Company Quick10K Filing
Quick10K
Village Bank & Trust Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$34.00 1 $49
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-21 Shareholder Vote, Other Events, Exhibits
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-01-30 Earnings, Exhibits
8-K 2018-12-20 Officers, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-08-09 Regulation FD, Exhibits
8-K 2018-07-27 Earnings, Exhibits
8-K 2018-05-31 Officers, Exhibits
8-K 2018-05-22 Shareholder Vote, Other Events, Exhibits
8-K 2018-05-14 Officers
8-K 2018-04-27 Earnings, Exhibits
8-K 2018-03-27 Officers
8-K 2018-03-21 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-02-27 Officers
8-K 2018-02-20 Regulation FD, Exhibits
8-K 2018-01-30 Earnings, Exhibits
8-K 2018-01-16 Officers
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KODK Eastman Kodak 106
BBW Build A Bear Workshop 74
CNET ChinaNet Online 24
FHRT First Hartford 0
TTCM Tautachrome 0
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GDSI Global Digital Solutions 0
VBFC 2019-03-31
Part I - Financial Information
Item 1 - Financial Statements
Note 1 - Principles of Presentation
Note 2 - Use of Estimates
Note 3 - Earnings per Common Share
Note 4 - Investment Securities Available for Sale
Note 5 - Loans and Allowance for Loan Losses
Note 6 - Deposits
Note 7 - Borrowings
Note 8 - Leases
Note 9 - Trust Preferred Securities
Note 10 - Subordinated Debt
Note 11 - Stock Incentive Plan
Note 12 &Mdash; Fair Value
Note 13 - Segment Reporting
Note 14 - Shareholders' Equity and Regulatory Matters
Note 15 - Commitments and Contingencies
Note 16 - Recent Accounting Pronouncements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-31.1 tv520728_ex31-1.htm
EX-31.2 tv520728_ex31-2.htm
EX-32.1 tv520728_ex32-1.htm

Village Bank & Trust Financial Earnings 2019-03-31

VBFC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520728_10q.htm 10-Q

 

 

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, 2019

 

¨ 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 every Interactive Data File required to be submitted 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 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 x 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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $4.00 per share   VBFC   Nasdaq Capital Market

 

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

 

1,438,430 shares of common stock, $4.00 par value, outstanding as of April 30, 2019

 

 

 

 

 

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, 2019 (unaudited) and December 31, 2018 3
   
Consolidated Statements of Income For the Three Months Ended March 31, 2019 and 2018 (unaudited) 4
   
Consolidated Statements of Comprehensive Income (Loss) For the Three Months Ended March 31, 2019 and 2018 (unaudited) 5
   
Consolidated Statements of Shareholders’ Equity For the Three Months Ended March 31, 2019 and 2018 (unaudited) 6
   
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2019 and 2018 (unaudited) 7
   
Notes to Consolidated Financial Statements (unaudited) 8
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 52
   
Item 4. Controls and Procedures 52
   
Part II – Other Information  
   
Item 1.  Legal Proceedings 53
   
Item 1A. Risk Factors 53
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 53
   
Item 3.  Defaults Upon Senior Securities 53
   
Item 4.  Mine Safety Disclosures 53
   
Item 5.  Other Information 53
   
Item 6.  Exhibits 54
   
Signatures 55

 

2

 

 

Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
March 31, 2019 (Unaudited) and December 31, 2018*
(in thousands, except per share data)

 

   March 31,   December 31, 
   2019   2018 
Assets          
Cash and due from banks  $15,178   $12,717 
Federal funds sold   10,728    6,826 
Total cash and cash equivalents   25,906    19,543 
Investment securities available for sale, at fair value   41,835    44,253 
Restricted stock, at cost   1,695    1,661 
Loans held for sale   5,218    6,128 
Loans          
Outstandings   417,810    414,430 
Allowance for loan losses   (3,027)   (3,051)
Deferred fees and costs, net   737    713 
Total loans, net   415,520    412,092 
Other real estate owned, net of valuation allowance   526    526 
Assets held for sale   537    554 
Premises and equipment, net   12,371    12,455 
Bank owned life insurance   7,478    7,441 
Accrued interest receivable   2,729    2,662 
Other assets   8,459    7,551 
           
   $522,274   $514,866 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $122,923   $119,317 
Interest bearing   320,477    319,730 
Total deposits   443,400    439,047 
Federal Home Loan Bank advances   21,000    21,000 
Long-term debt - trust preferred securities   8,764    8,764 
Subordinated debt, net   5,571    5,563 
Accrued interest payable   241    221 
Other liabilities   4,985    3,138 
Total liabilities   483,961    477,733 
           
Shareholders' equity          
Common stock, $4 par value, 10,000,000 shares authorized;          
1,438,430 shares issued and outstanding at March 31, 2019 and 1,435,283 shares issued and outstanding at December 31, 2018   5,720    5,707 
Additional paid-in capital   53,245    53,212 
Accumulated deficit   (20,960)   (21,769)
Common stock warrant   732    732 
Stock in directors rabbi trust   (856)   (883)
Directors deferred fees obligation   856    883 
Accumulated other comprehensive loss   (424)   (749)
Total shareholders' equity   38,313    37,133 
           
   $522,274   $514,866 

 

* Derived from audited consolidated financial statements

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, 2019 and 2018
(in thousands, except per share data)
(unaudited)

 

   Three Months Ended 
   2019   2018 
Interest income          
Loans  $5,365   $4,488 
Investment securities   293    263 
Federal funds sold   51    26 
Total interest income   5,709    4,777 
           
Interest expense          
Deposits   882    631 
Borrowed funds   361    135 
Total interest expense   1,243    766 
           
Net interest income   4,466    4,011 
Provision for loan losses   -    - 
Net interest income after provision for loan losses   4,466    4,011 
           
Noninterest income          
Service charges and fees   458    457 
Mortgage banking income, net   787    817 
Gain on sale of investment securities   101    - 
Other   172    59 
Total noninterest income   1,518    1,333 
           
