)   39,811    421    390    693    41,315 
Guaranteed student loans   43,896    -    -    -    43,896 
Consumer and other   1,957    10    6    -    1,973 
                          
Total loans  $372,223   $8,549   $6,262   $693   $387,727 
                          
December 31, 2017                    
Construction and land development                         
Residential  $5,361   $-   $-   $-   $5,361 
Commercial   24,305    1,108    43    -    25,456 
    29,666    1,108    43    -    30,817 
Commercial real estate                         
Owner occupied   78,791    2,716    3,497    -    85,004 
Non-owner occupied   70,845    -    -    -    70,845 
Multifamily   9,210    176    -    -    9,386 
Farmland   270    -    -    -    270 
    159,116    2,892    3,497    -    165,505 
Consumer real estate                         
Home equity lines   21,777    932    140    -    22,849 
Secured by 1-4 family residential                         
First deed of trust   53,591    2,637    1,691    -    57,919 
Second deed of trust   7,140    181    139    -    7,460 
    82,508    3,750    1,970    -    88,228 
                          
Commercial and industrial loans (except those secured by real estate)   35,143    139    529    695    36,506 
Guaranteed student loans   45,805    -    -    -    45,805 
Consumer and other   1,826    4    18    -    1,848 
                          
Total loans  $354,064   $7,893   $6,057   $695   $368,709 

 

15

 

 

The following table presents the aging of the recorded investment in past due loans and leases as of the dates indicated (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 
March 31, 2018                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $4,256   $4,256   $- 
Commercial   -    -    -    -    29,028    29,028    - 
    -    -    -    -    33,284    33,284    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    90,007    90,007    - 
Non-owner occupied   -    515    -    515    75,968    76,483    - 
Multifamily   -    -    -    -    10,152    10,152    - 
Farmland   -    -    -    -    259    259    - 
    -    515    -    515    176,386    176,901    - 
Consumer real estate                                   
Home equity lines   -    -    -    -    23,213    23,213    - 
Secured by 1-4 family residential                                   
First deed of trust   225    57    -    282    57,844    58,126    - 
Second deed of trust   157    -    -    157    8,862    9,019    - 
    382    57    -    439    89,919    90,358    - 
Commercial and industrial loans (except those secured by real estate)   115    -    -    115    41,200    41,315    - 
Guaranteed student loans   2,644    1,527    7,226    11,397    32,499    43,896    7,226 
Consumer and other   -    12    -    12    1,961    1,973    - 
                                    
Total loans  $3,141   $2,111   $7,226   $12,478   $375,249   $387,727   $7,226 
                                    
                           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, 2017                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $5,361   $5,361   $- 
Commercial   -    -    -    -    25,456    25,456    - 
    -    -    -    -    30,817    30,817    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    85,004    85,004    - 
Non-owner occupied   -    -    -    -    70,845    70,845    - 
Multifamily   -    -    -    -    9,386    9,386    - 
Farmland   -    -    -    -    270    270    - 
    -    -    -    -    165,505    165,505    - 
Consumer real estate                                   
Home equity lines   18    -    -    18    22,831    22,849    - 
Secured by 1-4 family residential                                   
First deed of trust   457    -    -    457    57,462    57,919    - 
Second deed of trust   91    -    -    91    7,369    7,460    - 
    566    -    -    566    87,662    88,228    - 
                                    
Commercial and industrial loans (except those secured by real estate)   -    3    -    3    36,503    36,506    - 
Guaranteed student loans   2,891    1,300    7,229    11,420    34,385    45,805    7,229 
Consumer and other   2    -    -    2    1,846    1,848    - 
                                    
Total loans  $3,459   $1,303   $7,229   $11,991   $356,718   $368,709   $7,229 

 

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.

 

16

 

 

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts when 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):

 

   March 31, 2018 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $495   $593   $- 
    495    593    - 
Commercial real estate               
Owner occupied   3,814    3,814    - 
Non-owner occupied   2,649    2,649    - 
    6,463    6,463    - 
Consumer real estate               
Home equity lines   17    17    - 
Secured by 1-4 family residential               
First deed of trust   3,134    3,134    - 
Second deed of trust   663    871    - 
    3,814    4,022    - 
Commercial and industrial loans (except those secured by real estate)   438    785    - 
Consumer and other   2    2    - 
    11,212    11,865    - 
                
With an allowance recorded               
Commercial real estate               
Owner occupied   1,482    1,497    17 
    1,482    1,497    17 
Consumer real estate               
Home equity lines   133    133    - 
Secured by 1-4 family residential               
First deed of trust   612    612    108 
Second deed of trust   166    166    7 
    911    911    115 
Commercial and industrial loans (except those secured by real estate)   737    737    385 
Consumer and other   4    4    4 
    3,134    3,149    521 
                
