ITEM 1 – FINANCIAL STATEMENTS
Village Bank and Trust Financial Corp. and Subsidiary
|
Consolidated Balance Sheets
|
September 30, 2017 (Unaudited) and December 31, 2016
|
(in thousands, except share data)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
15,684
|
|
|
$
|
10,848
|
|
Federal funds sold
|
|
|
15,026
|
|
|
|
948
|
|
Total cash and cash equivalents
|
|
|
30,710
|
|
|
|
11,796
|
|
Investment securities available for sale
|
|
|
44,834
|
|
|
|
43,894
|
|
Loans held for sale
|
|
|
5,641
|
|
|
|
14,784
|
|
Loans
|
|
|
|
|
|
|
|
|
Outstandings
|
|
|
347,002
|
|
|
|
337,100
|
|
Allowance for loan losses
|
|
|
(3,243
|
)
|
|
|
(3,373
|
)
|
Deferred fees and costs, net
|
|
|
676
|
|
|
|
660
|
|
Total loans, net
|
|
|
344,435
|
|
|
|
334,387
|
|
Other real estate owned, net of valuation allowance
|
|
|
1,788
|
|
|
|
2,926
|
|
Assets held for sale
|
|
|
841
|
|
|
|
841
|
|
Premises and equipment, net
|
|
|
13,077
|
|
|
|
12,758
|
|
Bank owned life insurance
|
|
|
7,222
|
|
|
|
7,093
|
|
Accrued interest receivable
|
|
|
2,516
|
|
|
|
2,274
|
|
Other assets
|
|
|
13,642
|
|
|
|
14,049
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
464,706
|
|
|
$
|
444,802
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
$
|
103,396
|
|
|
$
|
92,574
|
|
Interest bearing
|
|
|
304,008
|
|
|
|
290,703
|
|
Total deposits
|
|
|
407,404
|
|
|
|
383,277
|
|
Federal Home Loan Bank advances
|
|
|
1,600
|
|
|
|
2,400
|
|
Long-term debt - trust preferred securities
|
|
|
8,764
|
|
|
|
8,764
|
|
Other borrowings
|
|
|
-
|
|
|
|
81
|
|
Accrued interest payable
|
|
|
142
|
|
|
|
70
|
|
Other liabilities
|
|
|
3,162
|
|
|
|
6,596
|
|
Total liabilities
|
|
|
421,072
|
|
|
|
401,188
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 shares authorized; 5,027 shares issued and outstanding at September 30, 2017 and 5,715 shares issued and outstanding at December 31, 2016
|
|
|
20
|
|
|
|
23
|
|
Common stock, $4 par value - 10,000,000 shares authorized; 1,430,854 shares issued and outstanding at September 30, 2017 and 1,428,261 shares issued and outstanding at December 31, 2016
|
|
|
5,661
|
|
|
|
5,629
|
|
Additional paid-in capital
|
|
|
58,028
|
|
|
|
58,643
|
|
Accumulated deficit
|
|
|
(20,631
|
)
|
|
|
(21,172
|
)
|
Common stock warrant
|
|
|
732
|
|
|
|
732
|
|
Stock in directors rabbi trust
|
|
|
(1,010
|
)
|
|
|
(1,034
|
)
|
Directors deferred fees obligation
|
|
|
1,010
|
|
|
|
1,034
|
|
Accumulated other comprehensive loss
|
|
|
(176
|
)
|
|
|
(241
|
)
|
Total shareholders' equity
|
|
|
43,634
|
|
|
|
43,614
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
464,706
|
|
|
$
|
444,802
|
|
See accompanying notes to consolidated financial statements.
Village Bank and Trust Financial Corp. and Subsidiary
|
Consolidated Statements of Operations
|
Three and Nine Months Ended September 30, 2017 and 2016
|
(Unaudited)
|
(in thousands, except per share data)
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
4,135
|
|
|
$
|
4,013
|
|
|
$
|
12,086
|
|
|
$
|
11,583
|
|
Investment securities
|
|
|
178
|
|
|
|
72
|
|
|
|
506
|
|
|
|
261
|
|
Federal funds sold
|
|
|
67
|
|
|
|
19
|
|
|
|
111
|
|
|
|
46
|
|
Total interest income
|
|
|
4,380
|
|
|
|
4,104
|
|
|
|
12,703
|
|
|
|
11,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
615
|
|
|
|
590
|
|
|
|
1,770
|
|
|
|
1,784
|
|
Borrowed funds
|
|
|
73
|
|
|
|
70
|
|
|
|
227
|
|
|
|
174
|
|
Total interest expense
|
|
|
688
|
|
|
|
660
|
|
|
|
1,997
|
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
3,692
|
|
|
|
3,444
|
|
|
|
10,706
|
|
|
|
9,932
|
|
Provision for loan losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net interest income after provision for loan losses
|
|
|
3,692
|
|
|
|
3,444
|
|
|
|
10,706
|
|
|
|
9,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
|
591
|
|
|
|
673
|
|
|
|
1,785
|
|
|
|
1,858
|
|
Gain on sale of loans
|
|
|
1,395
|
|
|
|
2,043
|
|
|
|
4,195
|
|
|
|
4,630
|
|
Gain on sale of asset held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
504
|
|
Gain (loss) on sale of investment securities
|
|
|
-
|
|
|
|
15
|
|
|
|
(9
|
)
|
|
|
162
|
|
Rental income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
582
|
|
Other
|
|
|
92
|
|
|
|
114
|
|
|
|
270
|
|
|
|
292
|
|
Total noninterest income
|
|
|
2,078
|
|
|
|
2,845
|
|
|
|
6,241
|
|
|
|
8,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
2,985
|
|
|
|
3,045
|
|
|
|
9,042
|
|
|
|
8,463
|
|
Commissions
|
|
|
431
|
|
|
|
533
|
|
|
|
1,180
|
|
|
|
1,163
|
|
Occupancy
|
|
|
269
|
|
|
|
324
|
|
|
|
821
|
|
|
|
1,188
|
|
Equipment
|
|
|
193
|
|
|
|
197
|
|
|
|
553
|
|
|
|
573
|
|
Write down of assets held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
220
|
|
Cease use lease obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
(125
|
)
|
|
|
-
|
|
Supplies
|
|
|
55
|
|
|
|
81
|
|
|
|
173
|
|
|
|
232
|
|
Professional and outside services
|
|
|
742
|
|
|
|
743
|
|
|
|
2,254
|
|
|
|
2,220
|
|
Advertising and marketing
|
|
|
134
|
|
|
|
76
|
|
|
|
274
|
|
|
|
239
|
|
Foreclosed assets, net
|
|
|
11
|
|
|
|
79
|
|
|
|
(151
|
)
|
|
|
250
|
|
FDIC insurance premium
|
|
|
69
|
|
|
|
90
|
|
|
|
207
|
|
|
|
287
|
|
Other operating expense
|
|
|
502
|
|
|
|
541
|
|
|
|
1,460
|
|
|
|
1,484
|
|
Total noninterest expense
|
|
|
5,391
|
|
|
|
5,709
|
|
|
|
15,688
|
|
|
|
16,319
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Income before income tax expense
|
|
|
379
|
|
|
|
580
|
|
|
|
1,259
|
|
|
|
1,641
|
|
Income tax expense (benefit)
|
|
|
106
|
|
|
|
(11,352
|
)
|
|
|
333
|
|
|
|
(11,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
273
|
|
|
|
11,932
|
|
|
|
926
|
|
|
|
12,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and amortization of discount
|
|
|
(113
|
)
|
|
|
(186
|
)
|
|
|
(385
|
)
|
|
|
(547
|
)
|
Net income available to common shareholders
|
|
$
|
160
|
|
|
$
|
11,746
|
|
|
$
|
541
|
|
|
$
|
12,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic
|
|
$
|
0.11
|
|
|
$
|
8.21
|
|
|
$
|
0.38
|
|
|
$
|
8.74
|
|
Earnings per share, diluted
|
|
$
|
0.11
|
|
|
$
|
8.21
|
|
|
$
|
0.38
|
|
|
$
|
8.74
|
|
See accompanying notes to consolidated financial statements.
Village Bank and Trust Financial Corp. and Subsidiary
|
Consolidated Statements of Comprehensive Income
|
Three and Nine Months Ended September 30, 2017 and 2016
|
(Unaudited)
|
(in thousands)
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
273
|
|
|
$
|
11,932
|
|
|
$
|
926
|
|
|
$
|
12,993
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the period
|
|
|
33
|
|
|
|
22
|
|
|
|
80
|
|
|
|
902
|
|
Tax effect
|
|
|
11
|
|
|
|
8
|
|
|
|
27
|
|
|
|
307
|
|
Net change in unrealized holding gains on securities available for sale, net of tax
|
|
|
22
|
|
|
|
14
|
|
|
|
53
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for (gains) losses realized in income
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
9
|
|
|
|
(162
|
)
|
Tax effect
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
(55
|
)
|
Reclassification for (gains) losses included in net income, net of tax
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
6
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension adjustment
|
|
|
3
|
|
|
|
3
|
|
|
|
9
|
|
|
|
9
|
|
Tax effect
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
Minimum pension adjustment, net of tax
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
24
|
|
|
|
6
|
|
|
|
65
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
297
|
|
|
$
|
11,938
|
|
|
$
|
991
|
|
|
$
|
13,487
|
|
See accompanying notes to consolidated financial statements.
Village Bank and Trust Financial Corp. and Subsidiary
|
Consolidated Statements of Shareholders' Equity
|
Nine Months Ended September 30, 2017 and 2016
|
(Unaudited)
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
Stock in
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
|
|
|
Directors
|
|
|
Fees
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Warrant
|
|
|
Rabbi Trust
|
|
|
Obligation
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
23
|
|
|
$
|
5,629
|
|
|
$
|
58,643
|
|
|
$
|
(21,172
|
)
|
|
$
|
732
|
|
|
$
|
(1,034
|
)
|
|
$
|
1,034
|
|
|
$
|
(241
|
)
|
|
$
|
43,614
|
|
Preferred stock redemption
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(685
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(688
|
)
|
Preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(385
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(385
|
)
|
Restricted stock redemption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
-
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
102
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102
|
|
Minimum pension adjustment
(net of income taxes of $3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
926
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
926
|
|
Change in unrealized gain
on investment securities available-for-sale, net of reclassification and tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September
30, 2017
|
|
$
|
20
|
|
|
$
|
5,661
|
|
|
$
|
58,028
|
|
|
$
|
(20,631
|
)
|
|
$
|
732
|
|
|
$
|
(1,010
|
)
|
|
$
|
1,010
|
|
|
$
|
(176
|
)
|
|
$
|
43,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
23
|
|
|
$
|
5,562
|
|
|
$
|
58,497
|
|
|
$
|
(33,948
|
)
|
|
$
|
732
|
|
|
$
|
(1,034
|
)
|
|
$
|
1,034
|
|
|
$
|
(507
|
)
|
|
$
|
30,359
|
|
Preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(547
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(547
|
)
|
Issuance of common stock
|
|
|
-
|
|
|
|
56
|
|
|
|
(56
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156
|
|
Minimum pension adjustment
(net of income taxes of $3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,993
|
|
Change in unrealized gain
on investment securities available-for-sale, net of reclassification and tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
488
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September
30, 2016
|
|
$
|
23
|
|
|
$
|
5,618
|
|
|
$
|
58,597
|
|
|
$
|
(21,502
|
)
|
|
$
|
732
|
|
|
$
|
(1,034
|
)
|
|
$
|
1,034
|
|
|
$
|
(13
|
)
|
|
$
|
43,455
|
|
See accompanying notes to consolidated financial statements.
Village Bank and Trust Financial Corp. and Subsidiary
|
Consolidated Statements of Cash Flows
|
Nine Months Ended September 30, 2017 and 2016
|
(Unaudited)
|
|
(in thousands)
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
926
|
|
|
$
|
12,993
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
552
|
|
|
|
606
|
|
Deferred income taxes
|
|
|
332
|
|
|
|
645
|
|
Valuation allowance (recovery) on net deferred tax asset
|
|
|
-
|
|
|
|
(11,997
|
)
|
Write-down of other real estate owned
|
|
|
351
|
|
|
|
466
|
|
Valuation allowance other real estate owned
|
|
|
(331
|
)
|
|
|
(335
|
)
|
Write-down of assets held for sale
|
|
|
-
|
|
|
|
220
|
|
(Gain) loss on securities sold
|
|
|
9
|
|
|
|
(162
|
)
|
Gain on loans sold
|
|
|
(4,195
|
)
|
|
|
(4,630
|
)
|
Gain on sale of assets held for sale
|
|
|
-
|
|
|
|
(504
|
)
|
Loss on sale and disposal of premises and equipment
|
|
|
-
|
|
|
|
2
|
|
Gain on sale of other real estate owned
|
|
|
(218
|
)
|
|
|
(59
|
)
|
Stock compensation expense
|
|
|
102
|
|
|
|
156
|
|
Proceeds from sale of mortgage loans
|
|
|
132,070
|
|
|
|
157,290
|
|
Origination of mortgage loans for sale
|
|
|
(118,732
|
)
|
|
|
(154,380
|
)
|
Amortization of premiums and accretion of discounts on securities, net
|
|
|
66
|
|
|
|
116
|
|
Increase in interest receivable
|
|
|
(242
|
)
|
|
|
(294
|
)
|
Increase in bank owned life insurance
|
|
|
(129
|
)
|
|
|
(139
|
)
|
Decrease in other assets
|
|
|
50
|
|
|
|
2,611
|
|
Increase (decrease) in interest payable
|
|
|
72
|
|
|
|
(1,282
|
)
|
Decrease in other liabilities
|
|
|
(903
|
)
|
|
|
(2,290
|
)
|
Net cash provided by (used in) operating activities
|
|
|
9,780
|
|
|
|
(967
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities
|
|
|
(4,379
|
)
|
|
|
(10,000
|
)
|
Proceeds from the sale or calls of available for sale securities
|
|
|
3,454
|
|
|
|
21,933
|
|
Proceeds from the sale of assets held for sale
|
|
|
-
|
|
|
|
7,338
|
|
Net increase in loans
|
|
|
(10,333
|
)
|
|
|
(22,488
|
)
|
Proceeds from sale of other real estate owned
|
|
|
1,621
|
|
|
|
3,101
|
|
Purchases of premises and equipment
|
|
|
(871
|
)
|
|
|
(700
|
)
|
Net cash used in investing activities
|
|
|
(10,508
|
)
|
|
|
(816
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Redeemption of preferred stock
|
|
|
(688
|
)
|
|
|
-
|
|
Payment of preferred dividends
|
|
|
(2,916
|
)
|
|
|
-
|
|
Net increase in deposits
|
|
|
24,127
|
|
|
|
14,372
|
|
Net increase (decrease) in Federal Home Loan Bank advances
|
|
|
(800
|
)
|
|
|
2,200
|
|
Net decrease in other borrowings
|
|
|
(81
|
)
|
|
|
(293
|
)
|
Net cash provided by financing activities
|
|
|
19,642
|
|
|
|
16,279
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
18,914
|
|
|
|
14,496
|
|
Cash and cash equivalents, beginning of period
|
|
|
11,796
|
|
|
|
17,262
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
30,710
|
|
|
$
|
31,758
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
1,925
|
|
|
$
|
3,239
|
|
Supplemental Schedule of Non Cash Activities
|
|
|
|
|
|
|
|
|
Real estate owned assets acquired in settlement of loans
|
|
$
|
285
|
|
|
$
|
268
|
|
Bank financed sale of asset held for sale
|
|
$
|
-
|
|
|
$
|
4,912
|
|
Dividends on preferred stock accrued
|
|
$
|
385
|
|
|
$
|
547
|
|
See accompanying notes to consolidated financial statements.