Noninterest expense          
Salaries and benefits   2,936    2,943 
Occupancy   349    330 
Equipment   226    215 
Supplies   41    57 
Professional and outside services   809    720 
Advertising and marketing   58    79 
Foreclosed assets, net   1    (69)
FDIC insurance premium   90    77 
Other operating expense   489    508 
Total noninterest expense   4,999    4,860 
           
Income before income tax expense   985    484 
Income tax expense   176    72 
           
Net income   809    412 
           
Preferred stock dividends and amortization of discount   -    (113)
Net income available to common shareholders  $809   $299 
           
Earnings per common share, basic  $0.56   $0.21 
Earnings per common share, diluted  $0.56   $0.21 

 

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, 2019 and 2018
(Unaudited)
(in thousands)

 

   2018   2017 
         
Net income  $809   $412 
Other comprehensive income (loss)          
Unrealized holding gains (losses) arising during the period   510    (537)
Tax effect   (107)   113 
Net change in unrealized holding losses on securities available for sale, net of tax   403    (424)
           
Reclassification adjustment          
Reclassification adjustment for losses realized in net income   (101)   - 
Tax effect   21    - 
Reclassification for losses included in net income (loss), net of tax   (80)   - 
           
Minimum pension adjustment   3    3 
Tax effect   (1)   (1)
Minimum pension adjustment, net of tax   2    2 
           
           
Total other comprehensive loss   325    (422)
           
Total comprehensive income (loss)  $1,134   $(10)

 

See accompanying notes to consolidated financial statements.

 

5

 

 

Consolidated Statements of Shareholders' Equity
Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)

 

                           Directors   Accumulated     
           Additional       Common   Stock in   Deferred   Other     
   Preferred   Common   Paid-in   Accumulated   Stock   Directors   Fees   Comprehensive     
   Stock   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Loss   Total 
                                     
Balance, December 31, 2018  $-   $5,707   $53,212   $(21,769)  $732   $(883)  $883   $(749)  $37,133 
                                              
Restricted stock redemption   -    -    -    -    -    27    (27)   -    - 
Vesting of restricted stock   -    13    (13)   -    -    -    -    -    - 
Stock based compensation   -    -    46    -    -    -    -    -    46 
Net income   -    -    -    809    -    -    -    -    809 
Other comprehensive income   -    -    -    -    -    -    -    325    325 
Balance, March 31, 2019   -    5,720    53,245    (20,960)   732    (856)   856    (424)   38,313 
                                              
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)   -    - 
Vesting of restricted 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 

 

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, 2019 and 2018
(Unaudited)
(in thousands)

 

   2019   2018 
         
Cash Flows from Operating Activities          
Net income  $809   $412 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   268    185 
Amortization of debt issuance costs   8    - 
Deferred income taxes   177    72 
Gain on sale of investment securities   (101)   - 
Gain on sales of loans held for sale   (928)   (1,029)
Gain on sale of other real estate owned   -    (78)
Stock compensation expense   46    46 
Proceeds from sale of mortgage loans   30,310    33,772 
Origination of mortgage loans for sale   (28,472)   (30,068)
Amortization of premiums and accretion of discounts on securities, net   31    29 
Increase in bank owned life insurance   (37)   (39)
Net change in:          
Interest receivable   (67)   78 
Other assets   (1,152)   560 
Interest payable   20    83 
Other liabilities   1,847    (324)
Net cash provided by operating activities   2,759    3,699 
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   (4,632)   - 
Proceeds from the sale of available for sale securities   6,491    - 
Proceeds from maturities, calls and paydowns of available for sale securities   1,038    843 
Net increase in loans   (3,428)   (18,867)
Proceeds from sale of other real estate owned   -    849 
Purchases of premises and equipment, net   (184)   (108)
Purchase of restricted stock   (34)   - 
Net cash used in investing activities   (749)   (17,283)
           
Cash Flows from Financing Activities          
Redeemption of preferred stock   -    (5,027)
Payment of preferred dividends   -    (113)
Net increase in deposits   4,353    9,874 
Net increase in other borrowings   -    1,777 
Issuance of subordinated debt, net   -    5,539 
Net cash provided by financing activities   4,353    12,050 
           
Net increase in cash and cash equivalents   6,363    (1,534)
Cash and cash equivalents, beginning of period   19,543    17,810 
           
Cash and cash equivalents, end of period  $25,906   $16,276 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $1,223   $683 
Supplemental Schedule of Non Cash Activities          
Unrealized gains (losses) on securities avalable for sale  $409   $(537)
Right of use assets obtained in exchage for new operating lease liabilities  $1,405   $- 

 

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, 2019 and 2018

(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, Village Bank Mortgage Corporation. 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, 2019 is not necessarily indicative of the results to be expected for the full year ending December 31, 2019. 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, 2018 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, 2019 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, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the optional transitional method provided by ASU 2018-11 and did not adjust prior periods for Accounting Standards Codification (“ASC”) Topic 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10-K, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $1.4 million at the date of adoption, which is related to the Company’s leases of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

 

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

 

The Company’s long-term lease agreements are all classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. See note 8 for additional information.

 

8

 

 

Note 2 - Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 including impaired loans and troubled debt restructurings (“TDRs”), the valuation allowance on the deferred tax asset, valuation of other real estate owned and the estimate of the fair value of assets held for sale.

 

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, 
   2019   2018 
Numerator          
Net income - basic and diluted  $809   $412 
Preferred stock dividend   -    (113)
Net income available to common  shareholders  $809   $299 
           
Denominator          
Weighted average shares outstanding - basic   1,435    1,432 
Dilutive effect of common stock options   -    - 
           
Weighted average shares outstanding - diluted   1,435    1,432 
           
Earnings per share - basic  $0.56   $0.21 
Earnings per share - diluted  $0.56   $0.21 

 

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.

 

The vesting of 8,650 and 7,590 respectively, of the unvested restricted units included in Note 11 “Stock incentive plan” are dependent upon meeting certain performance criteria. As of March 31, 2019 and 2018, it was indeterminable whether these unvested restricted units will vest and as such those shares are excluded from common shares issued and outstanding at each date and are not included in the computation of earnings per share for any period presented.