Total               
Construction and land development               
Commercial   495    593    - 
    495    593    - 
Commercial real estate               
Owner occupied   5,296    5,311    17 
Non-owner occupied   2,649    2,649    - 
    7,945    7,960    17 
Consumer real estate               
Home equity lines   150    150    - 
Secured by 1-4 family residential,               
First deed of trust   3,746    3,746    108 
Second deed of trust   829    1,037    7 
    4,725    4,933    115 
Commercial and industrial loans (except those secured by real estate)   1,175    1,522    385 
Consumer and other   6    6    4 
   $14,346   $15,014   $521 

 

17

 

 

   December 31, 2017 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $502   $600   $- 
    502    600    - 
Commercial real estate               
Owner occupied   3,879    3,879    - 
Non-owner occupied   2,153    2,153    - 
    6,032    6,032    - 
Consumer real estate               
Home equity lines   577    577    - 
Secured by 1-4 family residential               
First deed of trust   3,931    3,931    - 
Second deed of trust   505    713    - 
    5,013    5,221    - 
Commercial and industrial loans (except those secured by real estate)   480    827    - 
Consumer and other   3    3    - 
    12,030    12,683    - 
                
With an allowance recorded               
Commercial real estate               
Owner occupied   1,491    1,506    18 
    1,491    1,506    18 
Consumer real estate               
Home equity lines   135    135    2 
Secured by 1-4 family residential               
First deed of trust   814    814    98 
Second deed of trust   85    85    4 
    1,034    1,034    104 
Commercial and industrial loans (except those secured by real estate)   740    740    375 
Consumer and other   19    19    18 
    3,284    3,299    515 
                
Total               
Construction and land development               
Commercial   502    600    - 
    502    600    - 
Commercial real estate               
Owner occupied   5,370    5,385    18 
Non-owner occupied   2,153    2,153    - 
    7,523    7,538    18 
Consumer real estate               
Home equity lines   712    712    2 
Secured by 1-4 family residential,               
First deed of trust   4,745    4,745    98 
Second deed of trust   590    798    4 
    6,047    6,255    104 
Commercial and industrial loans (except those secured by real estate)   1,220    1,567    375 
Consumer and other   22    22    18 
   $15,314   $15,982   $515 

 

18

 

 

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 (in thousands):

 

   For the Three Months Ended March 31, 
   2018   2017 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development Commercial  $299   $6   $99   $7 
    299    6    99    7 
Commercial real estate                    
Owner occupied   3,689    40    1,292    50 
Non-owner occupied   2,294    26    2,400    30 
    5,983    66    3,692    80 
Consumer real estate                    
Home equity lines   524    -    932    4 
Secured by 1-4 family residential                    
First deed of trust   3,635    31    3,867    40 
Second deed of trust   570    11    608    11 
    4,729    42    5,407    55 
Commercial and industrial loans (except those secured by real estate)   465    8    456    8 
Consumer and other   3    -    -    - 
    11,479    122    9,654    150 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   233    6    796    - 
Commercial real estate                    
Owner occupied   1,708    11    4,216    - 
Non-Owner occupied   -    -    23    - 
    1,708    11    4,239    - 
Consumer real estate                    
Home equity lines   136    2    -    - 
Secured by 1-4 family residential                    
First deed of trust   764    7    1,491    - 
Second deed of trust   127    -    151    - 
    1,027    9    1,642    - 
                     
Commercial and industrial loans (except those secured by real estate)   591    -    56    - 
Consumer and other   5    -    1    - 
    3,564    26    6,734    - 
                     
Total                    
Construction and land development                    
Commercial  $532   $12   $895   $7 
    532    12    895    7 
Commercial real estate                    
Owner occupied   5,397    51    5,508    50 
Non-owner occupied   2,294    26    2,423    30 
    7,691    77    7,931    80 
Consumer real estate                    
Home equity lines   660    -    932    4 
Secured by 1-4 family residential,                    
First deed of trust   4,399    38    5,358    40 
Second deed of trust   697    11    759    11 
    5,756    49    7,049    55 
Commercial and industrial loans (except those secured by real estate)   1,056    8    512    8 
Consumer and other   8    -    1    - 
   $15,043   $146   $16,388   $150 

 

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 
March 31, 2018                    
Construction and land development                    
Commercial  $453   $453   $-   $- 
    453    453    -    - 
Commercial real estate                    
Owner occupied   4,135    3,952    183    17 
Non-owner occupied   2,134    2,134    -    - 
    6,269    6,086    183    17 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   3,083    2,394    689    80 
Second deeds of trust   874    807    67    7 
    3,957    3,201    756    87 
                     
Commercial and industrial loans (except those secured by real estate)   350    309    41    - 
   $11,029   $10,049   $980   $104 
                     
Number of loans   50    43    7    10 

 

20

 

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2017                    
Construction and land development                    
Commercial  $459   $459   $-   $- 
    459    459    -    - 
Commercial real estate                    
Owner occupied   4,188    4,005    183    18 
Non-owner occupied   2,153    2,153    -    - 
    6,341    6,158    183    18 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   3,398    2,709    689    57 
Second deeds of trust   590    523    67    4 
    3,988    3,232    756    61 
                     
Commercial and industrial loans (except those secured by real estate)   385    344    41    - 
   $11,173   $10,194   $980   $79 
                     
Number of loans   50    43    7    10 

 

There were no TDRs identified during the three months ended March 31, 2018 and 2017 and were no defaults on TDRs that were modified as TDRs during the prior twelve month period.