Village Bank and Trust Financial Corp. and
Subsidiary
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30,
2017 and 2016
(Unaudited)
Note 1 – Principles of
presentation
Village Bank and Trust Financial Corp.
(the “Company”) is the holding company of Village Bank (the “Bank”). The consolidated financial statements
include the accounts of the Company, the Bank and the Bank’s subsidiary. All material intercompany balances and transactions
have been eliminated in consolidation.
In the opinion of management, the accompanying
condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally
accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the
opinion of management, necessary for a fair presentation have been included. The results of operations for the nine month period
ended September 30, 2017 is not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial
statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with
the Securities and Exchange Commission (“SEC”).
The Company has evaluated events and
transactions occurring subsequent to the consolidated balance sheet date of September 30, 2017 for items that should potentially
be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated
financial statements were issued.
Note 2 – Use of estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
as of the date of the balance sheets and statements of operations for the period. Actual results could differ significantly from
those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance
for loan losses and its related provision, the valuation allowance on the deferred tax asset, and the estimate of the fair value
of assets held for sale.
Note 3 – Earnings per common share
The following table presents the basic and
diluted earnings per common share computation (in thousands, except per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income - basic and diluted
|
|
$
|
273
|
|
|
$
|
11,932
|
|
|
$
|
926
|
|
|
$
|
12,993
|
|
Preferred stock dividend
|
|
|
(113
|
)
|
|
|
(186
|
)
|
|
|
(385
|
)
|
|
|
(547
|
)
|
Net income available to common shareholders
|
|
$
|
160
|
|
|
$
|
11,746
|
|
|
$
|
541
|
|
|
$
|
12,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
1,431
|
|
|
|
1,430
|
|
|
|
1,430
|
|
|
|
1,423
|
|
Dilutive effect of common stock options and restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
1,431
|
|
|
|
1,430
|
|
|
|
1,430
|
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.11
|
|
|
$
|
8.21
|
|
|
$
|
0.38
|
|
|
$
|
8.74
|
|
Earnings per share - diluted
|
|
$
|
0.11
|
|
|
$
|
8.21
|
|
|
$
|
0.38
|
|
|
$
|
8.74
|
|
Outstanding options and warrants to purchase
common stock were considered in the computation of diluted earnings per share for the periods presented. Stock options for 2,337
shares were not included in computing diluted earnings per share for the three and nine months ended September 30, 2017, and stock
options for 2,587 and 1,742 were not included in computed diluted earnings per share for the three and nine months ended September
30, 2016, because their effects were anti-dilutive.
Note 4 – Investment securities available
for sale
At September 30, 2017 and December 31, 2016,
all of our securities were classified as available for sale. The following table presents the composition of our investment portfolio
at the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
|
Par
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
$
|
27,400
|
|
|
$
|
27,558
|
|
|
$
|
-
|
|
|
$
|
(150
|
)
|
|
$
|
27,408
|
|
|
|
1.29
|
%
|
Five to ten years
|
|
|
2,000
|
|
|
|
2,049
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
2,045
|
|
|
|
2.00
|
%
|
More than ten years
|
|
|
2,548
|
|
|
|
2,553
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
2,538
|
|
|
|
1.78
|
%
|
|
|
|
31,948
|
|
|
|
32,160
|
|
|
|
-
|
|
|
|
(169
|
)
|
|
|
31,991
|
|
|
|
1.37
|
%
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
|
3,595
|
|
|
|
3,673
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
3,661
|
|
|
|
1.44
|
%
|
More than ten years
|
|
|
6,967
|
|
|
|
6,864
|
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
6,857
|
|
|
|
2.41
|
%
|
|
|
|
10,562
|
|
|
|
10,537
|
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
10,518
|
|
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five to ten years
|
|
|
2,300
|
|
|
|
2,323
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2,325
|
|
|
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
44,810
|
|
|
$
|
45,020
|
|
|
$
|
3
|
|
|
$
|
(189
|
)
|
|
$
|
44,834
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
$
|
29,400
|
|
|
$
|
29,607
|
|
|
$
|
-
|
|
|
$
|
(213
|
)
|
|
$
|
29,394
|
|
|
|
1.25
|
%
|
More than ten years
|
|
|
2,862
|
|
|
|
2,868
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
2,852
|
|
|
|
1.08
|
%
|
|
|
|
32,262
|
|
|
|
32,475
|
|
|
|
-
|
|
|
|
(229
|
)
|
|
|
32,246
|
|
|
|
1.24
|
%
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
|
3,457
|
|
|
|
3,524
|
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
3,491
|
|
|
|
1.78
|
%
|
More than ten years
|
|
|
8,253
|
|
|
|
8,170
|
|
|
|
1
|
|
|
|
(14
|
)
|
|
|
8,157
|
|
|
|
2.16
|
%
|
|
|
|
11,710
|
|
|
|
11,694
|
|
|
|
1
|
|
|
|
(47
|
)
|
|
|
11,648
|
|
|
|
2.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
43,972
|
|
|
$
|
44,169
|
|
|
$
|
1
|
|
|
$
|
(276
|
)
|
|
$
|
43,894
|
|
|
|
1.45
|
%
|
There were no investment securities pledged
to secure deposit repurchase agreements at September 30, 2017 and approximately $1,050,000 at December 31, 2016.
Gross realized gains and losses pertaining
to available for sale securities are detailed as follows for the periods indicated (dollars in thousands):
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
162
|
|
Gross realized losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
(9
|
)
|
|
$
|
162
|
|
The Company sold approximately $2 million of
investment securities available for sale at a loss of $9,000 for the nine months ended September 30, 2017. The Company sold approximately
$4 million and $22 million of investment securities for the three and nine months ended September 30, 2016 resulting in a net gain
of $15,000 and $162,000, respectively. The sale of these securities, which had fixed interest rates, allowed the Company to decrease
its exposure to the anticipated upward movement in interest rates that would result in unrealized losses being recognized in shareholders’
equity.
Investment securities available for sale that
have an unrealized loss position at September 30, 2017 and December 31, 2016 are detailed below (dollars in thousands):
|
|
Securities in a loss
|
|
|
Securities in a loss
|
|
|
|
|
|
|
|
|
|
position for less than
|
|
|
position for more than
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
$
|
19,511
|
|
|
$
|
(95
|
)
|
|
$
|
12,480
|
|
|
$
|
(74
|
)
|
|
$
|
31,991
|
|
|
$
|
(169
|
)
|
Mortgage-backed securities
|
|
|
7,800
|
|
|
|
(15
|
)
|
|
|
587
|
|
|
|
(5
|
)
|
|
|
8,387
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,311
|
|
|
$
|
(110
|
)
|
|
$
|
13,067
|
|
|
$
|
(79
|
)
|
|
$
|
40,378
|
|
|
$
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
$
|
27,291
|
|
|
$
|
(213
|
)
|
|
$
|
2,852
|
|
|
$
|
(16
|
)
|
|
$
|
33,143
|
|
|
$
|
(229
|
)
|
Mortgage-backed securities
|
|
|
9,450
|
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
9,450
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,741
|
|
|
$
|
(260
|
)
|
|
$
|
2,852
|
|
|
$
|
(16
|
)
|
|
$
|
42,593
|
|
|
$
|
(276
|
)
|
All of the unrealized losses are attributable
to increases in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company
will be able to collect all amounts due according to the contractual terms of the investments. Because the decline in market value
is attributable to changes in interest rates and not to credit quality, and because it is not more likely than not that the Company
will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does
not consider these investments to be other than temporarily impaired at September 30, 2017.
Note 5 – Loans and allowance for
loan losses
The following table presents the composition of our loan portfolio
(excluding mortgage loans held for sale) at the dates indicated (dollars in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
6,327
|
|
|
|
1.82
|
%
|
|
$
|
6,770
|
|
|
|
2.01
|
%
|
Commercial
|
|
|
28,721
|
|
|
|
8.28
|
%
|
|
|
27,092
|
|
|
|
8.04
|
%
|
|
|
|
35,048
|
|
|
|
10.10
|
%
|
|
|
33,862
|
|
|
|
10.05
|
%
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
71,834
|
|
|
|
20.70
|
%
|
|
|
66,021
|
|
|
|
19.59
|
%
|
Non-owner occupied
|
|
|
61,831
|
|
|
|
17.82
|
%
|
|
|
57,944
|
|
|
|
17.19
|
%
|
Multifamily
|
|
|
6,114
|
|
|
|
1.76
|
%
|
|
|
8,824
|
|
|
|
2.62
|
%
|
Farmland
|
|
|
278
|
|
|
|
0.08
|
%
|
|
|
310
|
|
|
|
0.09
|
%
|
|
|
|
140,057
|
|
|
|
40.36
|
%
|
|
|
133,099
|
|
|
|
39.49
|
%
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
20,595
|
|
|
|
5.94
|
%
|
|
|
20,691
|
|
|
|
6.14
|
%
|
Secured by 1-4 family residential,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
54,820
|
|
|
|
15.80
|
%
|
|
|
54,791
|
|
|
|
16.25
|
%
|
Second deed of trust
|
|
|
6,293
|
|
|
|
1.81
|
%
|
|
|
5,768
|
|
|
|
1.71
|
%
|
|
|
|
81,708
|
|
|
|
23.55
|
%
|
|
|
81,250
|
|
|
|
24.10
|
%
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
40,647
|
|
|
|
11.71
|
%
|
|
|
39,390
|
|
|
|
11.68
|
%
|
Guaranteed student loans
|
|
|
47,643
|
|
|
|
13.73
|
%
|
|
|
47,398
|
|
|
|
14.06
|
%
|
Consumer and other
|
|
|
1,899
|
|
|
|
0.55
|
%
|
|
|
2,101
|
|
|
|
0.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
347,002
|
|
|
|
100.0
|
%
|
|
|
337,100
|
|
|
|
100.0
|
%
|
Deferred loan cost, net
|
|
|
676
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(3,243
|
)
|
|
|
|
|
|
|
(3,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344,435
|
|
|
|
|
|
|
$
|
334,387
|
|
|
|
|
|
The Bank purchased portfolios of rehabilitated
student loans guaranteed by the Department of Education (“DOE”). The guarantee covers approximately 98% of principal
and accrued interest. The loans are serviced by a third-party servicer that specializes in handling the special needs of the DOE
student loan programs.
Loans pledged as collateral with the Federal Home Loan Bank of Atlanta
(“FHLB”) as part of their lending arrangement with the Company totaled $25,111,000 and $27,073,000 at September 30,
2017 and December 31, 2016, respectively.
The Company assigns risk rating classifications to its loans. These
risk ratings are divided into the following groups:
|
·
|
Risk rated 1 to 4 loans are considered
of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying
capacity of the obligor or by the value of the asset or underlying collateral;
|
|
·
|
Risk rated 5 loans are defined as having
potential weaknesses that deserve management’s close attention;
|
|
·
|
Risk rated 6 loans are inadequately protected
by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any;
|
|
·
|
Risk rated 7 loans have all the weaknesses
inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the
basis of currently existing facts, conditions and values, highly questionable and improbable; and
|
|
·
|
Loans rated 6 or 7 are considered “Classified”
loans for regulatory classification purposes.