 

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 578 and 1,708 shares were not included in computing diluted earnings per share for the three months ended March 31, 2019 and 2018, 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.

 

9

 

 

Note 4 – Investment securities available for sale

 

The amortized cost and fair value of investment securities available for sale as of March 31, 2019 and December 31, 2018 are as follows (in thousands):

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized       
   Cost   Gains   Losses   Fair Value 
                 
March 31, 2019                    
U.S. Government agencies  $15,434   $-   $(174)  $15,260 
Mortgage-backed securities   22,287    21    (228)   22,080 
Subordinated debt   4,586    26    (117)   4,495 
                     
   $42,307   $47   $(519)  $41,835 
                     
December 31, 2018                    
U.S. Government agencies  $14,120   $-   $(269)  $13,851 
Mortgage-backed securities   26,924    102    (576)   26,450 
Subordinated debt   4,089    11    (148)   3,952 
                     
   $45,133   $113   $(993)  $44,253 

 

At March 31, 2019 and December 31, 2018, the Company had investment securities with a fair value of approximately $8,065,000 and $8,004,000, respectively, pledged to secure borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”).

 

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

 

   Three Months 
   Ended March 31, 
   2019   2018 
         
Gross realized gains  $101   $- 
Gross realized losses   -    - 
           
   $101   $- 

 

The Company sold approximately $6.5 million of investment securities available for sale at a gross gain of $101,000 during the three months ended March 31, 2019.

 

10

 

 

Investment securities available for sale that have an unrealized loss position at March 31, 2019 and December 31, 2018 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, 2019                              
US Government Agencies  $-   $-   $13,715   $(174)  $13,715   $(174)
Mortgage-backed securities             18,051    (228)   18,051    (228)
Subordinated debt   1,150    (105)   1,007    (12)   2,157    (117)
                               
   $1,150   $(105)  $32,773   $(414)  $33,923   $(519)
                               
December 31, 2018                              
US Government Agencies  $-   $-   $13,851   $(269)  $13,851   $(269)
Mortgage-backed securities   -    -    18,397    (576)   18,397    (576)
Subordinated debt   1,915    (140)   512    (8)   2,427    (148)
                               
   $1,915   $(140)  $32,760   $(853)  $34,675   $(993)

 

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 fair 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, 2019.

 

The amortized cost and estimated fair value of investment securities available for sale as March 31, 2019, by contractual maturity, are as follows (in thousands):

 

   Amortized     
   Cost   Fair Value 
         
One to five years  $13,007   $12,839 
Five to ten years   6,504    6,385 
More than ten years   22,796    22,611 
           
Total  $42,307   $41,835 

 

11

 

 

Note 5 – Loans and allowance for loan losses

 

Loans classified by type as of March 31, 2019 and December 31, 2018 are as follows (dollars in thousands):

 

   March 31, 2019   December 31, 2018 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $7,840    1.88%  $7,704    1.86%
Commercial   28,543    6.83%   33,904    8.18%
    36,383    8.71%   41,608    10.04%
Commercial real estate                    
Owner occupied   101,926    24.39%   98,153    23.68%
Non-owner occupied   97,672    23.38%   95,034    22.93%
Multifamily   13,728    3.29%   13,597    3.28%
Farmland   178    0.04%   185    0.04%
    213,504    51.10%   206,969    49.93%
Consumer real estate                    
Home equity lines   20,004    4.79%   20,675    4.99%
Secured by 1-4 family residential,                    
First deed of trust   58,579    14.02%   57,410    13.85%
Second deed of trust   9,717    2.32%   9,556    2.31%
    88,300    21.13%   87,641    21.15%
Commercial and industrial loans
(except those secured by real estate)
   40,241    9.63%   36,639    8.84%
Guaranteed student loans   37,396    8.95%   39,315    9.49%
Consumer and other   1,986    0.48%   2,258    0.55%
                     
Total loans   417,810    100.0%   414,430    100.0%
Deferred fees and costs, net   737         713      
Less: allowance for loan losses   (3,027)        (3,051)     
                     
   $415,520        $412,092      

 

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 FHLB as part of their lending arrangement with the Company totaled $40,650,000 and $38,751,000 as of March 31, 2019 and December 31, 2018, 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.

 

12

 

 

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

 

   March 31,   December 31, 
   2019   2018 
Construction and land development          
Commercial  $-   $39 
    -    39 
Commercial real estate          
Non-owner occupied   515    515 
    515    515 
Consumer real estate          
Home equity lines   123    125 
Secured by 1-4 family residential,          
First deed of trust   1,079    1,163 
Second deed of trust   152    154 
    1,354    1,442 
Commercial and industrial loans
(except those secured by real estate)
   236    255 
Consumer and other   8    8 
           
Total loans  $2,113   $2,259 

 

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.

 

13

 

 

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

 

   Risk Rated   Risk Rated   Risk Rated   Risk Rated   Total 
   1-4   5   6   7   Loans 
March 31, 2019                         
Construction and land development                         
Residential  $7,093   $-   $747   $-   $7,840 
Commercial   28,194    -    349    -    28,543 
    35,287    -    1,096    -    36,383 
Commercial real estate                         
Owner occupied   93,318    6,590    2,018         101,926 
Non-owner occupied   97,157    -    515    -    97,672 
Multifamily   13,569    159    -    -    13,728 
Farmland   79    99    -    -    178 
    204,123    6,848    2,533    -    213,504 
Consumer real estate                         
Home equity lines   19,130    734    140    -    20,004 
Secured by 1-4 family residential                         
First deed of trust   55,265    1,849    1,465    -    58,579 
Second deed of trust   7,874    1,634    209    -    9,717 
    82,269    4,217    1,814    -    88,300 
Commercial and industrial loans
(except those secured by real estate)
   37,302    2,509    430    -    40,241 
Guaranteed student loans   37,396    -    -    -    37,396 
Consumer and other   1,968    8    10    -    1,986 
                          