 

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

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended March 31, 2018                         
Construction and land development                         
Residential  $32   $(6)  $-   $-   $26 
Commercial   165    23    -    1    189 
    197    17    -    1    215 
Commercial real estate                         
Owner occupied   624    38    -    -    662 
Non-owner occupied   500    (181)   -    218    537 
Multifamily   60    -    -    -    60 
Farmland   3    (1)   -    -    2 
    1,187    (144)   -    218    1,261 
Consumer real estate                         
Home equity lines   268    9    -    -    277 
Secured by 1-4 family residential                         
First deed of trust   502    57    (34)   2    527 
Second deed of trust   47    47    (45)   5    54 
    817    113    (79)   7    858 
                          
Commercial and industrial loans (except those secured by real estate)   556    44    -    4    604 
Student loans   108    31    (32)   -    107 
Consumer and other   27    15    (21)   6    27 
Unallocated   347    (76)   -    -    271 
                          
   $3,239   $-   $(132)  $236   $3,343 

 

21

 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Year Ended December 31, 2017                         
Construction and land development                         
Residential  $41   $(10)  $-   $1   $32 
Commercial   300    (108)   (31)   4    165 
    341    (118)   (31)   5    197 
Commercial real estate                         
Owner occupied   611    -    -    13    624 
Non-owner occupied   406    94    -    -    500 
Multifamily   56    4    -    -    60 
Farmland   3    -    -    -    3 
    1,076    98    -    13    1,187 
Consumer real estate                         
Home equity lines   271    (5)   -    2    268 
Secured by 1-4 family residential                         
First deed of trust   447    98    (107)   64    502 
Second deed of trust   136    (123)   -    34    47 
    854    (30)   (107)   100    817 
Commercial and industrial loans (except those secured by real estate)   223    316    -    17    556 
Student loans   158    96    (146)   -    108 
Consumer and other   8    4    (2)   17    27 
Unallocated   713    (366)   -    -    347 
                          
   $3,373   $-   $(286)  $152   $3,239 
                          
       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended March 31, 2017                         
Construction and land development                         
Residential  $41   $-   $-   $-   $41 
Commercial   300    (51)   -    -    249 
    341    (51)   -    -    290 
Commercial real estate                         
Owner occupied   611    (5)   -    13    619 
Non-owner occupied   406    (2)   -    -    404 
Multifamily   56    (12)   -    -    44 
Farmland   3    -    -    -    3 
    1,076    (19)   -    13    1,070 
Consumer real estate                         
Home equity lines   271    (16)   -    1    256 
Secured by 1-4 family residential                         
First deed of trust   447    67    -    18    532 
Second deed of trust   136    (2)   -    5    139 
    854    49    -    24    927 
Commercial and industrial loans (except those secured by real estate)   223    66    -    3    292 
Student loans   158    (11)   (42)   -    105 
Consumer and other   8    5    (1)   2    14 
Unallocated   713    (39)   -    -    674 
                          
   $3,373   $-   $(43)  $42   $3,372 

 

22

 

 

The allowance for loan losses at each of the periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and the variability related to the factors used in calculation of the allowance. We concluded that the unallocated portion of the allowance was acceptable given the continued higher level of classified assets. The allowance for loan losses included an unallocated portion of approximately $271,000, $347,000, and 674,000 at March 31, 2018, December 31, 2017, and March 31, 2017, respectively.

 

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

 

·The recovery of loan losses totaling $144,000 for the commercial real estate portfolio for the three months ended March 31, 2018 was attributed to the recognition of a $218,000 recovery during the quarter. The general component of the allowance for loan losses related to the historical loss experience remained consistent at 0.04% at March 31, 2018 and December 31, 2017.

 

·The provision for loan losses totaling $113,000 for the consumer real estate portfolio for the three months ended March 31, 2018 was attributed to an increase in the general component of the allowance for loan losses as a result of an increase in the historical loss experience from 0.10% as of December 31, 2017 to 0.13% as of March 31, 2018.

 

·The recovery of loan losses totaling $118,000 for the construction and land development portfolio for the year ended December 31, 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 0.04% as of December 31, 2017.

 

·The provision for loan losses totaling $316,000 for the commercial and industrial loans (except those secured by real estate) at December 31, 2017 was attributed to an increase of $369,000 in the specific reserve associated with loans evaluated individually for impairment.

 

·The activity in the provision for (recovery of) loan losses for the three months ended March 31, 2017 was not significant.