|
The following tables provide information on
the risk rating of loans at the dates indicated (dollars in thousands):
|
|
Risk Rated
|
|
|
Risk Rated
|
|
|
Risk Rated
|
|
|
Risk Rated
|
|
|
Total
|
|
|
|
1-4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
Loans
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
6,327
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,327
|
|
Commercial
|
|
|
27,495
|
|
|
|
1,129
|
|
|
|
97
|
|
|
|
-
|
|
|
|
28,721
|
|
|
|
|
33,822
|
|
|
|
1,129
|
|
|
|
97
|
|
|
|
-
|
|
|
|
35,048
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
70,657
|
|
|
|
798
|
|
|
|
379
|
|
|
|
-
|
|
|
|
71,834
|
|
Non-owner occupied
|
|
|
57,095
|
|
|
|
1,568
|
|
|
|
3,168
|
|
|
|
-
|
|
|
|
61,831
|
|
Multifamily
|
|
|
6,114
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,114
|
|
Farmland
|
|
|
278
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
278
|
|
|
|
|
134,144
|
|
|
|
2,366
|
|
|
|
3,547
|
|
|
|
-
|
|
|
|
140,057
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
19,495
|
|
|
|
378
|
|
|
|
722
|
|
|
|
-
|
|
|
|
20,595
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
50,626
|
|
|
|
2,016
|
|
|
|
2,178
|
|
|
|
-
|
|
|
|
54,820
|
|
Second deed of trust
|
|
|
5,944
|
|
|
|
206
|
|
|
|
143
|
|
|
|
-
|
|
|
|
6,293
|
|
|
|
|
76,065
|
|
|
|
2,600
|
|
|
|
3,043
|
|
|
|
-
|
|
|
|
81,708
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
35,440
|
|
|
|
3,916
|
|
|
|
1,291
|
|
|
|
-
|
|
|
|
40,647
|
|
Guaranteed student loans
|
|
|
47,643
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,643
|
|
Consumer and other
|
|
|
1,659
|
|
|
|
222
|
|
|
|
18
|
|
|
|
-
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
328,773
|
|
|
$
|
10,233
|
|
|
$
|
7,996
|
|
|
$
|
-
|
|
|
$
|
347,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
6,770
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,770
|
|
Commercial
|
|
|
25,342
|
|
|
|
1,648
|
|
|
|
102
|
|
|
|
-
|
|
|
|
27,092
|
|
|
|
|
32,112
|
|
|
|
1,648
|
|
|
|
102
|
|
|
|
-
|
|
|
|
33,862
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
58,788
|
|
|
|
3,565
|
|
|
|
3,668
|
|
|
|
-
|
|
|
|
66,021
|
|
Non-owner occupied
|
|
|
57,944
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,944
|
|
Multifamily
|
|
|
8,634
|
|
|
|
190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,824
|
|
Farmland
|
|
|
310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
310
|
|
|
|
|
125,676
|
|
|
|
3,755
|
|
|
|
3,668
|
|
|
|
-
|
|
|
|
133,099
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
19,501
|
|
|
|
487
|
|
|
|
703
|
|
|
|
-
|
|
|
|
20,691
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
49,648
|
|
|
|
2,847
|
|
|
|
2,296
|
|
|
|
-
|
|
|
|
54,791
|
|
Second deed of trust
|
|
|
5,399
|
|
|
|
125
|
|
|
|
244
|
|
|
|
-
|
|
|
|
5,768
|
|
|
|
|
74,548
|
|
|
|
3,459
|
|
|
|
3,243
|
|
|
|
-
|
|
|
|
81,250
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
39,390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,390
|
|
Guaranteed student loans
|
|
|
46,009
|
|
|
|
739
|
|
|
|
650
|
|
|
|
-
|
|
|
|
47,398
|
|
Consumer and other
|
|
|
2,043
|
|
|
|
52
|
|
|
|
6
|
|
|
|
-
|
|
|
|
2,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
319,778
|
|
|
$
|
9,653
|
|
|
$
|
7,669
|
|
|
$
|
-
|
|
|
$
|
337,100
|
|
The following table presents the aging of the recorded investment
in past due loans and leases as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
Investment >
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Than
|
|
|
Total Past
|
|
|
|
|
|
Total
|
|
|
90 Days and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
90 Days
|
|
|
Due
|
|
|
Current
|
|
|
Loans
|
|
|
Accruing
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,327
|
|
|
$
|
6,327
|
|
|
$
|
-
|
|
Commercial
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
28,695
|
|
|
|
28,721
|
|
|
|
-
|
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
35,022
|
|
|
|
35,048
|
|
|
|
-
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,834
|
|
|
|
71,834
|
|
|
|
-
|
|
Non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,831
|
|
|
|
61,831
|
|
|
|
-
|
|
Multifamily
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,114
|
|
|
|
6,114
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
278
|
|
|
|
278
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,057
|
|
|
|
140,057
|
|
|
|
-
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,595
|
|
|
|
20,595
|
|
|
|
-
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
271
|
|
|
|
150
|
|
|
|
-
|
|
|
|
421
|
|
|
|
54,399
|
|
|
|
54,820
|
|
|
|
-
|
|
Second deed of trust
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
|
|
6,198
|
|
|
|
6,293
|
|
|
|
-
|
|
|
|
|
366
|
|
|
|
150
|
|
|
|
-
|
|
|
|
516
|
|
|
|
81,192
|
|
|
|
81,708
|
|
|
|
-
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
-
|
|
|
|
536
|
|
|
|
-
|
|
|
|
536
|
|
|
|
40,111
|
|
|
|
40,647
|
|
|
|
-
|
|
Guaranteed student loans
|
|
|
2,077
|
|
|
|
1,597
|
|
|
|
8,113
|
|
|
|
11,787
|
|
|
|
35,856
|
|
|
|
47,643
|
|
|
|
8,113
|
|
Consumer and other
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
1,895
|
|
|
|
1,899
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,469
|
|
|
$
|
2,287
|
|
|
$
|
8,113
|
|
|
$
|
12,869
|
|
|
$
|
334,133
|
|
|
$
|
347,002
|
|
|
$
|
8,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
Investment >
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Than
|
|
|
Total Past
|
|
|
|
|
|
Total
|
|
|
90 Days and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
90 Days
|
|
|
Due
|
|
|
Current
|
|
|
Loans
|
|
|
Accruing
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,770
|
|
|
$
|
6,770
|
|
|
$
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,092
|
|
|
|
27,092
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,862
|
|
|
|
33,862
|
|
|
|
-
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,021
|
|
|
|
66,021
|
|
|
|
-
|
|
Non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,944
|
|
|
|
57,944
|
|
|
|
-
|
|
Multifamily
|
|
|
190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
190
|
|
|
|
8,634
|
|
|
|
8,824
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
310
|
|
|
|
310
|
|
|
|
-
|
|
|
|
|
190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
190
|
|
|
|
132,909
|
|
|
|
133,099
|
|
|
|
-
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,691
|
|
|
|
20,691
|
|
|
|
-
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
414
|
|
|
|
63
|
|
|
|
-
|
|
|
|
477
|
|
|
|
54,314
|
|
|
|
54,791
|
|
|
|
-
|
|
Second deed of trust
|
|
|
128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128
|
|
|
|
5,640
|
|
|
|
5,768
|
|
|
|
-
|
|
|
|
|
542
|
|
|
|
63
|
|
|
|
-
|
|
|
|
605
|
|
|
|
80,645
|
|
|
|
81,250
|
|
|
|
-
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
15
|
|
|
|
62
|
|
|
|
-
|
|
|
|
77
|
|
|
|
39,313
|
|
|
|
39,390
|
|
|
|
-
|
|
Guaranteed student loans
|
|
|
2,743
|
|
|
|
1,923
|
|
|
|
8,174
|
|
|
|
12,840
|
|
|
|
34,558
|
|
|
|
47,398
|
|
|
|
8,174
|
|
Consumer and other
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
2,090
|
|
|
|
2,101
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
3,501
|
|
|
$
|
2,048
|
|
|
$
|
8,174
|
|
|
$
|
13,723
|
|
|
$
|
323,377
|
|
|
$
|
337,100
|
|
|
$
|
8,174
|
|
Loans greater than 90 days past due are student
loans that are guaranteed by the DOE which covers approximately 98% of the principal and interest. Accordingly, these loans will
not be placed on nonaccrual status.
Loans are considered impaired when, based on
current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original
contractual terms of the loan agreement, including scheduled principal and interest payments. Loans evaluated individually for
impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and
other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If
the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.
Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans.
If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present
value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the
principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof,
are charged off when deemed uncollectible. Impaired loans are set forth in the following table as of the dates indicated (in thousands):
|
|
September 30, 2017
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
97
|
|
|
$
|
164
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
3,512
|
|
|
|
3,512
|
|
|
|
|
|
Non-owner occupied
|
|
|
2,176
|
|
|
|
2,176
|
|
|
|
-
|
|
|
|
|
5,688
|
|
|
|
5,688
|
|
|
|
-
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
601
|
|
|
|
601
|
|
|
|
-
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
3,968
|
|
|
|
3,968
|
|
|
|
-
|
|
Second deed of trust
|
|
|
594
|
|
|
|
802
|
|
|
|
-
|
|
|
|
|
5,163
|
|
|
|
5,371
|
|
|
|
-
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
463
|
|
|
|
693
|
|
|
|
-
|
|
Consumer and other
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
11,414
|
|
|
|
11,919
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
464
|
|
|
|
464
|
|
|
|
2
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1,922
|
|
|
|
1,937
|
|
|
|
21
|
|
|
|
|
1,922
|
|
|
|
1,937
|
|
|
|
21
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
138
|
|
|
|
138
|
|
|
|
4
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
765
|
|
|
|
765
|
|
|
|
62
|
|
Second deed of trust
|
|
|
86
|
|
|
|
86
|
|
|
|
5
|
|
|
|
|
989
|
|
|
|
989
|
|
|
|
71
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
785
|
|
|
|
901
|
|
|
|
233
|
|
|
|
|
4,160
|
|
|
|
4,291
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
561
|
|
|
|
628
|
|
|
|
2
|
|
|
|
|
561
|
|
|
|
628
|
|
|
|
2
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
5,434
|
|
|
|
5,449
|
|
|
|
21
|
|
Non-owner occupied
|
|
|
2,176
|
|
|
|
2,176
|
|
|
|
-
|
|
|
|
|
7,610
|
|
|
|
7,625
|
|
|
|
21
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
739
|
|
|
|
739
|
|
|
|
4
|
|
Secured by 1-4 family residential,
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
4,733
|
|
|
|
4,733
|
|
|
|
62
|
|
Second deed of trust
|
|
|
680
|
|
|
|
888
|
|
|
|
5
|
|
|
|
|
6,152
|
|
|
|
6,360
|
|
|
|
71
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
1,248
|
|
|
|
1,594
|
|
|
|
233
|
|
Consumer and other
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
$
|
15,574
|
|
|
$
|
16,210
|
|
|
$
|
327
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
102
|
|
|
$
|
169
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1,487
|
|
|
|
1,487
|
|
|
|
-
|
|
Non-owner occupied
|
|
|
2,236
|
|
|
|
2,236
|
|
|
|
-
|
|
|
|
|
3,723
|
|
|
|
3,723
|
|
|
|
-
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
703
|
|
|
|
703
|
|
|
|
-
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
3,514
|
|
|
|
3,518
|
|
|
|
-
|
|
Second deed of trust
|
|
|
619
|
|
|
|
865
|
|
|
|
-
|
|
|
|
|
4,836
|
|
|
|
5,086
|
|
|
|
-
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
538
|
|
|
|
768
|
|
|
|
-
|
|
|
|
|
9,199
|
|
|
|
9,746
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
479
|
|
|
|
479
|
|
|
|
9
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
4,117
|
|
|
|
4,132
|
|
|
|
86
|
|
Non-Owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,117
|
|
|
|
4,132
|
|
|
|
86
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
1,550
|
|
|
|
1,550
|
|
|
|
144
|
|
Second deed of trust
|
|
|
90
|
|
|
|
90
|
|
|
|
90
|
|
|
|
|
1,640
|
|
|
|
1,640
|
|
|
|
234
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
6
|
|
|
|
122
|
|
|
|
6
|
|
|
|
|
6,242
|
|
|
|
6,373
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
581
|
|
|
|
648
|
|
|
|
9
|
|
|
|
|
581
|
|
|
|
648
|
|
|
|
9
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
5,604
|
|
|
|
5,619
|
|
|
|
86
|
|
Non-owner occupied
|
|
|
2,236
|
|
|
|
2,236
|
|
|
|
-
|
|
|
|
|
7,840
|
|
|
|
7,855
|
|
|
|
86
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
703
|
|
|
|
703
|
|
|
|
-
|
|
Secured by 1-4 family residential,
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
5,064
|
|
|
|
5,068
|
|
|
|
144
|
|
Second deed of trust
|
|
|
709
|
|
|
|
955
|
|
|
|
90
|
|
|
|
|
6,476
|
|
|
|
6,726
|
|
|
|
234
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
544
|
|
|
|
890
|
|
|
|
6
|
|
|
|
$
|
15,441
|
|
|
$
|
16,119
|
|
|
$
|
335
|
|
The following is a summary of average recorded investment in impaired
loans with and without a valuation allowance and interest income recognized on those loans for the periods indicated (dollars in
thousands):
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30, 2017
|
|
|
Ended September 30, 2017
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
99
|
|
|
$
|
1
|
|
|
$
|
100
|
|
|
$
|
3
|
|
|
|
|
99
|
|
|
|
1
|
|
|
|
100
|
|
|
|
3
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
3,531
|
|
|
|
32
|
|
|
|
2,539
|
|
|
|
90
|
|
Non-owner occupied
|
|
|
2,187
|
|
|
|
23
|
|
|
|
2,206
|
|
|
|
82
|
|
|
|
|
5,718
|
|
|
|
55
|
|
|
|
4,745
|
|
|
|
172
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
751
|
|
|
|
16
|
|
|
|
761
|
|
|
|
17
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
3,737
|
|
|
|
24
|
|
|
|
3,615
|
|
|
|
86
|
|
Second deed of trust
|
|
|
555
|
|
|
|
9
|
|
|
|
563
|
|
|
|
27
|
|
|
|
|
5,043
|
|
|
|
49
|
|
|
|
4,939
|
|
|
|
130
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
470
|
|
|
|
35
|
|
|
|
493
|
|
|
|
49
|
|
Consumer and other
|
|
|
4
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
|
11,334
|
|
|
|
140
|
|
|
|
10,279
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
467
|
|
|
|
5
|
|
|
|
472
|
|
|
|
17
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1,929
|
|
|
|
17
|
|
|
|
2,978
|
|
|
|
58
|
|
|
|
|
1,929
|
|
|
|
17
|
|
|
|
2,978
|
|
|
|
58
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity line
|
|
|
139
|
|
|
|
-
|
|
|
|
69
|
|
|
|
6
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
815
|
|
|
|
8
|
|
|
|
1,120
|
|
|
|
26
|
|
Second deed of trust
|
|
|
129
|
|
|
|
1
|
|
|
|
131
|
|
|
|
3
|
|
|
|
|
1,083
|
|
|
|
9
|
|
|
|
1,320
|
|
|
|
35
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
444
|
|
|
|
-
|
|
|
|
245
|
|
|
|
4
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
3,923
|
|
|
|
31
|
|
|
|
5,016
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
566
|
|
|
|
6
|
|
|
|
572
|
|
|
|
20
|
|
|
|
|
566
|
|
|
|
6
|
|
|
|
572
|
|
|
|
20
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
5,460
|
|
|
|
49
|
|
|
|
5,517
|
|
|
|
148
|
|
Non-owner occupied
|
|
|
2,187
|
|
|
|
23
|
|
|
|
2,206
|
|
|
|
82
|
|
|
|
|
7,647
|
|
|
|
72
|
|
|
|
7,723
|
|
|
|
230
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
890
|
|
|
|
16
|
|
|
|
830
|
|
|
|
23
|
|
Secured by 1-4 family residential,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
4,552
|
|
|
|
32
|
|
|
|
4,735
|
|
|
|
112
|
|
Second deed of trust
|
|
|
684
|
|
|
|
10
|
|
|
|
694
|
|
|
|
30
|
|
|
|
|
6,126
|
|
|
|
58
|
|
|
|
6,259
|
|
|
|
165
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
915
|
|
|
|
35
|
|
|
|
738
|
|
|
|
53
|
|
Consumer and other
|
|
|
4
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
$
|
15,257
|
|
|
$
|
171
|
|
|
$
|
15,295
|
|
|
$
|
468
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30, 2016
|
|
|
Ended September 30, 2016
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
92
|
|
|
$
|
-
|
|
|
$
|
211
|
|
|
$
|
40
|
|
|
|
|
92
|
|
|
|
-
|
|
|
|
211
|
|
|
|
40
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