Total loans  $398,345   $13,582   $5,883   $-   $417,810 
                          
December 31, 2018                         
Construction and land development                         
Residential  $6,957   $-   $747   $-   $7,704 
Commercial   33,432    6    466    -    33,904 
    40,389    6    1,213    -    41,608 
Commercial real estate                         
Owner occupied   88,484    6,540    3,129    -    98,153 
Non-owner occupied   94,519    -    515    -    95,034 
Multifamily   13,436    161    -    -    13,597 
Farmland   81    104    -    -    185 
    196,520    6,805    3,644    -    206,969 
Consumer real estate                         
Home equity lines   19,601    934    140    -    20,675 
Secured by 1-4 family residential                         
First deed of trust   53,994    1,612    1,804    -    57,410 
Second deed of trust   9,167    175    214    -    9,556 
    82,762    2,721    2,158    -    87,641 
Commercial and industrial loans
(except those secured by real estate)
   32,776    3,349    499    15    36,639 
Guaranteed student loans   39,315    -    -    -    39,315 
Consumer and other   2,239    8    11    -    2,258 
                          
Total loans  $394,001   $12,889   $7,525   $15   $414,430 

 

14

 

 

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, 2019                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $7,840   $7,840   $- 
Commercial   117    -    -    117    28,426    28,543    - 
    117    -    -    117    36,266    36,383    - 
Commercial real estate                                   
Owner occupied   673    -    -    673    101,253    101,926    - 
Non-owner occupied   -    -    -    -    97,672    97,672    - 
Multifamily   -    -    -    -    13,728    13,728    - 
Farmland   -    -    -    -    178    178    - 
    673    -    -    673    212,831    213,504    - 
Consumer real estate                                   
Home equity lines   378    -    -    378    19,626    20,004    - 
Secured by 1-4 family residential                                   
First deed of trust   274    -    -    274    58,305    58,579    - 
Second deed of trust   118    -    -    118    9,599    9,717    - 
    770    -    -    770    87,530    88,300    - 
Commercial and industrial loans
(except those secured by real estate)
   -    434    -    434    39,807    40,241    - 
Guaranteed student loans   1,274    1,007    4,164    6,445    30,951    37,396    4,164 
Consumer and other   11    9    -    20    1,966    1,986    - 
                                    
Total loans  $2,845   $1,450   $4,164   $8,459   $409,351   $417,810   $4,164 

 

                           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, 2018                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $7,704   $7,704   $- 
Commercial   118    -    -    118    33,786    33,904    - 
    118    -    -    118    41,490    41,608    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    98,153    98,153    - 
Non-owner occupied   -    -    -    -    95,034    95,034    - 
Multifamily   -    -    -    -    13,597    13,597    - 
Farmland   -    -    -    -    185    185    - 
    -    -    -    -    206,969    206,969    - 
Consumer real estate                                   
Home equity lines   -    315    -    315    20,360    20,675    - 
Secured by 1-4 family residential                                   
First deed of trust   171    7    -    178    57,232    57,410    - 
Second deed of trust   162    -    -    162    9,394    9,556    - 
    333    322    -    655    86,986    87,641    - 
Commercial and industrial loans
(except those secured by real estate)
   312    433    -    745    35,894    36,639    - 
Guaranteed student loans   1,946    971    5,573    8,490    30,825    39,315    5,573 
Consumer and other   9    1    -    10    2,248    2,258    - 
                                    
Total loans  $2,718   $1,727   $5,573   $10,018   $404,412   $414,430   $5,573 

 

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

 

15

 

 

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.

 

16

 

 

Impaired loans are set forth in the following table as of the dates indicated (in thousands):

 

   March 31, 2019   December 31, 2018 
       Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded                              
Construction and land development                              
Residential  $323   $323   $-   $747   $747   $- 
Commercial   356    454    -    360    458    - 
    679    777    -    1,107    1,205    - 
Commercial real estate                              
Owner occupied   2,576    2,576    -    3,703    3,703    - 
Non-owner occupied   2,566    2,566    -    2,588    2,588    - 
    5,142    5,142    -    6,291    6,291    - 
Consumer real estate                              
Home equity lines   123    123    -    684    684    - 
Secured by 1-4 family residential                              
First deed of trust   2,958    2,958    -    3,057    3,057    - 
Second deed of trust   711    936    -    721    929    - 
    3,792    4,017    -    4,462    4,670    - 
Commercial and industrial loans
(except those secured by real estate)
   512    885    -    528    875    - 
Consumer and other   -    -    -    -    -    - 
    10,125    10,821    -    12,388    13,041    - 
                               
With an allowance recorded                              
Construction and land development                              
Commercial   -    -    -    106    106    8 
    -    -    -    106    106    8 
Commercial real estate                              
Owner occupied   1,450    1,450    25    1,459    1,459    25 
    1,450    1,450    25    1,459    1,459    25 
Consumer real estate                              
Home equity lines   -    -    -    -    -    - 
Secured by 1-4 family residential                              
First deed of trust   197    197    19    200    200    20 
Second deed of trust   159    159    3    161    161    4 
    356    356    22    361    361    24 
Commercial and industrial loans
(except those secured by real estate)
   -    -    -    8    8    8 
Consumer and other   8    8    8    9    9    9 
    1,814    1,814    55    1,943    1,943    74 
                               
Total                              
Construction and land development                              
Residential   323    323    -    747    747    - 
Commercial   356    454    -    466    564    8 
    679    777    -    1,213    1,311    8 
Commercial real estate                              
Owner occupied   4,026    4,026    25    5,162    5,162    25 
Non-owner occupied   2,566    2,566    -    2,588    2,588    - 
    6,592    6,592    25    7,750    7,750    25 
Consumer real estate                              
Home equity lines   123    123    -    684    684    - 
Secured by 1-4 family residential,                              
First deed of trust   3,155    3,155    19    3,257    3,257    20 
Second deed of trust   870    1,095    3    882    1,090    4 
    4,148    4,373    22    4,823    5,031    24 
Commercial and industrial loans
(except those secured by real estate)
   512    885    -    536    883    8 
Consumer and other   8    8    8    9    9    9 
   $11,939   $12,635   $55   $14,331   $14,984   $74 