 

23

 

 

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

 

   Recorded Investment in Loans 
   Allowance   Loans 
   Ending           Ending         
   Balance   Individually   Collectively   Balance   Individually   Collectively 
                         
As of March 31, 2018                               
Construction and land development                              
Residential  $26   $-   $26   $4,256   $-   $4,256 
Commercial   189    -    189    29,028    495    28,533 
    215    -    215    33,284    495    32,789 
Commercial real estate                              
Owner occupied   662    17    645    90,007    5,296    84,711 
Non-owner occupied   537    -    537    76,483    2,649    73,834 
Multifamily   60    -    60    10,152    -    10,152 
Farmland   2    -    2    259    -    259 
    1,261    17    1,244    176,901    7,945    168,956 
Consumer real estate                              
Home equity lines   277    -    277    23,213    150    23,063 
Secured by 1-4 family residential                              
First deed of trust   527    108    419    58,126    3,746    54,380 
Second deed of trust   54    7    47    9,019    829    8,190 
    858    115    743    90,358    4,725    85,633 
Commercial and industrial loans (except those secured by real estate)   604    385    219    41,315    1,175    40,140 
Student loans   107    -    107    43,896    -    43,896 
Consumer and other   298    4    294    1,973    6    1,967 
                               
   $3,343   $521   $2,822   $387,727   $14,346   $373,381 
                               
Year Ended December 31, 2017                              
Construction and land development                              
Residential  $32   $-   $32   $5,361   $-   $5,361 
Commercial   165    -    165    25,456    502    24,954 
    197    -    197    30,817    502    30,315 
Commercial real estate                              
Owner occupied   624    18    606    85,004    5,370    79,634 
Non-owner occupied   500    -    500    70,845    2,153    68,692 
Multifamily   60    -    60    9,386    -    9,386 
Farmland   3    -    3    270    -    270 
    1,187    18    1,169    165,505    7,523    157,982 
Consumer real estate                              
Home equity lines   268    2    266    22,849    712    22,137 
Secured by 1-4 family residential                              
First deed of trust   502    98    404    57,919    4,745    53,174 
Second deed of trust   47    4    43    7,460    590    6,870 
    817    104    713    88,228    6,047    82,181 
Commercial and industrial loans (except those secured by real estate)   556    375    181    36,506    1,220    35,286 
Student loans   108    -    108    45,805    -    45,805 
Consumer and other   374    18    356    1,848    22    1,826 
                               
   $3,239   $515   $2,724   $368,709   $15,314   $353,395 

 

24

 

 

Note 6 – Deposits

 

Deposits as of March 31, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

   March 31, 2018   December 31, 2017 
   Amount   %   Amount   % 
                 
Demand accounts  $114,088    27.1%  $104,138    25.3%
Interest checking accounts   50,145    11.9%   48,042    11.7%
Money market accounts   81,722    19.4%   82,523    20.1%
Savings accounts   29,043    6.9%   27,596    6.7%
Time deposits of $250,000 and over   21,743    5.2%   21,592    5.2%
Other time deposits   124,757    29.5%   127,733    31.0%
                     
Total  $421,498    100.0%  $411,624    100.0%

 

Note 7 – Borrowings

 

The Company uses both short-term and long-term borrowings to supplement deposits when they are available at a lower overall cost to the Company or they can be invested at a positive rate of return.

 

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $950,700 in FHLB stock at March 31, 2018 and $920,000 at December 31, 2017 which is held at cost and included in other assets. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings are secured by the pledge of commercial and 1-4 family residential loans. The Company had FHLB advances of $12,300,000 at March 31, 2018 and December 31, 2017 maturing through 2018.

 

The Company uses federal funds purchased and repurchase agreements for short-term borrowing needs. Securities sold under agreements to repurchase are classified as borrowings and generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The carrying value of these short-term borrowing agreements was $3,328,000 and $1,584,000 at March 31, 2018 and December 31, 2017, respectively.

 

Note 8 – 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 March 31, 2018 was 4.27%. 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 March 31, 2018 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.

 

25

 

 

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 March 31, 2018 was 3.52%. 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 March 31, 2018 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.

 

Note 9 – Subordinated Debt Offering

 

On March 21, 2018, the Company issued $5,700,000 of fixed-to-floating rate subordinated notes due March 31, 2028 in a private placement. The Company received $5,539,000 in net proceeds after deducting issuance costs. The subordinated notes accrue interest at a fixed rate of 6.50% for the first five years until March 31, 2023; thereafter, the subordinated notes will accrue interest at an annual floating rate equal to three-month LIBOR plus a spread of 3.73% until maturity or early redemption. The Company may redeem the subordinated notes in whole or in part, on or after March 31, 2023. The subordinated notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior indebtedness, whether secured or unsecured, including claims of depositors and general creditors, and rank equally in right of payment with any unsecured, subordinated indebtedness that the Company may incur in the future. At March 31, 2018, the carrying value of the notes totaled $5,539,000.

 

Note 10 – 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.