935
|
|
|
|
-
|
|
|
|
933
|
|
|
|
29
|
|
Non-owner occupied
|
|
|
2,546
|
|
|
|
28
|
|
|
|
2,537
|
|
|
|
92
|
|
|
|
|
3,481
|
|
|
|
28
|
|
|
|
3,470
|
|
|
|
121
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
1,164
|
|
|
|
-
|
|
|
|
1,246
|
|
|
|
1
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
4,137
|
|
|
|
42
|
|
|
|
4,188
|
|
|
|
134
|
|
Second deed of trust
|
|
|
839
|
|
|
|
9
|
|
|
|
950
|
|
|
|
32
|
|
|
|
|
6,140
|
|
|
|
51
|
|
|
|
6,384
|
|
|
|
167
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
455
|
|
|
|
-
|
|
|
|
568
|
|
|
|
14
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
|
10,168
|
|
|
|
79
|
|
|
|
10,638
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,423
|
|
|
|
7
|
|
|
|
1,531
|
|
|
|
19
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
4,911
|
|
|
|
47
|
|
|
|
5,272
|
|
|
|
157
|
|
Non-Owner occupied
|
|
|
158
|
|
|
|
-
|
|
|
|
174
|
|
|
|
9
|
|
|
|
|
5,069
|
|
|
|
47
|
|
|
|
5,446
|
|
|
|
166
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
1,680
|
|
|
|
-
|
|
|
|
1,800
|
|
|
|
9
|
|
Second deed of trust
|
|
|
171
|
|
|
|
-
|
|
|
|
185
|
|
|
|
4
|
|
|
|
|
1,851
|
|
|
|
-
|
|
|
|
1,985
|
|
|
|
13
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
99
|
|
|
|
-
|
|
|
|
122
|
|
|
|
-
|
|
|
|
|
8,442
|
|
|
|
54
|
|
|
|
9,084
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,515
|
|
|
|
7
|
|
|
|
1,742
|
|
|
|
59
|
|
|
|
|
1,515
|
|
|
|
7
|
|
|
|
1,742
|
|
|
|
59
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
5,846
|
|
|
|
47
|
|
|
|
6,205
|
|
|
|
186
|
|
Non-owner occupied
|
|
|
2,704
|
|
|
|
28
|
|
|
|
2,711
|
|
|
|
101
|
|
|
|
|
8,550
|
|
|
|
75
|
|
|
|
8,916
|
|
|
|
287
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
1,164
|
|
|
|
-
|
|
|
|
1,246
|
|
|
|
1
|
|
Secured by 1-4 family residential,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
5,817
|
|
|
|
42
|
|
|
|
5,987
|
|
|
|
143
|
|
Second deed of trust
|
|
|
1,010
|
|
|
|
9
|
|
|
|
1,135
|
|
|
|
36
|
|
|
|
|
7,991
|
|
|
|
51
|
|
|
|
8,368
|
|
|
|
180
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
554
|
|
|
|
-
|
|
|
|
690
|
|
|
|
14
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
$
|
18,610
|
|
|
$
|
133
|
|
|
$
|
19,722
|
|
|
$
|
540
|
|
Included in impaired loans are loans classified
as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor
grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it
would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or nonaccrual.
To restore a nonaccrual loan that has been formally restructured in a TDR to accrual status, we perform a current, well documented
credit analysis supporting a return to accrual status based on the borrower’s financial condition and prospects for repayment
under the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis considers the borrower’s sustained
historical repayment performance for a reasonable period to the return-to-accrual date, but may take into account payments made
for a reasonable period prior to the restructuring if the payments are consistent with the modified terms. A sustained period of
repayment performance generally would be a minimum of six months and would involve payments in the form of cash or cash equivalents.
An accruing loan that is modified in a TDR
can remain in accrual status if, based on a current well-documented credit analysis, collection of principal and interest in accordance
with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for
a reasonable period before modification. The following is a summary of performing and nonaccrual TDRs and the related specific
valuation allowance by portfolio segment for the periods indicated (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
Specific
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
|
|
Total
|
|
|
Performing
|
|
|
Nonaccrual
|
|
|
Allowance
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development Commercial
|
|
$
|
464
|
|
|
$
|
464
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
|
|
464
|
|
|
|
464
|
|
|
|
-
|
|
|
|
2
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
4,232
|
|
|
|
4,037
|
|
|
|
195
|
|
|
|
21
|
|
Non-owner occupied
|
|
|
2,176
|
|
|
|
2,176
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
6,408
|
|
|
|
6,213
|
|
|
|
195
|
|
|
|
21
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deeds of trust
|
|
|
3,432
|
|
|
|
2,733
|
|
|
|
699
|
|
|
|
60
|
|
Second deeds of trust
|
|
|
597
|
|
|
|
530
|
|
|
|
67
|
|
|
|
5
|
|
|
|
|
4,029
|
|
|
|
3,263
|
|
|
|
766
|
|
|
|
65
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
351
|
|
|
|
230
|
|
|
|
121
|
|
|
|
-
|
|
|
|
$
|
11,252
|
|
|
$
|
10,170
|
|
|
$
|
1,082
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
|
|
Total
|
|
|
Performing
|
|
|
Nonaccrual
|
|
|
Allowance
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development Commercial
|
|
$
|
479
|
|
|
$
|
479
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
|
|
479
|
|
|
|
479
|
|
|
|
-
|
|
|
|
9
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
4,342
|
|
|
|
4,117
|
|
|
|
225
|
|
|
|
86
|
|
Non-owner occupied
|
|
|
2,236
|
|
|
|
2,236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
6,578
|
|
|
|
6,353
|
|
|
|
225
|
|
|
|
86
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deeds of trust
|
|
|
3,853
|
|
|
|
3,012
|
|
|
|
841
|
|
|
|
139
|
|
Second deeds of trust
|
|
|
547
|
|
|
|
547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,400
|
|
|
|
3,559
|
|
|
|
841
|
|
|
|
139
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
397
|
|
|
|
-
|
|
|
|
397
|
|
|
|
-
|
|
|
|
$
|
11,854
|
|
|
$
|
10,391
|
|
|
$
|
1,463
|
|
|
$
|
234
|
|
The following table provides information about
TDRs identified during the indicated period (dollars in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Loans
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
1
|
|
|
$
|
190
|
|
|
$
|
190
|
|
Second deed of trust
|
|
|
1
|
|
|
|
68
|
|
|
|
68
|
|
|
|
|
2
|
|
|
|
258
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
$
|
258
|
|
|
$
|
258
|
|
There were no TDRs identified during the nine
months ended September 30, 2016.
The following table summarizes defaults on
TDRs identified for the indicated periods (dollars in thousands):
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
|
Loans
|
|
|
Balance
|
|
|
Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
3
|
|
|
$
|
2,309
|
|
|
|
2
|
|
|
$
|
390
|
|
Non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
3
|
|
|
|
2,309
|
|
|
|
2
|
|
|
|
390
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
10
|
|
|
|
1,049
|
|
|
|
7
|
|
|
|
692
|
|
Second deed of trust
|
|
|
2
|
|
|
|
75
|
|
|
|
2
|
|
|
|
86
|
|
|
|
|
12
|
|
|
|
1,124
|
|
|
|
9
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial (except those secured by real estate)
|
|
|
2
|
|
|
|
44
|
|
|
|
1
|
|
|
|
103
|
|
|
|
|
17
|
|
|
$
|
3,477
|
|
|
|
12
|
|
|
$
|
1,271
|
|
Activity in the allowance for loan losses is
as follows for the periods indicated (dollars in thousands):
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
(Recovery of)
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
38
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38
|
|
Commercial
|
|
|
213
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
175
|
|
|
|
|
251
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
213
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
515
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
524
|
|
Non-owner occupied
|
|
|
416
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
434
|
|
Multifamily
|
|
|
40
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
Farmland
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
974
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
250
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
247
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
462
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
7
|
|
|
|
459
|
|
Second deed of trust
|
|
|
127
|
|
|
|
(89
|
)
|
|
|
-
|
|
|
|
7
|
|
|
|
45
|
|
|
|
|
839
|
|
|
|
(102
|
)
|
|
|
-
|
|
|
|
14
|
|
|
|
751
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
302
|
|
|
|
140
|
|
|
|
-
|
|
|
|
3
|
|
|
|
445
|
|
Student loans
|
|
|
99
|
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
99
|
|
Consumer and other
|
|
|
9
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
7
|
|
Unallocated
|
|
|
793
|
|
|
|
(65
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,267
|
|
|
$
|
-
|
|
|
$
|
(45
|
)
|
|
$
|
21
|
|
|
$
|
3,243
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
(Recovery of)
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
31
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43
|
|
Commercial
|
|
|
259
|
|
|
|
22
|
|
|
|
(10
|
)
|
|
|
5
|
|
|
|
276
|
|
|
|
|
290
|
|
|
|
34
|
|
|
|
(10
|
)
|
|
|
5
|
|
|
|
319
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
711
|
|
|
|
(17
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
637
|
|
Non-owner occupied
|
|
|
437
|
|
|
|
53
|
|
|
|
(1
|
)
|
|
|
51
|
|
|
|
540
|
|
Multifamily
|
|
|
54
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
Farmland
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
1,204
|
|
|
|
39
|
|
|
|
(58
|
)
|
|
|
51
|
|
|
|
1,236
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
259
|
|
|
|
4
|
|
|
|
-
|
|
|
|
1
|
|
|
|
264
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
490
|
|
|
|
79
|
|
|
|
(113
|
)
|
|
|
6
|
|
|
|
462
|
|
Second deed of trust
|
|
|
133
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
6
|
|
|
|
128
|
|
|
|
|
882
|
|
|
|
72
|
|
|
|
(113
|
)
|
|
|
13
|
|
|
|
854
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
226
|
|
|
|
(46
|
)
|
|
|
(15
|
)
|
|
|
46
|
|
|
|
211
|
|
Guaranteed student loans
|
|
|
191
|
|
|
|
13
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
188
|
|
Consumer and other
|
|
|
8
|
|
|
|
7
|
|
|
|
(12
|
)
|
|
|
5
|
|
|
|
8
|
|
Unallocated
|
|
|
722
|
|
|
|
(119
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,523
|
|
|
$
|
-
|
|
|
$
|
(224
|
)
|
|
$
|
120
|
|
|
$
|
3,419
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
(Recovery of)
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
41
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
38
|
|
Commercial
|
|
|
300
|
|
|
|
(127
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
175
|
|
|
|
|
341
|
|
|
|
(131
|
)
|
|
|
-
|
|
|
|
3
|
|
|
|
213
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
611
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
13
|
|
|
|
524
|
|
Non-owner occupied
|
|
|
406
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
434
|
|
Multifamily
|
|
|
56
|
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
Farmland
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
1,076
|
|
|
|
(89
|
)
|
|
|
-
|
|
|
|
13
|
|
|
|
1,000
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
271
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
1
|
|
|
|
247
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
447
|
|
|
|
90
|
|
|
|
(107
|
)
|
|
|
29
|
|
|
|
459
|
|
Second deed of trust
|
|
|
136
|
|
|
|
(120
|
)
|
|
|
-
|
|
|
|
29
|
|
|
|
45
|
|
|
|
|
854
|
|
|
|
(55
|
)
|
|
|
(107
|
)
|
|
|
59
|
|
|
|
751
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
223
|
|
|
|
209
|
|
|
|
-
|
|
|
|
13
|
|
|
|
445
|
|
Student loans
|
|
|
158
|
|
|
|
56
|
|
|
|
(115
|
)
|
|
|
-
|
|
|
|
99
|
|
Consumer and other
|
|
|
8
|
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
6
|
|
|
|
7
|
|
Unallocated
|
|
|
713
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,373
|
|
|
$
|
-
|
|
|
$
|
(224
|
)
|
|
$
|
94
|
|
|
$
|
3,243
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
(Recovery of)
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
30
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
43
|
|
Commercial
|
|
|
291
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
5
|
|
|
|
276
|
|
|
|
|
321
|
|
|
|
2
|
|
|
|
(10
|
)
|
|
|
6
|
|
|
|
319
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1,167
|
|
|
|
(464
|
)
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
637
|
|
Non-owner occupied
|
|
|
460
|
|
|
|
27
|
|
|
|
-
|
|
|
|
53
|
|
|
|
540
|
|
Multifamily
|
|
|
51
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
Farmland
|
|
|
17
|
|
|
|
(139
|
)
|
|
|
-
|
|
|
|
125
|
|
|
|
3
|
|
|
|
|
1,695
|
|
|
|
(571
|
)
|
|
|
(66
|
)
|
|
|
178
|
|
|
|
1,236
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
448
|
|
|
|
(134
|
)
|
|
|
(53
|
)
|
|
|
3
|
|
|
|
264
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
602
|
|
|
|
(20
|
)
|
|
|
(140
|
)
|
|
|
20
|
|
|
|
462
|
|
Second deed of trust
|
|
|
111
|
|
|
|
23
|
|
|
|
(25
|
)
|
|
|
19
|
|
|
|
128
|
|
|
|
|
1,161
|
|
|
|
(131
|
)
|
|
|
(218
|
)
|
|
|
42
|
|
|
|
854
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
94
|
|
|
|
42
|
|
|
|
(15
|
)
|
|
|
90
|
|
|
|
211
|
|
Guaranteed student loans
|
|
|
230
|
|
|
|
101
|
|
|
|
(143
|
)
|
|
|
-
|
|
|
|
188
|
|
Consumer and other
|
|
|
2
|
|
|
|
13
|
|
|
|
(14
|
)
|
|
|
7
|
|
|
|
8
|
|
Unallocated
|
|
|
59
|
|
|
|
544
|
|
|
|
-
|
|
|
|
-
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,562
|
|
|
$
|
-
|
|
|
$
|
(466
|
)
|
|
$
|
323
|
|
|
$
|
3,419
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
(Recovery of)
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
30
|
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
41
|
|
Commercial
|
|
|
291
|
|
|
|
9
|
|
|
|
(10
|
)
|
|
|
10
|
|
|
|
300
|
|
|
|
|
321
|
|
|
|
19
|
|
|
|
(10
|
)
|
|
|
11
|
|
|
|
341
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1,167
|
|
|
|
(490
|
)
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
611
|
|
Non-owner occupied
|
|
|
460
|
|
|
|
(106
|
)
|
|
|
(1
|
)
|
|
|
53
|
|
|
|
406
|
|
Multifamily
|
|
|
51
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
Farmland
|
|
|
17
|
|
|
|
(139
|
)
|
|
|
-
|
|
|
|
125
|
|
|
|
3
|
|
|
|
|
1,695
|
|
|
|
(730
|
)
|
|
|
(67
|
)
|
|
|
178
|
|
|
|
1,076
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
448
|
|
|
|
(127
|
)
|
|
|
(53
|
)
|
|
|
3
|
|
|
|
271
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
602
|
|
|
|
(40
|
)
|
|
|
(140
|
)
|
|
|
25
|
|
|
|
447
|
|
Second deed of trust
|
|
|
111
|
|
|
|
21
|
|
|
|
(25
|
)
|
|
|
29
|
|
|
|
136
|
|
|
|
|
1,161
|
|
|
|
(146
|
)
|
|
|
(218
|
)
|
|
|
57
|
|
|
|
854
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
94
|
|
|
|
44
|
|
|
|
(15
|
)
|
|
|
100
|
|
|
|
223
|
|
Student loans
|
|
|
230
|
|
|
|
149
|
|
|
|
(221
|
)
|
|
|
-
|
|
|
|
158
|
|
Consumer and other
|
|
|
2
|
|
|
|
10
|
|
|
|
(13
|
)
|
|
|
9
|
|
|
|
8
|
|
Unallocated
|
|
|
59
|
|
|
|
654
|
|
|
|
-
|
|
|
|
-
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,562
|
|
|
$
|
-
|
|
|
$
|
(544
|
)
|
|
$
|
355
|
|
|
$
|
3,373
|
|
The allowance for loan losses at each of the
periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion
of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and variability related
to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the
allowance is too high. We concluded that the unallocated portion of the allowance was acceptable given the continued higher level
of classified assets and was within a reasonable range around the estimate of losses. The allowance for loan losses included an
unallocated portion of approximately $728,000, $713,000, and $603,000 at September 30, 2017, December 31, 2016, and September 30,
2016, respectively.