 

17

 

 

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

 

   For the Three Months Ended March 31, 
   2019   2018 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Residential  $267   $-   $299   $6 
Commercial   475    -    -    - 
    742    -    299    6 
Commercial real estate                    
Owner occupied   3,460    42    3,689    40 
Non-owner occupied   2,597    23    2,294    26 
    6,057    65    5,983    66 
Consumer real estate                    
Home equity lines   550    -    524    - 
Secured by 1-4 family residential                    
First deed of trust   2,972    42    3,635    31 
Second deed of trust   704    13    570    11 
    4,226    55    4,729    42 
Commercial and industrial loans
(except those secured by real estate)
   477    8    465    8 
Consumer and other   1    -    3    - 
    11,503    128    11,479    122 
                     
With an allowance recorded                    
Construction and land development Commercial   26    -    233    6 
Commercial real estate                    
Owner occupied   1,461    15    1,708    11 
Non-Owner occupied   -    -    -    - 
    1,461    15    1,708    11 
Consumer real estate                    
Home equity lines   -    -    136    2 
Secured by 1-4 family residential                    
First deed of trust   262    3    764    7 
Second deed of trust   162    2    127    - 
    424    5    1,027    9 
Commercial and industrial loans
(except those secured by real estate)
   176    -    591    - 
Consumer and other   14    -    5    - 
    2,101    20    3,564    26 
                     
Total                    
Construction and land development                    
Residential  $267   $-   $-   $- 
Commercial   501    -    532    12 
    768    -    532    12 
Commercial real estate                    
Owner occupied   4,921    57    5,397    51 
Non-owner occupied   2,597    23    2,294    26 
    7,518    80    7,691    77 
Consumer real estate                    
Home equity lines   550    -    660    - 
Secured by 1-4 family residential,                    
First deed of trust   3,234    45    4,399    38 
Second deed of trust   866    15    697    11 
    4,650    60    5,756    49 
Commercial and industrial loans
(except those secured by real estate)
   653    8    1,056    8 
Consumer and other   15    -    8    - 
   $13,604   $148   $15,043   $146 

 

18

 

 

Included in impaired loans are loans classified as 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, 2019                    
Commercial real estate                    
Owner occupied  $4,026   $4,026   $-   $25 
Non-owner occupied   2,566    2,051    515    - 
    6,592    6,077    515    25 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   2,196    1,516    680    19 
Second deeds of trust   783    718    65    3 
    2,979    2,234    745    22 
Commercial and industrial loans
(except those secured by real estate)
   310    276    34    - 
   $9,881   $8,587   $1,294   $47 
                     
Number of loans   42    33    9    6 

 

19

 

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2018                    
Construction and land development
Commercial
  $-   $-   $-   $- 
    -    -    -    - 
Commercial real estate                    
Owner occupied   4,064    4,064    -    25 
Non-owner occupied   2,072    2,072    -    - 
    6,136    6,136    -    25 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   2,284    1,525    759    20 
Second deeds of trust   794    729    65    4 
    3,078    2,254    824    24 
Commercial and industrial loans
(except those secured by real estate)
   317    282    35    - 
   $9,531   $8,672   $859   $49 
                     
Number of loans   42    33    9    6 

 

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

 

   March 31, 2019   March 31, 2018 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification         Modification   Modification 
   Number of   Recorded   Recorded   Number of   Recorded   Recorded 
   Loans   Balance   Balance   Loans   Balance   Balance 
                         
Commercial real estate                              
Non-owner occupied   1   $515   $515    -   $-   $- 
    1   $515   $515    -   $-   $- 

 

There were no defaults on TDRs that were modified as TDRs during the prior twelve month period.

 

20

 

 

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, 2019                         
Construction and land development                         
Residential  $42   $3   $-   $1   $46 
Commercial   220    (48)   -    1    173 
    262    (45)   -    2    219 
Commercial real estate                         
Owner occupied   673    37    -    -    710 
Non-owner occupied   673    19    -    -    692 
Multifamily   87    1    -    -    88 
Farmland   2    -    -    -    2 
    1,435    57    -    -    1,492 
Consumer real estate                         
Home equity lines   244    (10)   -    6    240 
Secured by 1-4 family residential                         
First deed of trust   385    8    -    2    395 
Second deed of trust   51    2    -    4    57 
    680    -    -    12    692 
Commercial and industrial loans
(except those secured by real estate)
   308    48    (15)   11    352 
Student loans   121    33    (33)   -    121 
Consumer and other   34    (3)   (2)   1    30 
Unallocated   211    (90)   -    -    121 
                          
   $3,051   $-   $(50)  $26   $3,027 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Year Ended December 31, 2018                         
Construction and land development                         
Residential  $32   $9   $-   $1   $42 
Commercial   165    49    -    6    220 
    197    58    -    7    262 
Commercial real estate                         
Owner occupied   624    49    -    -    673 
Non-owner occupied   500    (45)   -    218    673 
Multifamily   60    27    -    -    87 
Farmland   3    (1)   -    -    2 
    1,187    30    -    218    1,435 
Consumer real estate                         
Home equity lines   268    39    (64)   1    244 
Secured by 1-4 family residential                         
First deed of trust   502    (97)   (41)   21    385 
Second deed of trust   47    6    (45)   43    51 
    817    (52)   (150)   65    680 
Commercial and industrial loans
(except those secured by real estate)
   556    (50)   (375)   177    308 
Student loans   108    118    (105)   -    121 
Consumer and other   27    32    (34)   9    34 
Unallocated   347    (136)   -    -    211 
                          
   $3,239   $-   $(664)  $476   $3,051 

 

21

 

 

       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 

 

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. The allowance for loan losses included an unallocated portion of approximately $121,000, $211,000, and $271,000 at March 31, 2019, December 31, 2018, and March 31, 2018, respectively.