 

26

 

 

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

 

   Three Months Ended March 31, 
   2018   2017 
       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   2,245   $24.17   $12.88         2,337   $24.21   $12.76      
Granted   -    -    -         -    -    -      
Forfeited   -    -    -         -    -    -      
Exercised   -    -    -         -    -    -      
Options outstanding, end of period   2,245   $24.17   $12.88   $-    2,337   $24.21   $12.76   $- 
Options exercisable, end of period   2,245                   2,337                

 

During the first quarter of 2018, we granted certain officers 1,590 restricted shares of common stock with a weighted average fair market value of $32.42 on the date of grant. These restricted stock awards vest over three years. 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. These 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 fourth quarter of 2017, we granted certain officers 660 restricted shares of common stock with a weighted average fair market value of $30.65 at the date of grant. These restricted stock awards vest over one year.

 

The total number of shares underlying non-vested restricted stock was 21,761 and 31,210 at March 31, 2018 and 2017, 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 March 31, 2018 and 2017, was $363,379 and $515,568, respectively. The time based unamortized compensation of $256,872 is expected to be recognized over a weighted average period of 1.82 years.

 

Stock-based compensation expense was approximately $46,000 and $21,000 for the three months ended March 31, 2018 and 2017, respectively.

 

Note 11 — Fair value

 

The Company determines the fair value of its financial instruments based on the requirements established in Accounting Standards Codification (“ASC”) 820: Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs when measuring fair value. ASC 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

 

27

 

 

ASC 820 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). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).

 

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.

 

28

 

 

Other Real Estate Owned: Other real estate owned assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Subsequently, real estate owned assets are carried at lower of cost or fair value less estimated costs to sell. 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):

 

   Fair Value Measurement 
   at March 31, 2018 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  $23,434   $-   $23,434   $- 
Mortgage-backed securities   20,770    -    20,770    - 
Subordinated debt   4,098    -    1,522    2,576 
                     
Financial Assets - Non-Recurring                    
Impaired loans   2,613    -    -    2,613 
Assets held for sale   610    -    -    610 
Other real estate owned   1,017    -    -    1,017 
     
   Fair Value Measurement 
   at December 31, 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  $23,683   $-   $23,683   $- 
Mortgage-backed securities   21,940    -    21,940    - 
Subordinated debt   4,088    757    1,531    1,800 
                     
Financial Assets - Non-Recurring                    
Impaired loans   2,769    -    -    2,769 
Assets held for sale   610    -    -    610 
Other real estate owned   1,788    -    -    1,788 

 

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The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at March 31, 2018 and December 31, 2017 (dollars in thousands):

 

   March 31, 2018
             Range
   Fair Value   Valuation  Unobservable  (Weighted
   Estimate   Techniques  Input  Average)
              
Impaired loans - real estate secured  $2,261   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  $352   Appraisal (1) or Discounted Cash Flow  Selling costs  10%
           Discount for lack of marketability or practical life  0%-50% (20%)
               
Assets held for sale  $610   Appraisal (1) or Internal Valuation (2)  Selling costs  6%-10% (7%)
           Discount for lack of marketability and age of appraisal  6%-30% (15%)
               
Other real estate owned  $1,017   Appraisal (1) or Internal Valuation (2)  Selling costs  6%-10% (7%)

 

(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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   December 31, 2017
             Range
   Fair Value   Valuation  Unobservable  (Weighted
   Estimate   Techniques  Input  Average)
     
Impaired loans - real estate secured  $2,403   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  $366   Appraisal (1) or Discounted Cash Flow  Selling costs  10%
           Discount for lack of marketability or practical life  0%-50% (20%)
               
Assets held for sale  $610   Appraisal (1) or Internal Valuation (2)  Selling costs  6%-10% (7%)
           Discount for lack of marketability and age of appraisal  6%-30% (15%)
               
Other real estate owned  $1,788   Appraisal (1) or Internal Valuation (2)  Selling costs  6%-10% (7%)

 

(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

 

On January 1, 2018, the Company adopted ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 makes targeted improvements to several areas of U.S. GAAP including the disclosure of the fair value of financial instruments that are not measured at fair value on a recurring basis. Specifically, the new guidance (i) eliminates the requirements to disclose the methods and significant assumptions used to estimate the fair value and the description of the changes therein, if any, during the period, (ii) requires the use of the exit price notion, prospectively, in calculating the fair values of financial instruments not measured at fair value on a recurring basis and (iii) eliminates the guidance that allowed the use of the entry price notion to calculate the fair value of certain financial instruments, such as loans and long-term debt. For example, the Company has historically estimated the fair value for loans reported at amortized cost on its balance sheet by examining the average rates per the terms of these loans, and comparing those average rates to the current rates offered by the Company (i.e., the entry price notion). Utilizing the exit price notion requires the Company to estimate fair value of these loans based on the price that would be received to sell these loans in an orderly transaction between market participants at the measurement date.