Discussion of the provision for (recovery of) loan losses related
to specific loan types are provided following:
|
·
|
The recovery of loan losses totaling $102,000
for the consumer real estate portfolio for the three months ended September 30, 2017 was attributed to a decline in the general
component of the allowance for loan losses as a result of a decrease in the historical loss experience from 0.16% as of June 30,
2017 to 0.13% as of September 30, 2017.
|
|
·
|
The provision for loan losses totaling
$140,000 for the commercial and industrial loans (except those secured by real estate) for the three months ended September 30,
2017 was attributed to an increase of $172,000 in the specific reserve associated with loans evaluated individually for impairment.
|
|
·
|
The recovery of loan losses totaling $131,000
for the construction and land development portfolio for the nine months ended September 30, 2017 was attributed to a decline in
the general component of the allowance for loan losses as a result of a decrease in the historical loss experience from 0.38% as
of December 31, 2016 to 0.01% as of September 30, 2017.
|
|
·
|
The recovery of loan losses totaling $89,000,
$730,000 and $571,000 for the commercial real estate portfolio for the nine months ended September 30, 2017, year ended December
31, 2016, and nine months ended September 30, 2016, respectively, was attributable to a decline in the general component of the
allowance for loan losses as a result of decreases in the historical loss experience from 0.20% as of September 30, 2016 to a net
recovery of 0.04% as of September 30, 2017. In addition, the portfolio was in a net-recovery position of $13,000 and $111,000 for
the nine months ended September 30, 2017 and year ended December 31, 2016, respectively.
|
|
·
|
The recovery of loan losses totaling $55,000
for the consumer real estate portfolio for the nine months ended September 30, 2017 was attributed to a decrease of $104,000 in
the specific reserve associated with loans evaluated individually for impairment. This decrease was offset by an increase in the
general component allocated to this portfolio as a result of increases in the historical loss experience from 0.0022% as of year
end December 31, 2016 to 0.13% for the nine months ended September 30, 2017. In addition, the portfolio was in a net charge-off
position of $48,000 for the nine months ended September 30, 2017.
|
|
·
|
The recovery of loan losses totaling $146,000
and $131,000 for the consumer real estate portfolio for the year ended December 31, 2016 and nine months ended September 30, 2016,
respectively, was attributable to a decline in the general component of the allowance for loan losses as a result of decreases
in the historical loss experience from 0.07% as of September 30, 2016 to 0.0022% as of December 31, 2016. In addition, the portfolio
was in a net-charge off position of $161,000 and $176,000 for the year ended December 31, 2016 and the nine months ended September
30, 2016.
|
|
·
|
The provision for loan losses totaling
$209,000 for the commercial and industrial loans (except those secured by real estate) for the nine months ended September 30,
2017 was attributed to an increase of $227,000 in the specific reserve associated with loans evaluated individually for impairment.
|
Loans were evaluated for impairment as follows for the periods indicated
(dollars in thousands):
|
|
Recorded Investment in Loans
|
|
|
|
Allowance
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Individually
|
|
|
Collectively
|
|
|
Balance
|
|
|
Individually
|
|
|
Collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
38
|
|
|
$
|
-
|
|
|
$
|
38
|
|
|
$
|
6,327
|
|
|
$
|
-
|
|
|
$
|
6,327
|
|
Commercial
|
|
|
175
|
|
|
|
2
|
|
|
|
173
|
|
|
|
28,721
|
|
|
|
561
|
|
|
|
28,160
|
|
|
|
|
213
|
|
|
|
2
|
|
|
|
211
|
|
|
|
35,048
|
|
|
|
561
|
|
|
|
34,487
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
524
|
|
|
|
21
|
|
|
|
503
|
|
|
|
71,834
|
|
|
|
5,434
|
|
|
|
66,400
|
|
Non-owner occupied
|
|
|
434
|
|
|
|
-
|
|
|
|
434
|
|
|
|
61,831
|
|
|
|
2,176
|
|
|
|
59,655
|
|
Multifamily
|
|
|
39
|
|
|
|
-
|
|
|
|
39
|
|
|
|
6,114
|
|
|
|
-
|
|
|
|
6,114
|
|
Farmland
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
278
|
|
|
|
-
|
|
|
|
278
|
|
|
|
|
1,000
|
|
|
|
21
|
|
|
|
979
|
|
|
|
140,057
|
|
|
|
7,610
|
|
|
|
132,447
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
247
|
|
|
|
4
|
|
|
|
243
|
|
|
|
20,595
|
|
|
|
739
|
|
|
|
19,856
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
459
|
|
|
|
62
|
|
|
|
397
|
|
|
|
54,820
|
|
|
|
4,733
|
|
|
|
50,087
|
|
Second deed of trust
|
|
|
45
|
|
|
|
5
|
|
|
|
40
|
|
|
|
6,293
|
|
|
|
680
|
|
|
|
5,613
|
|
|
|
|
751
|
|
|
|
71
|
|
|
|
680
|
|
|
|
81,708
|
|
|
|
6,152
|
|
|
|
75,556
|
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
445
|
|
|
|
233
|
|
|
|
212
|
|
|
|
40,647
|
|
|
|
1,248
|
|
|
|
39,399
|
|
Student loans
|
|
|
99
|
|
|
|
-
|
|
|
|
99
|
|
|
|
47,643
|
|
|
|
-
|
|
|
|
47,643
|
|
Consumer and other
|
|
|
735
|
|
|
|
-
|
|
|
|
735
|
|
|
|
1,899
|
|
|
|
3
|
|
|
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,243
|
|
|
$
|
327
|
|
|
$
|
2,916
|
|
|
$
|
347,002
|
|
|
$
|
15,574
|
|
|
$
|
331,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
41
|
|
|
$
|
6,770
|
|
|
$
|
-
|
|
|
$
|
6,770
|
|
Commercial
|
|
|
300
|
|
|
|
9
|
|
|
|
291
|
|
|
|
27,092
|
|
|
|
581
|
|
|
|
26,511
|
|
|
|
|
341
|
|
|
|
9
|
|
|
|
332
|
|
|
|
33,862
|
|
|
|
581
|
|
|
|
33,281
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
611
|
|
|
|
86
|
|
|
|
525
|
|
|
|
66,021
|
|
|
|
5,604
|
|
|
|
60,417
|
|
Non-owner occupied
|
|
|
406
|
|
|
|
-
|
|
|
|
406
|
|
|
|
57,944
|
|
|
|
2,236
|
|
|
|
55,708
|
|
Multifamily
|
|
|
56
|
|
|
|
-
|
|
|
|
56
|
|
|
|
8,824
|
|
|
|
-
|
|
|
|
8,824
|
|
Farmland
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
310
|
|
|
|
-
|
|
|
|
310
|
|
|
|
|
1,076
|
|
|
|
86
|
|
|
|
990
|
|
|
|
133,099
|
|
|
|
7,840
|
|
|
|
125,259
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
271
|
|
|
|
-
|
|
|
|
271
|
|
|
|
20,691
|
|
|
|
703
|
|
|
|
19,988
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
447
|
|
|
|
144
|
|
|
|
303
|
|
|
|
54,791
|
|
|
|
5,064
|
|
|
|
49,727
|
|
Second deed of trust
|
|
|
136
|
|
|
|
90
|
|
|
|
46
|
|
|
|
5,768
|
|
|
|
709
|
|
|
|
5,059
|
|
|
|
|
854
|
|
|
|
234
|
|
|
|
620
|
|
|
|
81,250
|
|
|
|
6,476
|
|
|
|
74,774
|
|
Commercial and industrial loans (except those
secured by real estate)
|
|
|
223
|
|
|
|
6
|
|
|
|
217
|
|
|
|
39,390
|
|
|
|
544
|
|
|
|
38,846
|
|
Student loans
|
|
|
158
|
|
|
|
-
|
|
|
|
158
|
|
|
|
47,398
|
|
|
|
-
|
|
|
|
47,398
|
|
Consumer and other
|
|
|
721
|
|
|
|
-
|
|
|
|
721
|
|
|
|
2,101
|
|
|
|
-
|
|
|
|
2,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,373
|
|
|
$
|
335
|
|
|
$
|
3,038
|
|
|
$
|
337,100
|
|
|
$
|
15,441
|
|
|
$
|
321,659
|
|
Note 6 – Deposits
Deposits as of September 30, 2017 and December
31, 2016 were as follows (dollars in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Demand accounts
|
|
$
|
103,396
|
|
|
$
|
92,574
|
|
Interest checking accounts
|
|
|
48,673
|
|
|
|
44,390
|
|
Money market accounts
|
|
|
81,423
|
|
|
|
71,290
|
|
Savings accounts
|
|
|
27,601
|
|
|
|
26,598
|
|
Time deposits of $250,000 and over
|
|
|
15,348
|
|
|
|
13,372
|
|
Other time deposits
|
|
|
130,963
|
|
|
|
135,053
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
407,404
|
|
|
$
|
383,277
|
|
Note 7 – Trust preferred securities
During the first quarter of 2005, Southern
Community Financial Capital Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable
securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The
securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly.
The interest rate at September 30, 2017 was 3.47%. The securities were redeemable at par beginning on March 15, 2010 and each quarter
after such date until the securities mature on March 15, 2035. No amounts have been redeemed at September 30, 2017 and there are
no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated debt securities
with like maturities and like interest rates to the Trust Preferred Capital Notes.
During the third quarter of 2007, Village Financial
Statutory Trust II, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September
20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed
floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at September
30, 2017 was 2.72%. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in
2037. No amounts have been redeemed at September 30, 2017 and there are no plans to do so. The principal asset of the Trust is
$3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust
Preferred Capital Notes.
The Trust Preferred Capital Notes may be included
in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion
of the Trust Preferred Capital Notes not considered as Tier 1 capital may be included in Tier 2 capital.
The obligations of the Company with respect
to the issuance of the Trust Preferred Capital Notes constitute a full and unconditional guarantee by the Company of the Trust’s
obligations with respect to the Trust Preferred Capital Notes. Subject to certain exceptions and limitations, the Company may elect
from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution
payments on the related Trust Preferred Capital Notes and require a deferral of common dividends. The Company is current on these
interest payments.
Note 8 – Stock incentive plan
The Village Bank and Trust Financial Corp.
Incentive Plan, which was adopted on February 28, 2006, authorized the issuance of up to 48,750 shares of common stock (after the
reverse stock split) (the “2006 Plan”). On May 26, 2015, the Company’s shareholders approved the adoption of
the Village Bank and Trust Financial Corp. 2015 Stock Incentive Plan (the “2015 Plan”) authorizing the issuance of
up to 60,000 shares of common stock. The 2015 Plan was adopted to replace the 2006 Plan and any new awards will be made pursuant
to the 2015 Plan. The prior awards made under the 2006 Plan were unchanged by the adoption of the 2015 Plan and continue to be
governed by the terms of the 2006 Plan.