 

22

 

 

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 
                         
Three Months Ended March 31, 2019                              
Construction and land development                              
Residential  $46   $-   $46   $7,840   $323   $7,517 
Commercial   173    -    173    28,543    356    28,187 
    219    -    219    36,383    679    35,704 
Commercial real estate                              
Owner occupied   710    25    685    101,926    4,026    97,900 
Non-owner occupied   692    -    692    97,672    2,566    95,106 
Multifamily   88    -    88    13,728    -    13,728 
Farmland   2    -    2    178    -    178 
    1,492    25    1,467    213,504    6,592    206,912 
Consumer real estate                              
Home equity lines   240    -    240    20,004    123    19,881 
Secured by 1-4 family residential                              
First deed of trust   395    19    376    58,579    3,155    55,424 
Second deed of trust   57    3    54    9,717    870    8,847 
    692    22    670    88,300    4,148    84,152 
Commercial and industrial loans
(except those secured by real estate)
   352    -    352    40,241    512    39,729 
Student loans   121    -    121    37,396    -    37,396 
Consumer and other   151    8    143    1,986    8    1,978 
                               
   $3,027   $55   $2,972   $417,810   $11,939   $405,871 
                               
Year Ended December 31, 2018                              
Construction and land development                              
Residential  $42   $-   $42   $7,704   $747   $6,957 
Commercial   220    8    212    33,904    466    33,438 
    262    8    254    41,608    1,213    40,395 
Commercial real estate                              
Owner occupied   673    25    648    98,153    5,162    92,991 
Non-owner occupied   673    -    673    95,034    2,588    92,446 
Multifamily   87    -    87    13,597    -    13,597 
Farmland   2    -    2    185    -    185 
    1,435    25    1,410    206,969    7,750    199,219 
Consumer real estate                              
Home equity lines   244    -    244    20,675    684    19,991 
Secured by 1-4 family residential                              
First deed of trust   385    20    365    57,410    3,257    54,153 
Second deed of trust   51    4    47    9,556    882    8,674 
    680    24    656    87,641    4,823    82,818 
Commercial and industrial loans
(except those secured by real estate)
   308    8    300    36,639    536    36,103 
Student loans   121    -    121    39,315    -    39,315 
Consumer and other   245    9    236    2,258    9    2,249 
                               
   $3,051   $74   $2,977   $414,430   $14,331   $400,099 

 

23

 

 

Note 6 – Deposits

 

Deposits as of March 31, 2019 and December 31, 2018 were as follows (dollars in thousands):

 

   March 31, 2019   December 31, 2018 
   Amount   %   Amount   % 
                 
Checking accounts                    
Noninterest bearing demand   122,923    27.7%  $119,317    27.2%
Interest bearing   48,223    10.9%   49,188    11.2%
Money market accounts   91,585    20.7%   86,295    19.7%
Savings accounts   27,727    6.3%   28,694    6.5%
Time deposits of $250,000 and over   25,048    5.6%   24,160    5.5%
Other time deposits   127,894    28.8%   131,393    29.9%
                     
Total  $443,400    100.0%  $439,047    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 $1,354,000 in FHLB stock at March 31, 2019 and $1,320,000 at December 31, 2018, which is held at cost. 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 $21,000,000 at March 31, 2019 and December 31, 2018 maturing through 2023.

 

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. There were no borrowings against the lines at March 31, 2019 and December 31, 2018.

 

24

 

 

Note 8 – Leases

 

The following tables present information about the Company’s leases (dollars in thousands):

 

   March 31, 2019 
Lease liabilities  $1,312 
Right-of-use assets  $1,308 
Weighted average remaining lease term   5.04 years 
Weighted average discount rate   2.98%

 

   For the Three
Months Ended
 
   March 31, 2019 
Lease cost     
Operating lease cost  $107 
Total lease cost  $107 

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

 

   As of 
   March 31, 2019 
Lease payments due     
Nine months ending December 31, 2019  $312 
Twelve months ending December 31, 2020   416 
Twelve months ending December 31, 2021   278 
Twelve months ending December 31, 2022   120 
Twelve months ending December 31, 2023   44 
Twelve months ending December 31, 2024   48 
Thereafter   203 
Total undiscounted cash flows  $1,421 
Discount   109 
Lease liabilities  $1,312 

 

Cash paid for amounts included in the measurement of lease liabilities during the three months ended March 31, 2019 was $103,000. The Company adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Company measured lease expense in accordance with FASB Accounting Standards Codification Topic 840. During the three months ended March 31, 2018, the Company recognized lease expense of $91,000.

 

Note 9 – Trust preferred securities

 

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated 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, 2019 was 4.75%. 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, 2019 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 unconsolidated 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, 2019 was 4.01%. 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, 2019 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 10 – Subordinated Debt

 

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, 2019, the carrying value of the notes totaled $5,571,000.

 

Note 11 – Stock incentive plan

 

In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service in exchange for the award rather than disclosed in the financial statements.

 

26

 

 

The following table summarizes options outstanding under the Company’s stock incentive plans at the indicated dates:

 

   Three Months Ended March 31, 
   2019   2018 
       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   734   $25.63   $9.76         2,245   $24.17   $12.88      
Granted   -    -    -         -    -    -      
Forfeited   -    -    -         -    -    -      
Exercised   -    -    -         -    -    -      
Options outstanding, end of period   734   $25.63   $9.76   $-    2,245   $24.17   $12.88   $- 
Options exercisable, end of period   734                   2,245                

 

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.

 

Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The total number of shares underlying non-vested restricted stock was 17,646 and 21,761 at March 31, 2019 and 2018, 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, 2019 and 2018, was $354,185 and $363,379, respectively. The time based unamortized compensation of $137,005 is expected to be recognized over a weighted average period of 1.63 years.

 

A summary of changes in the Company’s nonvested restricted stock awards for the three months ended March 31, 2019 follows:

 

       Weighted-     
       Average   Aggregate 
       Grant-Date   Intrinsic 
   Shares   Fair-Value   Value 
             
December 31, 2018   23,556   $32.46   $767,926 
Granted   -    -    - 
Vested   (3,147)   20.19    (102,592)
Forfeited   (2,763)   22.35    (90,074)
                
March 31, 2019   17,646   $31.18   $575,260 

 

Stock-based compensation expense was approximately $46,000 for the three months ended March 31, 2019 and 2018, respectively.