 

In accordance with the prospective adoption of ASU No. 2016-01 as previously discussed, the fair value of loans as of March 31, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

 

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      March 31,   December 31, 
      2018   2017 
   Level in Fair                
   Value  Carrying   Estimated   Carrying   Estimated 
   Hierarchy  Value   Fair Value   Value   Fair Value 
   (In thousands) 
Financial assets                       
Cash  Level 1  $16,276   $16,276   $17,810   $17,810 
Investment securities available for sale  Level 1   -    -    757    757 
Investment securities available for sale  Level 2   45,726    45,726    47,154    47,154 
Investment securities available for sale  Level 3   2,576    2,576    1,800    1,800 
Federal Home Loan Bank stock  Level 2   951    951    920    920 
Loans held for sale  Level 2   5,372    5,372    8,047    8,047 
Loans  Level 3   385,114    380,747    365,940    366,035 
Impaired loans  Level 3   2,613    2,613    2,769    2,769 
Assets held for sale  Level 3   610    610    610    610 
Other real estate owned  Level 3   1,017    1,017    1,788    1,788 
Bank owned life insurance  Level 3   7,307    7,307    7,268    7,268 
Accrued interest receivable  Level 2   2,522    2,522    2,600    2,600 
                        
Financial liabilities                       
Deposits  Level 2   421,498    420,968    411,624    411,044 
FHLB borrowings  Level 2   12,300    12,289    12,300    12,294 
Trust preferred securities  Level 2   8,764    8,717    8,764    9,099 
Other borrowings  Level 2   8,867    8,867    1,584    1,584 
Accrued interest payable  Level 2   176    176    93    93 

 

Note 12 – Segment Reporting

 

The Company has two reportable segments: traditional commercial banking and mortgage banking. Revenues from commercial banking operations consist primarily of interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income.

 

The commercial banking segment provides the mortgage banking segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the commercial banking segment’s cost of funds. Additionally, the mortgage banking segment leases premises from the commercial banking segment. These transactions are eliminated in the consolidation process.

 

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The following table presents segment information as of and for the three months ended March 31, 2018 and 2017 (in thousands):

 

   Commercial   Mortgage       Consolidated 
   Banking   Banking   Eliminations   Totals 
Three Months Ended March 31, 2018                    
                     
Revenues                    
Interest income  $4,730   $47   $-   $4,777 
Gain on sale of loans   -    1,029    -    1,029 
Other revenues   557    116    (47)   626 
Total revenues   5,287    1,192    (47)   6,432 
                     
Expenses                    
Interest expense   766    -    -    766 
Salaries and benefits   2,123    820    -    2,943 
Commissions   -    322    -    322 
Other expenses   1,697    267    (47)   1,917 
Total operating expenses   4,586    1,409    (47)   5,948 
                     
Income before income taxes  $701   $(217)  $-   $484 
                     
Total assets  $492,277   $9,852   $(13,310)  $488,819 
                 
   Commercial   Mortgage       Consolidated 
   Banking   Banking   Eliminations   Totals 
Three Months Ended March 31, 2017                    
                     
Revenues                    
Interest income  $4,073   $65   $(6)  $4,132 
Gain on sale of loans   -    1,376    -    1,376 
Other revenues   551    133    (44)   640 
Total revenues   4,624    1,574    (50)   6,148 
                     
Expenses                    
Interest expense   639    6    (6)   639 
Salaries and benefits   2,018    991    -    3,009 
Commissions   -    366    -    366 
Other expenses   1,376    253    (44)   1,585 
Total operating expenses   4,033    1,616    (50)   5,599 
                     
Income before income taxes  $591   $(42)  $-   $549 
                     
Total assets  $454,583   $10,570   $(13,824)  $451,329 

 

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Note 13 – Shareholders’ Equity and Regulatory Matters

 

Preferred Stock

 

On May 1, 2009, as part of the Capital Purchase Program established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement—Standard Terms with the Treasury, pursuant to which the Company sold (i) 14,738 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $4.00 per share, having a liquidation preference of $1,000 per share (the “preferred stock”) and (ii) a warrant (the “Warrant”) to purchase 499,029 shares of the Company’s common stock at an initial exercise price of $4.43 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $14,738,000 in cash. As a result of the Company’s 1 for 16 reverse stock split completed in August 2014, the number of shares underlying the Warrant and the exercise price per share were adjusted to 31,190 and $70.88, respectively.

 

The Warrant was immediately exercisable. The Warrant provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of common stock, and upon certain issuances of common stock at or below a specified price relative to the then-current market price of common stock. The Warrant expires ten years from the issuance date.

 

In November 2013, the Company participated in a successful auction of the Company’s preferred stock by the Treasury that resulted in the purchase of the securities by private and institutional investors.

 

During the first quarter of 2017, the Company received approval from state and federal regulators allowing the Bank to pay a special dividend to the Company for the sole purpose of paying all accrued and unpaid dividends on the preferred stock through February 15, 2017, as well as to redeem 688 shares of the total 5,715 shares outstanding. The accrued and unpaid dividends paid on February 15, 2017 amounted to $2,911,000. The 688 shares were redeemed on February 24, 2017 at a redemption price of $1,000 per share plus accrued dividends from February 15, 2017 to the redemption date.