The following table summarizes stock options
outstanding under the stock incentive plans at the indicated dates:
|
|
Nine Months
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Per Share
|
|
|
Value
|
|
|
Options
|
|
|
Price
|
|
|
Per Share
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, beginning of period
|
|
|
2,337
|
|
|
$
|
24.21
|
|
|
$
|
12.76
|
|
|
|
|
|
|
|
2,929
|
|
|
$
|
24.47
|
|
|
$
|
12.74
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period
|
|
|
2,337
|
|
|
$
|
24.21
|
|
|
$
|
12.76
|
|
|
$
|
-
|
|
|
|
2,929
|
|
|
$
|
24.47
|
|
|
$
|
12.74
|
|
|
$
|
-
|
|
Options exercisable, end of period
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the second quarter of 2017, we granted certain officers 600 restricted shares of common stock with a weighted average fair market
value of $28.83 at the date of grant. The restricted stock awards vest over two years. During
the
third quarter of 2017, we granted certain officers 5,450 restricted shares of common stock with a weighted average fair market
value of $31.00 at the date of grant. These restricted stock awards vest over three years. During the second quarter of 2016, we
granted certain officers 4,000 restricted shares of common stock with a weighted average fair market value of $20.00 at the date
of grant. These restricted stock awards vest over two years. Prior to vesting, these shares are subject to forfeiture to us without
consideration upon termination of employment under certain circumstances. The total number of shares underlying non-vested restricted
stock was 28,437 and 51,665 at September 30, 2017 and 2016, respectively.
The fair value of the stock is based on the
grant date of the award and the expense is recognized over the vesting period. Unamortized stock-based compensation related to
nonvested share based compensation arrangements granted under the stock incentive plan as of September 30, 2017 and 2016, was $487,374
and $775,575, respectively. The time based unamortized compensation of $301,676 is expected to be recognized over a weighted average
period of 1.99 years.
Stock-based compensation expense was approximately
$102,000 and $156,000 for the nine months ended September 30, 2017 and 2016, respectively.
Note 9 – Fair value
The fair value of an asset or liability is
the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal
market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be
adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior
to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and
liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent,
knowledgeable, able to transact and willing to transact.
Financial Accounting Standards Board (“FASB”)
Codification Topic 820:
Fair Value Measurements and Disclosures
establishes a hierarchy for valuation inputs that gives
the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. The fair values hierarchy is as follows:
Level 1 Inputs
— Quoted
prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement
date.
Level 2 Inputs
— Significant
other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 Inputs
— Significant
unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in
pricing an asset or liability.
The Company used the following methods to determine
the fair value of each type of financial instrument:
Securities
: Fair values for securities
available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service
uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various
assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market
and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations
of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against
the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable
in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed
in the marketplace (Levels 1 and 2).
Impaired loans
: The fair values of impaired
loans are measured for impairment using the fair value of the collateral for collateral-dependent loans on a nonrecurring basis.
Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast
majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income
or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data
(Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property
is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is
based upon an outside appraisal if deemed significant using observable market data. Likewise, values for inventory and account
receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded
in the period incurred as provision for loan losses on the Consolidated Statements of Operations.
Real Estate Owned:
Real estate owned
assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, real estate owned assets are carried
at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s
estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current
appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below the appraised value and there is no observable
market price, the Company records the foreclosed asset as nonrecurring Level 3.
Assets held for sale
: Assets held for
sale were transferred from premises and equipment at cost less accumulated depreciation at the date of transfer. The Company periodically
evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling
costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation
of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised
value, the Company records the assets held for sale as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price,
the Company records the asset held for sale as nonrecurring Level 3.
Assets and liabilities measured at fair value
under Topic 820 on a recurring and non-recurring basis are summarized below for the indicated dates (dollars in thousands):
|
|
Fair Value Measurement
|
|
|
|
at September 30, 2017 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Financial Assets - Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
$
|
31,991
|
|
|
$
|
-
|
|
|
$
|
31,991
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
10,518
|
|
|
|
-
|
|
|
|
10,518
|
|
|
|
-
|
|
Other investments
|
|
|
2,325
|
|
|
|
1,000
|
|
|
|
1,325
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets - Non-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
15,574
|
|
|
|
-
|
|
|
|
14,039
|
|
|
|
1,535
|
|
Assets held for sale
|
|
|
841
|
|
|
|
-
|
|
|
|
-
|
|
|
|
841
|
|
Real estate owned
|
|
|
1,788
|
|
|
|
-
|
|
|
|
1,788
|
|
|
|
-
|
|
|
|
Fair Value Measurement
|
|
|
|
at December 31, 2016 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Financial Assets - Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
$
|
32,246
|
|
|
$
|
2,103
|
|
|
$
|
30,143
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
11,648
|
|
|
|
9,450
|
|
|
|
2,198
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets - Non-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
15,441
|
|
|
|
-
|
|
|
|
14,467
|
|
|
|
974
|
|
Assets held for sale
|
|
|
841
|
|
|
|
-
|
|
|
|
-
|
|
|
|
841
|
|
Real estate owned
|
|
|
2,926
|
|
|
|
-
|
|
|
|
2,926
|
|
|
|
-
|
|
The following tables present qualitative information about Level
3 fair value measurements for financial instruments measured at fair value at September 30, 2017 and December 31, 2016 (dollars
in thousands):
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
Fair Value
|
|
|
Valuation
|
|
Unobservable
|
|
(Weighted
|
|
|
Estimate
|
|
|
Techniques
|
|
Input
|
|
Average)
|
|
|
|
|
|
|
|
|
|
|
Impaired loans - real estate secured
|
|
$
|
287
|
|
|
Appraisal (1) or Internal Valuation (2)
|
|
Selling costs
|
|
6%-10% (7%)
|
|
|
|
|
|
|
|
|
Discount for lack of marketability and age of appraisal
|
|
6%-30% (10%)
|
Impaired loans - non-real estate secured
|
|
$
|
1,248
|
|
|
Appraisal (1) or Discounted Cash Flow
|
|
Selling costs
|
|
10%
|
|
|
|
|
|
|
|
|
Discount for lack of marketability or practical life
|
|
0%-50% (20%)
|
Assets held for sale
|
|
$
|
841
|
|
|
Appraisal (1) or Internal Valuation (2)
|
|
Selling costs
|
|
6%-10% (7%)
|
|
|
|
|
|
|
|
|
Discount for lack of marketability and age of appraisal
|
|
6%-30% (15%)
|
|
(1)
|
Fair Value is generally determined through independent
appraisals of the underlying collateral, which generally included various level 3 inputs which are not identifiable
|
|
(2)
|
Internal valuations may be conducted to determine Fair
Value for assets with nominal carrying balances
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
Fair Value
|
|
|
Valuation
|
|
Unobservable
|
|
(Weighted
|
|
|
Estimate
|
|
|
Techniques
|
|
Input
|
|
Average)
|
|
|
|
|
|
|
|
|
|
|
Impaired loans - real estate secured
|
|
$
|
517
|
|
|
Appraisal (1) or Internal Valuation (2)
|
|
Selling costs
|
|
6%-10% (7%)
|
|
|
|
|
|
|
|
|
Discount for lack of marketability and age of appraisal
|
|
6%-30% (10%)
|
Impaired loans - non-real estate secured
|
|
$
|
457
|
|
|
Appraisal (1) or Discounted Cash Flow
|
|
Selling costs
|
|
10%
|
|
|
|
|
|
|
|
|
Discount for lack of marketability or practical life
|
|
0%-50% (20%)
|
Assets held for sale
|
|
$
|
841
|
|
|
Appraisal (1) or Internal Valuation (2)
|
|
Selling costs
|
|
6%-10% (7%)
|
|
|
|
|
|
|
|
|
Discount for lack of marketability and age of appraisal
|
|
6%-30% (15%)
|
|
(1)
|
Fair Value is generally determined through independent
appraisals of the underlying collateral, which generally included various level 3 inputs which are not identifiable
|
|
(2)
|
Internal valuations may be conducted to determine Fair
Value for assets with nominal carrying balances
|
In general,
fair value of securities is based upon quoted market prices, where available. If such quoted market prices are not available, fair
value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based
parameters. Fair value of loans held for sale is based upon internally developed models that primarily use as inputs, observable
market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These
adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters.
Any such valuation adjustments are applied consistently over time. The Company valuation methodologies may produce a fair value
calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the
Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value
at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances
that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.
Cash and cash equivalents
– The
carrying amount of cash and cash equivalents approximates fair value.
Investment securities
– The fair
value of investment securities available-for-sale is estimated based on bid quotations received from independent pricing services
for similar assets. The carrying amount of other investments approximates fair value.
Loans
– For variable rate loans
that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other
loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect
the credit and interest rate risk inherent in the loans, or by using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Assets held for sale
– The carrying
value of assets held for sale is based on fair value less selling costs. Fair values for assets held for sale are estimated
based on appraised values of the asset or management’s estimation of the value of the assets.
Deposits
– The fair value of deposits
with no stated maturity, such as demand, interest checking and money market, and savings accounts, is equal to the amount payable
on demand at year-end. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using
the rates currently offered for deposits of similar remaining maturities.
Borrowings
– The fair value of
borrowings is based on the discounted value of contractual cash flows using the rates currently offered for borrowings of similar
remaining maturities.
Accrued interest
– The carrying
amounts of accrued interest receivable and payable approximate fair value.
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Level in Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Hierarchy
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
Level 1
|
|
$
|
15,684
|
|
|
$
|
15,684
|
|
|
$
|
10,848
|
|
|
$
|
10,848
|
|
Cash equivalents
|
|
Level 2
|
|
|
15,026
|
|
|
|
15,026
|
|
|
|
948
|
|
|
|
948
|
|
Investment securities available for sale
|
|
Level 1
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
11,553
|
|
|
|
11,553
|
|
Investment securities available for sale
|
|
Level 2
|
|
|
43,834
|
|
|
|
43,834
|
|
|
|
32,341
|
|
|
|
32,341
|
|
Federal Home Loan Bank stock
|
|
Level 2
|
|
|
466
|
|
|
|
466
|
|
|
|
512
|
|
|
|
512
|
|
Loans held for sale
|
|
Level 2
|
|
|
5,641
|
|
|
|
5,641
|
|
|
|
14,784
|
|
|
|
14,784
|
|
Loans
|
|
Level 2
|
|
|
331,428
|
|
|
|
330,874
|
|
|
|
321,659
|
|
|
|
322,386
|
|
Impaired loans
|
|
Level 2
|
|
|
14,039
|
|
|
|
14,039
|
|
|
|
14,467
|
|
|
|
14,467
|
|
Impaired loans
|
|
Level 3
|
|
|
1,535
|
|
|
|
1,535
|
|
|
|
974
|
|
|
|
974
|
|
Assets held for sale
|
|
Level 3
|
|
|
841
|
|
|
|
841
|
|
|
|
841
|
|
|
|
841
|
|
Other real estate owned
|
|
Level 2
|
|
|
1,788
|
|
|
|
1,788
|
|
|
|
2,926
|
|
|
|
2,926
|
|
Bank owned life insurance
|
|
Level 3
|
|
|
7,222
|
|
|
|
7,222
|
|
|
|
7,093
|
|
|
|
7,093
|
|
Accrued interest receivable
|
|
Level 2
|
|
|
2,516
|
|
|
|
2,516
|
|
|
|
2,274
|
|
|
|
2,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
Level 2
|
|
|
407,404
|
|
|
|
407,503
|
|
|
|
383,277
|
|
|
|
383,985
|
|
FHLB borrowings
|
|
Level 2
|
|
|
1,600
|
|
|
|
1,600
|
|
|
|
2,400
|
|
|
|
2,402
|
|
Trust preferred securities
|
|
Level 2
|
|
|
8,764
|
|
|
|
9,380
|
|
|
|
8,764
|
|
|
|
8,565
|
|
Other borrowings
|
|
Level 2
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
|
81
|
|
Accrued interest payable
|
|
Level 2
|
|
|
142
|
|
|
|
142
|
|
|
|
70
|
|
|
|
70
|
|
Note 10 – 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.