 

27

 

 

Note 12 — Fair value

 

The Company determines the fair value of its financial instruments based on the requirements established in 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.

 

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.

 

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Other Real Estate Owned: OREO assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Subsequently, OREO 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 the lower of cost less accumulated depreciation or fair value 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, 2019 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  $15,260   $1,545   $13,715   $- 
Mortgage-backed securities   22,080    2,587    19,493    - 
Subordinated debt   4,495    -    3,995    500 
                     
Financial Assets - Non-Recurring                    
Impaired loans   1,759    -    -    1,759 
Assets held for sale   537    -    -    537 
Other real estate owned   526    -    -    526 

 

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   Fair Value Measurement 
   at December 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  $13,851   $-   $13,851   $- 
Mortgage-backed securities   26,450    -    26,450    - 
Subordinated debt   3,952    -    3,452    500 
                     
Financial Assets - Non-Recurring                    
Impaired loans   1,869    -    -    1,869 
Assets held for sale   554    -    -    554 
Other real estate owned   526    -    -    526 

 

The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at March 31, 2019 and December 31, 2018 (dollars in thousands):

 

   March 31, 2019
             Range
   Fair Value   Valuation  Unobservable  (Weighted
   Estimate   Techniques  Input  Average)
              
Impaired loans - real estate secured  $1,759   Appraisal (1) or Internal Valuation (2)  Selling costs  6%-10% (7%)
           Discount for lack of  marketability and age of appraisal  6%-30% (10%)
               
Assets held for sale  $537   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  $526   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 typically includes various level 3 inputs that 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, 2018
             Range
   Fair Value   Valuation  Unobservable  (Weighted
   Estimate   Techniques  Input  Average)
              
Impaired loans - real estate secured  $1,869   Appraisal (1) or Internal Valuation (2)  Selling costs  6%-10% (7%)
           Discount for lack of  marketability and age of appraisal  6%-30% (10%)
               
Assets held for sale  $554   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  $526   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 typically includes various level 3 inputs that are not identifiable
(2)Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances

 

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with ASU 2016-01, which the Company adopted on January 1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

 

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The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.

 

      March 31,   December 31, 
      2019   2018 
   Level in Fair                
   Value  Carrying   Estimated   Carrying   Estimated 
   Hierarchy  Value   Fair Value   Value   Fair Value 
   (In thousands) 
Financial assets                       
Cash  Level 1  $15,178   $15,178   $12,717   $12,717 
Cash equivalents  Level 2   10,728    10,728    6,826    6,826 
Investment securities available for sale  Level 1   4,132    4,132    -    - 
Investment securities available for sale  Level 2   37,203    37,203    43,753    43,753 
Investment securities available for sale  Level 3   500    500    500    500 
Federal Home Loan Bank stock  Level 2   1,354    1,354    1,320    1,320 
Loans held for sale  Level 2   5,218    5,218    6,128    6,128 
Loans  Level 3   416,051    410,738    412,562    409,939 
Impaired loans  Level 3   1,759    1,759    1,869    1,869 
Assets held for sale  Level 3   537    537    554    554 
Other real estate owned  Level 3   526    526    526    526 
Bank owned life insurance  Level 3   7,478    7,478    7,441    7,441 
Accrued interest receivable  Level 2   2,729    2,729    2,662    2,662 
                        
Financial liabilities                       
Deposits  Level 2   443,400    443,528    439,047    439,125 
FHLB borrowings  Level 2   21,000    21,183    21,000    21,093 
Trust preferred securities  Level 2   8,764    9,534    8,764    8,852 
Other borrowings  Level 2   5,571    5,571    5,563    5,563 
Accrued interest payable  Level 2   241    241    221    221 

 

Note 13 – 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, 2019 and 2018 (in thousands):

 

   Commercial   Mortgage       Consolidated 
   Banking   Banking   Eliminations   Totals 
Three Months Ended March 31, 2019                    
                     
Revenues                    
Interest income  $5,646   $63   $-   $5,709 
Gain on sale of loans   -    928    -    928 
Other revenues   774    112    (57)   829 
Total revenues   6,420    1,103    (57)   7,466 
                     
Expenses                    
Interest expense   1,243    -    -    1,243 
Salaries and benefits   2,200    736    -    2,936 
Commissions   -    239    -    239 
Other expenses   1,882    238    (57)   2,063 
Total operating expenses   5,325    1,213    (57)   6,481 
                     
Income before income taxes  $1,095   $(110)  $-   $985 
                     
Total assets  $525,782   $9,892   $(13,400)  $522,274 

 

   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 

 

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Note 14 – 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 and 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.

 

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.

 

Accumulated Other Comprehensive Loss

 

The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes of $113,000 and $199,000 as of March 31, 2019 and December 31, 2018 (in thousands):

 

   March 31,   December 31, 
   2019   2018 
         
Net unrealized losses on securities  $(373)  $(696)
Net unrecognized losses on defined benefit plan   (51)   (53)
Total other comprehensive loss  $(424)  $(749)

 

Regulatory Matters

 

Both the Company and the Bank are required to comply with the capital adequacy standards established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), in the case of the Company, and the Federal Deposit Insurance Corporation (“FDIC”), in the case of the Bank. The Federal Reserve and the FDIC have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the “Basel III Capital Rules”).  The Basel III Capital Rules implement minimum capital ratios and establish risk weightings that are applied to many classes of assets held by community banks, including applying higher risk weightings to certain commercial real estate loans.

 

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The Basel III Capital Rules require banks and bank holding companies to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress.  Banking organizations with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

 

The Company meets the eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement (the “SBHC Policy Statement”). On August 28, 2018, the Federal Reserve issued an interim final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which was signed into law on May 24, 2018 (the “EGRRCPA”), that expands the applicability of the SBHC Policy Statement to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules. As of March 31, 2019, the Bank exceeded the minimum ratios under the Basel III Capital Rules.