 

During the second quarter of 2017, the Company received approval from the state regulators allowing the Bank to pay a special dividend to the Company for the purpose of paying the preferred stock dividend due on May 15, 2017. No other dividends were paid by the Bank to the Company during 2017.

 

At December 31, 2017, the aggregate amount of the Company’s total accrued dividend payments on the preferred stock was $56,000 and reflected as a reduction of retained earnings.

 

During the first quarter of 2018, the Company used the proceeds from the subordinated note issuance to redeem the remaining 5,027 shares ($5,027,000 aggregate liquidation value) of preferred stock plus accrued dividends of $56,554.

 

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Common Stock

 

On August 6, 2014, the Company filed Articles of Amendment to its Articles of Incorporation with the Virginia State Corporation Commission to affect a reverse stock split of its outstanding common stock which became effective on August 8, 2014. As a result of the reverse split, every sixteen shares of the Company’s issued and outstanding common stock were consolidated into one issued and outstanding share of common stock.

 

On March 27, 2015, the Company completed a rights offering to shareholders (the “Rights Offering”) and concurrent standby offering to Kenneth R. Lehman (the “Standby Offering”), in which the Company issued an aggregate of 1,051,866 shares of common stock (the total number of shares offered) at $13.87 per share for aggregate gross proceeds of $14,589,381 (including the value of the Company’s preferred stock exchanged by Mr. Lehman for shares of common stock of $4,618,813). In connection with the Rights Offering, 283,293 shares were issued to shareholders upon exercise of their basic subscription rights and 191,773 shares were issued to shareholders upon exercise of their oversubscription privileges (approximately 36.9% of the total number of shares requested pursuant to oversubscription privileges). In connection with the Standby Offering, Mr. Lehman purchased an aggregate of 576,800 shares of the Company’s common stock, 333,007 of which were issued in exchange for 9,023 shares of the Company’s preferred stock and 243,793 of which were purchased for cash. Also, as part of the Standby Offering, Mr. Lehman forgave $2,215,009 in accrued and unpaid dividends on the preferred stock.

 

Regulatory Matters

 

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures are established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 Capital to average assets (the Leverage ratio).

 

In July 2013, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (“CET1 ratio”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

 

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The capital amounts and ratios at March 31, 2018 and December 31, 2017 for the Bank are presented in the table below (dollars in thousands):

 

           For Capital         
   Actual   Adequacy Purposes   To be Well Capitalized 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
March 31, 2018                              
Total capital (to risk- weighted assets)
Village Bank
  $46,203    12.61%  $29,316    8.00%  $36,645    10.00%
                               
Tier 1 capital (to risk- weighted assets)
Village Bank
   42,860    11.70%   21,987    6.00%   29,316    8.00%
                               
Leverage ratio (Tier 1 capital to average assets)
Village Bank
   42,860    9.08%   18,887    4.00%   23,068    5.00%
                               
Common equity tier 1 (to risk- weighted assets)
Village Bank
   42,860    11.70%   16,490    4.50%   23,819    6.50%
                               
December 31, 2017                              
Total capital (to risk- weighted assets)
Village Bank
  $45,504    12.88%  $28,268    8.00%  $35,335    10.00%
                               
Tier 1 capital (to risk- weighted assets)
Village Bank
   42,265    11.96%   21,201    6.00%   26,268    8.00%
                               
Leverage ratio (Tier 1 capital to average assets)
Village Bank
   42,265    9.18%   18,422    4.00%   23,028    5.00%
                               
Common equity tier 1 (to risk- weighted assets)
Village Bank
   42,265    11.96%   15,901    4.50%   22,968    6.50%

 

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Note 14 – Commitments and contingencies

 

Off-balance-sheet risk – The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the financial statements. The contract amounts of these instruments reflect the extent of involvement that the Company has in particular classes of instruments.

 

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, and to potential credit loss associated with letters of credit issued, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans and other such on-balance sheet instruments.

 

The Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk at the dates indicated (in thousands):

 

   March 31,   December 31, 
   2018   2017 
         
Undisbursed credit lines  $63,430   $65,495 
Commitments to extend or originate credit   19,560    13,888 
Standby letters of credit   4,439    4,615 
           
Total commitments to extend credit  $87,429   $83,998 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Historically, many commitments expire without being drawn upon; therefore, the total commitment amounts shown in the above table are not necessarily indicative of future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include personal or income-producing commercial real estate, accounts receivable, inventory and equipment.

 

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

 

Concentrations of credit risk – All of the Company’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company’s market area. Although the Company is building a diversified loan portfolio, a substantial portion of its clients’ ability to honor contracts is reliant upon the economic stability of the Richmond, Virginia area, including the real estate markets in the area. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

 

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Prior Agreements with Regulators – In February 2012, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC and the Virginia Bureau of Financial Institutions (the “Supervisory Authorities”), and the Supervisory Authorities issued the related Consent Order effective February 3, 2012 (the “Consent Order”). In June 2012, the Company entered into a similar written agreement (the “Written Agreement”) with the Reserve Bank. As a result of the steps the Company and the Bank took to, among other things, improve asset quality, increase capital, augment management and board oversight, and increase earnings, the Consent Order was terminated effective December 14, 2015. In place of the Consent Order, the Bank’s Board of Directors made certain written assurances to the Supervisory Authorities in the form of a Memorandum of Understanding (“MOU”) that became effective November 17, 2015. Due to further improvements by the Company and the Bank in asset quality and earnings, and the correction of a prior Regulation W violation, the MOU was terminated effective May 12, 2016, and the Written Agreement was terminated effective July 28, 2016.