The following table presents segment information
as of and for the three and nine months ended September 30, 2017 and 2016 (in thousands):
|
|
Commercial
|
|
|
Mortgage
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Eliminations
|
|
|
Totals
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
4,313
|
|
|
$
|
72
|
|
|
$
|
(5
|
)
|
|
$
|
4,380
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
1,395
|
|
|
|
-
|
|
|
|
1,395
|
|
Other revenues
|
|
|
566
|
|
|
|
158
|
|
|
|
(41
|
)
|
|
|
683
|
|
Total revenues
|
|
|
4,879
|
|
|
|
1,625
|
|
|
|
(46
|
)
|
|
|
6,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
688
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
688
|
|
Salaries and benefits
|
|
|
2,010
|
|
|
|
975
|
|
|
|
-
|
|
|
|
2,985
|
|
Commissions
|
|
|
-
|
|
|
|
431
|
|
|
|
-
|
|
|
|
431
|
|
Other expenses
|
|
|
1,775
|
|
|
|
241
|
|
|
|
(41
|
)
|
|
|
1,975
|
|
Total operating expenses
|
|
|
4,473
|
|
|
|
1,652
|
|
|
|
(46
|
)
|
|
|
6,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
406
|
|
|
$
|
(27
|
)
|
|
$
|
-
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
467,558
|
|
|
$
|
10,123
|
|
|
$
|
(12,975
|
)
|
|
$
|
464,706
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Eliminations
|
|
|
Totals
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
3,995
|
|
|
$
|
165
|
|
|
$
|
(56
|
)
|
|
$
|
4,104
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
2,043
|
|
|
|
-
|
|
|
|
2,043
|
|
Other revenues
|
|
|
1,109
|
|
|
|
229
|
|
|
|
(32
|
)
|
|
|
1,306
|
|
Total revenues
|
|
|
5,104
|
|
|
|
2,437
|
|
|
|
(88
|
)
|
|
|
7,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
660
|
|
|
|
56
|
|
|
|
(56
|
)
|
|
|
660
|
|
Salaries and benefits
|
|
|
2,066
|
|
|
|
979
|
|
|
|
-
|
|
|
|
3,045
|
|
Commissions
|
|
|
-
|
|
|
|
533
|
|
|
|
-
|
|
|
|
533
|
|
Other expenses
|
|
|
2,370
|
|
|
|
297
|
|
|
|
(32
|
)
|
|
|
2,635
|
|
Total operating expenses
|
|
|
5,096
|
|
|
|
1,865
|
|
|
|
(88
|
)
|
|
|
6,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
8
|
|
|
$
|
572
|
|
|
$
|
-
|
|
|
$
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
450,043
|
|
|
$
|
10,562
|
|
|
$
|
(14,314
|
)
|
|
$
|
446,291
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Eliminations
|
|
|
Totals
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,513
|
|
|
$
|
205
|
|
|
$
|
(15
|
)
|
|
$
|
12,703
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
4,195
|
|
|
|
-
|
|
|
|
4,195
|
|
Other revenues
|
|
|
1,680
|
|
|
|
503
|
|
|
|
(137
|
)
|
|
|
2,046
|
|
Total revenues
|
|
|
14,193
|
|
|
|
4,903
|
|
|
|
(152
|
)
|
|
|
18,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,997
|
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
1,997
|
|
Salaries and benefits
|
|
|
6,090
|
|
|
|
2,952
|
|
|
|
-
|
|
|
|
9,042
|
|
Commissions
|
|
|
-
|
|
|
|
1,180
|
|
|
|
-
|
|
|
|
1,180
|
|
Other expenses
|
|
|
4,914
|
|
|
|
689
|
|
|
|
(137
|
)
|
|
|
5,466
|
|
Total operating expenses
|
|
|
13,001
|
|
|
|
4,836
|
|
|
|
(152
|
)
|
|
|
17,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,192
|
|
|
$
|
67
|
|
|
$
|
-
|
|
|
$
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
467,558
|
|
|
$
|
10,123
|
|
|
$
|
(12,975
|
)
|
|
$
|
464,706
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Eliminations
|
|
|
Totals
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
11,625
|
|
|
$
|
363
|
|
|
$
|
(98
|
)
|
|
$
|
11,890
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
4,630
|
|
|
|
-
|
|
|
|
4,630
|
|
Other revenues
|
|
|
2,994
|
|
|
|
533
|
|
|
|
(129
|
)
|
|
|
3,398
|
|
Total revenues
|
|
|
14,619
|
|
|
|
5,526
|
|
|
|
(227
|
)
|
|
|
19,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,958
|
|
|
|
98
|
|
|
|
(98
|
)
|
|
|
1,958
|
|
Salaries and benefits
|
|
|
5,828
|
|
|
|
2,635
|
|
|
|
-
|
|
|
|
8,463
|
|
Commissions
|
|
|
-
|
|
|
|
1,163
|
|
|
|
-
|
|
|
|
1,163
|
|
Other expenses
|
|
|
6,014
|
|
|
|
808
|
|
|
|
(129
|
)
|
|
|
6,693
|
|
Total operating expenses
|
|
|
13,800
|
|
|
|
4,704
|
|
|
|
(227
|
)
|
|
|
18,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
819
|
|
|
$
|
822
|
|
|
$
|
-
|
|
|
$
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
450,043
|
|
|
$
|
10,562
|
|
|
$
|
(14,314
|
)
|
|
$
|
446,291
|
|
Note 11 – Shareholders’ equity
and regulatory matters
Preferred Stock
On May 1, 2009, as part of the Capital Purchase
Program (the “TARP 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 (collectively, the “Purchase Agreement”) 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 fair value of the preferred stock was estimated using discounted cash flow methodology
at an assumed market equivalent rate of 13%, with 20 quarterly payments over a five year period, and was determined to be $10,208,000.
The fair value of the Warrant was estimated using the Black-Scholes option pricing model, with assumptions of 25% volatility, a
risk-free rate of 2.03%, a yield of 6.162% and an estimated life of 5 years, and was determined to be $534,000. The aggregate fair
value for both the preferred stock and Warrant was determined to be $10,742,000 with 95% of the aggregate attributable to the preferred
stock and 5% attributable to the Warrant. Therefore, the $14,738,000 issuance was allocated with $14,006,000 being assigned to
the preferred stock and $732,000 being allocated to the Warrant. The difference between the $14,738,000 face value of the preferred
stock and the amount allocated of $14,006,000 to the preferred stock was accreted as a discount on the preferred stock using the
effective interest rate method over five years.
The preferred stock qualifies as Tier 1 capital
and accrued cumulative dividends at a rate of 5% until May 1, 2014 and now accrues at a 9% rate. The preferred stock is generally
non-voting, other than on certain matters that could adversely affect the preferred stock.
The Warrant was immediately exercisable. The
Warrant provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant
to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of common
stock, and upon certain issuances of common stock at or below a specified price relative to the then-current market price of common
stock. The Warrant expires ten years from the issuance date. Pursuant to the Purchase Agreement, the Treasury has agreed not to
exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
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.
In accordance with the Company’s prior
Written Agreement with the Federal Reserve Bank of Richmond (the “Reserve Bank”), the Company had been deferring quarterly
cash dividends on the preferred stock since May 2011. The Written Agreement was terminated by the Reserve Bank as of July 28, 2016.
With the termination of the Written Agreement, the Company is not required to defer the quarterly cash dividends on the preferred
stock.
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 dividend to the Company.
At September 30, 2017, the aggregate amount
of the Company’s total accrued dividend payments on the preferred stock was $56,000 and reflected as a reduction of retained
earnings.
Common Stock
On December 4, 2013, the Company issued 67,907
(after the reverse stock split) new shares of common stock through a private placement to directors and executive officers. The
sale raised $1,684,075 in new capital for the Company. The $24.80 (after the reverse stock split) sale price for the common shares
was equal to the stock’s book value at September 30, 2013, which represented a 30% premium over the closing price of the
stock on December 3, 2013.
On August 6,
2014, the Company filed Articles of Amendment to its Articles of Incorporation with the Virginia State Corporation Commission to
affect a reverse stock split of its outstanding common stock which became effective on August 8, 2014. As a result of the reverse
split, every sixteen shares of the Company’s issued and outstanding common stock were consolidated into one issued and outstanding
share of common stock
.
On March 27, 2015, the Company completed a
rights offering to shareholders (the “Rights Offering”) and concurrent standby offering to Kenneth R. Lehman (the “Standby
Offering”), in which the Company issued an aggregate of 1,051,866 shares of common stock (the total number of shares offered)
at $13.87 per share for aggregate gross proceeds of $14,589,381 (including the value of the Company’s preferred stock exchanged
by Mr. Lehman for shares of common stock of $4,618,813). In connection with the Rights Offering, 283,293 shares were issued to
shareholders upon exercise of their basic subscription rights and 191,773 shares were issued to shareholders upon exercise of their
oversubscription privileges (approximately 36.9% of the total number of shares requested pursuant to oversubscription privileges).
In connection with the Standby Offering, Mr. Lehman purchased an aggregate of 576,800 shares of the Company’s common stock,
333,007 of which were issued in exchange for 9,023 shares of the Company’s preferred stock and 243,793 of which were purchased
for cash. Also, as part of the Standby Offering, Mr. Lehman forgave $2,215,009 in accrued and unpaid dividends on the preferred
stock.
Regulatory Matters
The Bank is subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material
effect on the Bank’s financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures are established by regulation
to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and
Tier 1 Capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 Capital to average assets (the Leverage ratio).
In July 2013, the Board of Governors of the
Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) approved the final rules implementing
the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules,
which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum
requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new
common equity Tier 1 capital to risk-weighted assets ratio (“CET1 ratio”) of 4.5% and a capital conservation buffer
of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises
the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively
results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted
assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel
III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital
ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.
The capital amounts and ratios at September
30, 2017 and December 31, 2016 for the Bank are presented in the table below (dollars in thousands):
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For Capital
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Actual
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Adequacy Purposes
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To be Well Capitalized
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Amount
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Ratio
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Amount
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Ratio
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Amount
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Ratio
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September 30, 2017
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Total capital (to risk- weighted assets) Village Bank
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$
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46,308
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14.23
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%
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$
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26,040
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8.00
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%
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$
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32,550
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10.00
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%
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Tier 1 capital (to risk- weighted assets) Village Bank
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43,065
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13.23
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%
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19,530
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6.00
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%
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26,040
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8.00
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%
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Leverage ratio (Tier 1 capital to average assets) Village Bank
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43,065
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9.51
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%
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18,299
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4.00
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%
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22,873
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5.00
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%
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Common equity tier 1 (to risk-weighted assets) Village Bank
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43,065
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13.23
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%
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14,648
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4.50
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%
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21,158
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|
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6.50
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%
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December 31, 2016
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Total capital (to risk- weighted assets) Village Bank
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$
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49,225
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15.33
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%
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$
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25,693
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|
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8.00
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%
|
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$
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32,117
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|
|
|
10.00
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%
|
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Tier 1 capital (to risk- weighted assets) Village Bank
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45,852
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14.28
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%
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12,847
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|
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4.00
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%
|
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19,270
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|
|
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6.00
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%
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|
|
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Leverage ratio (Tier 1 capital to average assets) Village Bank
|
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45,852
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10.47
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%
|
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17,523
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4.00
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%
|
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21,903
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|
|
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5.00
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%
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Common equity tier 1 (to risk-weighted assets) Village Bank
|
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45,852
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14.28
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%
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14,452
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4.50
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%
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20,876
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|
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6.50
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%
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Note 12 – Commitments and contingencies
Off-balance-sheet risk
– The Company
is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of
its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the financial statements.
The contract amounts of these instruments reflect the extent of involvement that the Company has in particular classes of instruments.
The Company’s exposure to credit loss
in the event of non-performance by the other party to the financial instrument for commitments to extend credit, and to potential
credit loss associated with letters of credit issued, is represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for loans and other such on-balance
sheet instruments.
The Company had outstanding the following approximate
off-balance-sheet financial instruments whose contract amounts represent credit risk at the dates indicated (dollars in thousands):
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September 30,
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December 31,
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2017
|
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2016
|
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Undisbursed credit lines
|
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$
|
55,999
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$
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55,315
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|
Commitments to extend or originate credit
|
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17,481
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|
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|
16,467
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|
Standby letters of credit
|
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4,213
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|
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4,397
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|
|
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Total commitments to extend credit
|
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$
|
77,693
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|
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$
|
76,179
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|
Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require the payment of a fee. Historically, many commitments expire
without being drawn upon; therefore, the total commitment amounts shown in the above table are not necessarily indicative of future
cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, as deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the customer.
Collateral held varies but may include personal or income-producing commercial real estate, accounts receivable, inventory and
equipment.
Standby letters of credit are written conditional
commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to customers.
Concentrations of credit risk
–
All of the Company’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in
the Company’s market area. Although the Company is building a diversified loan portfolio, a substantial portion of its clients’
ability to honor contracts is reliant upon the economic stability of the Richmond, Virginia area, including the real estate markets
in the area. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit
approximates the distribution of loans outstanding.
Approximately 14% of the Company’s loan
portfolio consists of student loans that are guaranteed by the DOE and covers approximately 98% of the principal and interest in
the event of default. The Company utilizes a third party vendor with significant experience and expertise to service these
loans. In the unlikely event that the third party servicer does not service the loans in accordance with the DOE requirements
and could not reimburse the Company for losses sustained as a result of servicing errors, the Company could sustain additional
losses beyond what has been factored in the allowance for loan losses.
Prior Agreements with Regulators
–
In February 2012, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC and the Virginia
Bureau of Financial Institutions (the “Supervisory Authorities”), and the Supervisory Authorities issued the related
Consent Order effective February 3, 2012 (the “Consent Order”). In June 2012, the Company entered into a similar written
agreement (the “Written Agreement”) with the Reserve Bank. As a result of the steps the Company and the Bank took to,
among other things, improve asset quality, increase capital, augment management and board oversight, and increase earnings, the
Consent Order was terminated effective December 14, 2015. In place of the Consent Order, the Bank’s Board of Directors made
certain written assurances to the Supervisory Authorities in the form of a Memorandum of Understanding (“MOU”) that
became effective November 17, 2015. Due to further improvements by the Company and the Bank in asset quality and earnings, and
the correction of a prior Regulation W violation, the MOU was terminated effective May 12, 2016, and the Written Agreement was
terminated effective July 28, 2016. With the terminations of the MOU and the Written Agreement, neither the Company nor the Bank
is under any formal or informal agreements with its regulators.
Note 13 – Income Taxes
The net deferred tax asset is included in other
assets on the balance sheet. Accounting Standards Codification Topic 740,
Income Taxes
, requires that companies assess whether
a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence
using a “more likely than not” standard. Management considers both positive and negative evidence and analyzes changes
in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant
weight is given to evidence that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting
realization.
In assessing the Company’s ability to
realize its net deferred tax asset, management considers whether it is more likely than not that some portion or all of the net
deferred tax asset will or will not be realized. The Company’s ultimate realization of the net deferred tax asset is
dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.
Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred
tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of net deferred taxes
recognized could be impacted by changes to any of these variables.
Each quarter, the Company weighs both the positive
and negative information with respect to realization of the net deferred tax asset and analyzes its position as to whether or not
a valuation allowance is required. Over the past several quarters, the positive information has been increasing while the negative
information has been decreasing. Over the last eight quarters, the Company has demonstrated consistent earnings while its level
of non-performing assets, which was the primary cause of the Company’s losses, has steadily decreased. Additionally, the
Reserve Bank, the FDIC and the Virginia Bureau of Financial Institutions have terminated their formal agreements with the Company
and the Bank, reducing regulatory risk.
Given the consistent earnings and improving
asset quality, the Company’s analysis concluded that, it is more likely than not that the Company will generate sufficient
taxable income within the applicable carry-forward periods to realize its net deferred tax asset.
There was a $106,000 and $333,000 income tax
expense recorded for the three and nine month periods ended September 30, 2017, respectively, compared to an $11,352,000 income
tax benefit recorded for each of the three and nine month periods ended September 30, 2016. The Company recognized an income tax
benefit of $11,172,000 for the year ended December 31, 2016. The income tax benefit in 2016 was due to the reversal of the valuation
allowance previously recorded against the net deferred tax asset as of September 30, 2016, offset by tax on pretax earnings for
2016 of $825,000.
The net operating losses available to offset
future taxable income amounted to $23,028,000 at September 30, 2017 and begin expiring in 2028; $1,257,000 of such amount is subject
to a limitation by Section 382 of the Internal Revenue Code of 1986, as amended, to $908,000 per year.