 

The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act of 1950. To be well capitalized under these regulations, a bank must have the following minimum capital ratios: (1) a common equity Tier 1 capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least 8.0%; (3) a total risk-based capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%. As of March 31, 2019, the Bank exceeded the minimum ratios to be classified as well capitalized.

 

On November 21, 2018, the federal bank regulators jointly issued a proposed rule required by the EGRRCPA that would permit qualifying banks and bank holding companies that have less than $10 billion of assets, like the Company and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or “CBLR”). Under the proposed rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework. The rule is in proposed form so the content and scope of the final rule, and its impact on the Company and the Bank (if any), cannot be determined.

 

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The capital amounts and ratios at March 31, 2019 and December 31, 2018 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, 2019                              
Total capital (to risk-weighted assets)
Village Bank
  $51,152    12.63%  $32,413    8.00%  $40,516    10.00%
                               
Tier 1 capital (to risk-weighted assets)
Village Bank
   48,125    11.88%   24,310    6.00%   32,413    8.00%
                               
Leverage ratio (Tier 1 capital to average assets)
Village Bank
   48,125    9.46%   20,352    4.00%   25,440    5.00%
                               
Common equity tier 1 (to risk-weighted assets)
Village Bank
   48,125    11.88%   18,232    4.50%   26,335    6.50%
                               
December 31, 2018                              
Total capital (to risk-weighted assets)
Village Bank
  $49,926    12.46%  $32,051    8.00%  $40,064    10.00%
                               
Tier 1 capital (to risk-weighted assets)
Village Bank
   46,875    11.70%   24,038    6.00%   32,051    8.00%
                               
Leverage ratio (Tier 1 capital to average assets)
Village Bank
   46,875    9.15%   20,502    4.00%   25,628    5.00%
                               
Common equity tier 1 (to risk-weighted assets)
Village Bank
   46,875    11.70%   18,029    4.50%   26,042    6.50%

 

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Note 15 – 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.

 

At March 31, 2019 and December 31, 2018, the Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

 

   March 31,   December 31, 
   2019   2018 
         
Undisbursed credit lines  $65,203   $66,057 
Commitments to extend or originate credit   20,543    12,738 
Standby letters of credit   4,051    3,999 
           
Total commitments to extend credit  $89,797   $82,794 

 

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 – Generally, 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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Note 16 – Recent accounting pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 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;
·problems with technology utilized by us;
·changing trends in customer profiles and behavior; and
·other factors described from time to time in our reports filed with the SEC.

 

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These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.  In addition, past results of operations are not necessarily indicative of future results.

 

General

 

The Company’s primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Company is not able to predict market interest rate fluctuations and its asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on the Company’s results of operations and financial condition.

 

Although we endeavor to minimize the credit risk inherent in the Company’s loan portfolio, we must necessarily make various assumptions and judgments about the collectability of the loan portfolio based on our experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for loan losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income.

 

Results of operations

 

The following presents management’s discussion and analysis of the financial condition of the Company at March 31, 2019 and December 31, 2018 and the results of operations for the Company for the three months ended March 31, 2019 and 2018. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

 

Summary

 

For the three months ended March 31, 2019, the Company had net income and net income available to common shareholders of $809,000, or $0.56 per fully diluted share, compared to net income of $412,000 and net income available to common shareholders of $299,000, or $0.21 per fully diluted share, for the same period in 2018.

 

Net interest income

 

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders’ equity. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets (“net interest margin”) is calculated by dividing tax equivalent net interest income by average interest-earning assets. Generally, the net interest margin will exceed the net interest spread because a portion of interest earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders’ equity.

 

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   For the Three Months Ended March 31, 
   2019   2018   Change 
   (dollars in thousands) 
             
Average interest-earning assets  $472,426   $434,701   $37,725 
Interest income  $5,709   $4,777   $932 
Yield on interest-earning assets   4.90%   4.46%   0.44%
Average interest-bearing liabilities  $352,430   $328,871   $23,559 
Interest expense  $1,243   $766   $477 
Cost of interest-bearing liabilities   1.43%   0.94%   0.49%
Net interest income  $4,466   $4,011   $455 
Net interest margin   3.83%   3.74%   0.09%

 

The increase in net interest income of $455,000 in the first quarter of 2019 was a result of positive movements in interest income. Interest income increased by $932,000 with interest income on loans held for investment increasing by $861,000 and interest income on investment securities increasing by $30,000.

 

The increase in interest income on loans held for investment was attributable to an increase in average loans outstanding of $40,274,000 and an increase in the yield of 38 basis points. Interest expense increased by $477,000 because of an increase in average interest bearing liabilities of $23,559,000 and an increase in the cost of interest bearing liabilities of 49 basis points.

 

The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders' equity and related income, expense and corresponding weighted-average yields and rates (dollars in thousands). The average balances used in these tables and other statistical data were calculated using daily average balances. We had no tax exempt interest-earning assets for the periods presented.

 

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Average Balance Sheets, Income and Expense, Yields and Rates

 

   Three Months Ended March 31, 2019   Three Months Ended March 31, 2018 
       Interest   Annualized       Interest   Annualized 
   Average   Income/   Yield   Average   Income/   Yield 
   Balance   Expense   Rate   Balance   Expense   Rate 
                         
Loans net of deferred fees  $415,404   $5,302    5.18%  $375,130   $4,441    4.80%
Loans held for sale   5,305    63    4.82%   4,255    47    4.48%
Investment securities   44,152    293    2.69%   49,054    263    2.17%
Federal funds and other   7,565    51    2.73%   6,262    26    1.68%
Total interest earning assets   472,426    5,709    4.90%   434,701    4,777    4.46%
                               
Allowance for loan losses and deferred fees   (3,048)             (3,214)          
Cash and due from banks   8,944              10,815           
Premises and equipment, net   12,432              12,985           
Other assets   21,559              21,166