 

Note 15 – Income Taxes

 

The net deferred tax asset is included in other assets on the balance sheet. Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant weight is given to evidence that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting realization.

 

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The Tax Reform Act includes a number of changes in existing tax law impacting businesses. One of the most significant changes is a permanent reduction in the corporate income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018. GAAP requires companies to re-value their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment.

 

As of December 31, 2017, the Company had net deferred tax assets of $11 million. The Company recorded a re-valuation of its deferred tax assets and liabilities as of December 31, 2017, at the new rate of 21%, based upon balances in existence at the date of enactment. As a result, the Company's net deferred tax assets were written down by approximately $4,181,000 in the fourth quarter of 2017 with a corresponding increase in tax expense. Although the Tax Reform Act had a significant negative impact on the Company’s earnings for 2017 as a result of the re-valuation of its deferred tax assets and liabilities, the reduction in the corporate tax rate to 21% is expected to have a significant positive benefit to the Company in 2018 and beyond.

 

In assessing the Company’s ability to realize its net deferred tax asset, management considers whether it is more likely than not that some portion or all of the net deferred tax asset will or will not be realized.  The Company’s ultimate realization of the net deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.  Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment.  The amount of net deferred taxes recognized could be impacted by changes to any of these variables.

 

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Each quarter, the Company weighs both the positive and negative information with respect to realization of the net deferred tax asset and analyzes its position as to whether or not a valuation allowance is required. Over the past several quarters, the positive information has been increasing while the negative information has been decreasing. The Company has demonstrated consistent earnings while its level of non-performing assets, which was the primary cause of the Company’s losses, has steadily decreased.

 

Given the consistent earnings and improving asset quality, the Company’s analysis concluded that, it is more likely than not that the Company will generate sufficient taxable income within the applicable carry-forward periods to realize its net deferred tax asset.

 

There was $72,000 in income tax expense recorded for the three month period ended March 31, 2018 compared to $134,000 in expense for the three month period ended March 31, 2017.

 

The net operating losses available to offset future taxable income amounted to $22,853,000 at March 31, 2018 and begin expiring in 2028.

 

Commercial banking organizations conducting business in Virginia are not subject to Virginia income taxes. Instead, they are subject to a franchise tax based on bank capital. The Company recorded franchise tax expense of approximately $80,000 and $85,000 for the three months ended March 31, 2018 and March 31, 2017, respectively.

 

Note 16 – Recent accounting pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This ASU requires lessees to recognize assets and liabilities arising from most operating leases on the statement of financial position. ASU 2016-02 will be effective for the Company for the fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has determined that the provisions of ASU-2016-02 may result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities, however, the Company does not expect this to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities by eliminating the probable initial recognition threshold (incurred loss methodology) and requiring entities to reflect its current estimate of all expected credit losses. The amendments in the ASU are effective beginning after December 15, 2019 and for interim periods within that year. Early adoption is permitted beginning after December 15, 2018. Entities will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings in the first period effective. While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. This guidance may result in material changes in the Company's accounting for credit losses on financial instruments.

 

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In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Cost (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does have exposure and is assessing the impact of ASU 2017-08, and may choose early adoption. Overall, the Company does not expect it to have a material impact on its accounting.

 

In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting.” The amendment clarifies Topic 718, Compensation – Stock Compensation, such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification, provided that the ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company has concluded the adoption of ASU No. 2017-09 will not have a material impact on its consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments provide targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include clarifications related to: measurement elections, transition requirements, and adjustments associated with equity securities without readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities; presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements for liabilities denominated in a foreign currency for which the fair value option has been elected. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-03 to have a material impact on its consolidated financial statements.

 

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Item 2 - Management’s Discussion and Analysis OF Financial condition and results of operations

 

Caution about forward-looking statements

 

In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy and financial and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements.

 

There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to:

 

·changes in assumptions underlying the establishment of allowances for loan losses, and other estimates;
·the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;
·the effects of future economic, business and market conditions;
·legislative and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;
·our inability to maintain our regulatory capital position;
·the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions despite security measures implemented by the Company;
·changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions we do business with;
·risks inherent in making loans such as repayment risks and fluctuating collateral values;
·changes in operations of the mortgage company as a result of the activity in the residential real estate market;
·exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;
·governmental monetary and fiscal policies;
·changes in accounting policies, rules and practices;
·reliance on our management team, including our ability to attract and retain key personnel;
·competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
·demand, development and acceptance of new products and services;