Commercial banking organizations conducting
business in Virginia are not subject to Virginia income taxes. Instead, they are subject to a franchise tax based on bank capital.
The Company recorded franchise tax expense of approximately $85,000 and $256,000 for the three and nine months ended September
30, 2017, respectively, compared to $19,000 and $56,000 for the three and nine months ended September 30, 2016, respectively.
Note 14 – Recent accounting pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers: Topic 606.” This ASU revised guidance for the recognition, measurement, and
disclosure of revenue from contracts with customers. The original guidance has been amended through subsequent accounting standard
updates that resulted in technical corrections, improvements, and a one-year deferral of the effective date to January 1, 2018.
The guidance, as amended, is applicable to all entities and, once effective, will replace significant portions of existing industry
and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with
financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance.
Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope.
Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require
a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented. Modified
retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period
in which the entity first applies the new guidance. The Company plans to adopt this guidance on the effective date, January 1,
2018 via the modified retrospective approach. The Company performed its assessment of the adoption of this ASU and the related
subsequent technical corrections issued. Based on the completed contracts reviewed thus far, the adoption of this accounting guidance
is not expected to have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition
and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to: (i) measure equity investments
at fair value through net income, with certain exceptions; (ii) present in Other Comprehensive Income the changes in instrument-specific
credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities
by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes
based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities
in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity
investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative
impairment assessment of such equity investments and amends certain fair value disclosure requirements. This ASU is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is only permitted
for the provision related to instrument-specific credit risk. The Company does not expect ASU 2016-01 to have a material impact
on the Company’s financial position, results of operations, or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)”. This ASU requires lessees to recognize assets and liabilities arising from most operating leases on the statement
of financial position. ASU 2016-02 will be effective for the Company for the fiscal years beginning after December 15, 2018 with
early adoption permitted. The Company has determined that the provisions of ASU-2016-02 may result in an increase in assets to
recognize the present value of the lease obligations with a corresponding increase in liabilities, however, the Company does not
expect this to have a material impact on the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-09,
“Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This
ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income
taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This
ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption
is permitted; however if the Company elects to early adopt, then all amendments must be adopted in the same period. The Company
has concluded the adoption of ASU No. 2016-09 has not had a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This
ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities by
eliminating the probable initial recognition threshold (incurred loss methodology) and requiring entities to reflect its current
estimate of all expected credit losses. The amendments in the ASU are effective beginning after December 15, 2019 and for interim
periods within that year. Early adoption is permitted beginning after December 15, 2018. Entities will apply the amendments in
this ASU through a cumulative-effect adjustment to retained earnings in the first period effective. While the Company is currently
evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s
Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming
an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems.
In August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payments (a consensus of Merging Issues
Task Force).” This ASU attempts to clarify how certain cash receipts and cash payments are presented and classified in the
statement of cash flows. The purpose of this update is to reduce existing diversity in practice in eight areas addressed by the
update. The amendment will be effective for the Company for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted. The Company has concluded the adoption of ASU No. 2016-15 will not have
a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables
– Nonrefundable Fees and Other Cost (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” These
amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments
require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities
held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted
including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as
of the beginning of the fiscal year that includes the interim period. The amendments should be applied on a modified retrospective
basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company
does have exposure and is assessing the impact of ASU 2017-08 and may choose early adoption. Overall, the Company does
not expect it to have a material impact on its accounting.
In May 2017, the FASB issued ASU No. 2017-09,
“Scope of Modification Accounting.” The amendment clarifies Topic 718,
Compensation – Stock Compensation
,
such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless
all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award
immediately before the modification, provided that the ASU indicates that if the modification does not affect any of the inputs
to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after
the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award
immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument
is the same as the classification of the original award immediately before the modification. The ASU is effective for all entities
for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted,
including adoption in an interim period. The Company has concluded the adoption of ASU No. 2017-09 will not have a material impact
on its consolidated financial statements.
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 Village Bank
Mortgage Corporation 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.
|
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 September 30, 2017 and December 31, 2016 and the results of operations
for the Company for the three and nine months ended September 30, 2017 and 2016. 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 September 30, 2017,
the Company had net income of $273,000 and net income available to common shareholders of $160,000, or $0.11 per fully diluted
share, compared to net income of $11,932,000 and net income available to common shareholders of $11,932,000, or $8.21 per fully
diluted share, for the same period in 2016. For the nine months ended September 30, 2017, the Company had net income of $926,000
and net income available to common shareholders of $541,000, or $0.38 per fully diluted share, compared to net income of $12,993,000
and net income available to common shareholders of $12,446,000, or $8.74 per fully diluted share, for the same period in 2016.
The decrease in net income for both the three and nine months ended September 30, 2017 is due to recording an income tax benefit
of $11,352,000 due to the reversal in the third quarter of 2016 of the $11,997,000 valuation allowance previously recorded against
the net deferred tax asset.
There were significant changes in income and
expense items when comparing 2017 and 2016 results. The more significant changes are reflected in the following table (in thousands):
|
|
Q3 2017
|
|
|
Nine Months 2017
|
|
|
|
Compared to
|
|
|
Compared to
|
|
|
|
Q3 2016
|
|
|
Nine Months 2016
|
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
248
|
|
|
$
|
774
|
|
Gains on loan sales
|
|
|
(648
|
)
|
|
|
(435
|
)
|
Gain on sale of assets
|
|
|
-
|
|
|
|
(504
|
)
|
Gain on sale of investments
|
|
|
(15
|
)
|
|
|
(171
|
)
|
Rental income
|
|
|
-
|
|
|
|
(582
|
)
|
(Increase) decrease in
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
60
|
|
|
|
(579
|
)
|
Commissions
|
|
|
102
|
|
|
|
(17
|
)
|
Occupancy
|
|
|
55
|
|
|
|
367
|
|
Writedown of assets held for sale
|
|
|
-
|
|
|
|
220
|
|
Cease use lease obligation
|
|
|
-
|
|
|
|
125
|
|
Expenses related to foreclosed real estate
|
|
|
68
|
|
|
|
401
|
|
FDIC premium
|
|
|
21
|
|
|
|
80
|
|
Income tax expense
|
|
|
(11,458
|
)
|
|
|
(11,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,567
|
)
|
|
$
|
(12,006
|
)
|
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.
|
|
For the Three Months Ended September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets
|
|
$
|
415,015
|
|
|
$
|
391,763
|
|
|
$
|
23,252
|
|
Interest income
|
|
$
|
4,380
|
|
|
$
|
4,104
|
|
|
$
|
276
|
|
Yield on interest-earning assets
|
|
|
4.19
|
%
|
|
|
4.17
|
%
|
|
|
0.02
|
%
|
Average interest-bearing liabilities
|
|
$
|
315,505
|
|
|
$
|
305,641
|
|
|
$
|
9,864
|
|
Interest expense
|
|
$
|
688
|
|
|
$
|
660
|
|
|
$
|
28
|
|
Cost of interest-bearing liabilities
|
|
|
0.87
|
%
|
|
|
0.86
|
%
|
|
|
0.01
|
%
|
Net interest income
|
|
$
|
3,692
|
|
|
$
|
3,444
|
|
|
$
|
248
|
|
Net interest margin
|
|
|
3.53
|
%
|
|
|
3.50
|
%
|
|
|
0.03
|
%
|
The increase in net interest income of $248,000
in the third quarter of 2017 was a result of positive movements in interest income. Interest income increased by $276,000, with
interest income on loans increasing by $215,000 and interest income on investment securities increasing by $106,000. The increase
in interest income on loans was attributable to an increase in average loans outstanding of $9,430,000. The increase in interest
income on investment securities was due to an increase in average investments securities of $18,355,000. The third quarter 2017
net interest margin increased 3 basis points to 3.53% compared to 3.50% in the third quarter of 2016. The increase in net interest
margin was driven by an increase in interest-earning asset yields as a result of the purchase of a $7.4 million student loan portfolio
in August 2017 with an expected yield of 4.64%.
|
|
For the Nine Months Ended September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets
|
|
$
|
405,320
|
|
|
$
|
372,514
|
|
|
$
|
32,806
|
|
Interest income
|
|
$
|
12,703
|
|
|
$
|
11,890
|
|
|
$
|
813
|
|
Yield on interest-earning assets
|
|
|
4.19
|
%
|
|
|
4.26
|
%
|
|
|
(0.07
|
)%
|
Average interest-bearing liabilities
|
|
$
|
310,417
|
|
|
$
|
304,086
|
|
|
$
|
6,331
|
|
Interest expense
|
|
$
|
1,997
|
|
|
$
|
1,958
|
|
|
$
|
39
|
|
Cost of interest-bearing liabilities
|
|
|
0.86
|
%
|
|
|
0.86
|
%
|
|
|
0.00
|
%
|
Net interest income
|
|
$
|
10,706
|
|
|
$
|
9,932
|
|
|
$
|
774
|
|
Net interest margin
|
|
|
3.53
|
%
|
|
|
3.56
|
%
|
|
|
(0.03
|
)%
|
The increase in net interest income of $774,000
for the nine months ended September 30, 2017 was a result of positive movements in interest income. Interest income increased by
$813,000, with interest income on loans increasing by $660,000 and interest income on investment securities increasing by $245,000.
The increase in interest income on loans was attributable to an increase in average loans outstanding of $21,149,000. The increase
in interest income on investment securities was due to an increase in average investment securities of $17,321,000. The nine months
ended September 30, 2017 net interest margin decreased 3 basis points to 3.53% compared to 3.56% in the third quarter of 2016.
The decrease in net interest margin was driven by lower loan yields, as new and renewed loans were originated and re-priced at
lower rates.
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 assets for the periods presented.
|
|
Three Months Ended September 30, 2017
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
Interest
|
|
|
Annualized
|
|
|
|
|
|
Interest
|
|
|
Annualized
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield
|
|
|
Average
|
|
|
Income/
|
|
|
Yield
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans net of deferred fees
|
|
$
|
343,357
|
|
|
$
|
4,063
|
|
|
|
4.69
|
%
|
|
$
|
333,927
|
|
|
$
|
3,848
|
|
|
|
4.58
|
%
|
Loans held for sale
|
|
|
7,123
|
|
|
|
72
|
|
|
|
4.01
|
%
|
|
|
18,358
|
|
|
|
165
|
|
|
|
3.58
|
%
|
Investment securities
|
|
|
44,009
|
|
|
|
178
|
|
|
|
1.60
|
%
|
|
|
25,654
|
|
|
|
72
|
|
|
|
1.12
|
%
|
Federal funds and other
|
|
|
20,526
|
|
|
|
67
|
|
|
|
1.30
|
%
|
|
|
13,824
|
|
|
|
19
|
|
|
|
0.55
|
%
|
Total interest earning assets
|
|
|
415,015
|
|
|
|
4,380
|
|
|
|
4.19
|
%
|
|
|
391,763
|
|
|
|
4,104
|
|
|
|
4.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses and deferred fees
|
|
|
(3,261
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,420
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
9,560
|
|
|
|
|
|
|
|
|
|
|
|
10,347
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
13,029
|
|
|
|
|
|
|
|
|
|
|
|
12,641
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
25,397
|
|
|
|
|
|
|
|
|
|
|
|
18,229
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
459,740
|
|
|
|
|
|
|
|
|
|
|
$
|
429,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
49,152
|
|
|
$
|
22
|
|
|
|
0.18
|
%
|
|
$
|
41,901
|
|
|
$
|
19
|
|
|
|
0.18
|
%
|
Money market
|
|
|
82,411
|
|
|
|
84
|
|
|
|
0.40
|
%
|
|
|
68,781
|
|
|
|
64
|
|
|
|
0.37
|
%
|
Savings
|
|
|
22,597
|
|
|
|
10
|
|
|
|
0.18
|
%
|
|
|
20,298
|
|
|
|
9
|
|
|
|
0.18
|
%
|
Certificates
|
|
|
150,981
|
|
|
|
499
|
|
|
|
1.31
|
%
|
|
|
158,494
|
|
|
|
498
|
|
|
|
1.25
|
%
|
Total
|
|
|
305,141
|
|
|
|
615
|
|
|
|
0.80
|
%
|
|
|
289,474
|
|
|
|
590
|
|
|
|
0.81
|
%
|
Borrowings
|
|
|
10,364
|
|
|
|
73
|
|
|
|
2.79
|
%
|
|
|
16,167
|
|
|
|
70
|
|
|
|
1.72
|
%
|
Total interest bearing liabilities
|
|
|
315,505
|
|
|
|
688
|
|
|
|
0.87
|
%
|
|
|
305,641
|
|
|
|
660
|
|
|
|
0.86
|
%
|
Noninterest bearing deposits
|
|
|
97,464
|
|
|
|
|
|
|
|
|
|
|
|
83,754
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,860
|
|
|
|
|
|
|
|
|
|
|
|
7,802
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
415,829
|
|
|
|
|
|
|
|
|
|
|
|
397,197
|
|
|
|
|
|
|
|
|
|
Equity capital
|
|
|
43,911
|
|
|
|
|
|
|
|
|
|
|
|
32,363
|
|
|
|
|
|
|
|
|
|
Total liabilities and capital
|
|
$
|
459,740
|
|
|
|
|
|
|
|
|
|
|
$
|
429,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses
|
|
|
|
|
|
$
|
3,692
|
|
|
|
|
|
|
|
|
|
|
$
|
3,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net interest margin (net interest income expressed as percentage of average earning assets)
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
Nine Months Ended September 30, 2017
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
Interest
|
|
|
Annualized
|
|
|
|
|
|
Interest
|
|
|
Annualized
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield
|
|
|
Average
|
|
|
Income/
|
|
|
Yield
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans net of deferred fees
|
|
$
|
342,157
|
|
|
$
|
11,880
|
|
|
|
4.64
|
%
|
|
$
|
321,008
|
|
|
$
|
11,220
|
|
|
|
4.67
|
%
|
Loans held for sale
|
|
|
6,704
|
|
|
|
206
|
|
|
|
4.11
|
%
|
|
|
12,985
|
|
|
|
363
|
|
|
|
3.73
|
%
|
Investment securities
|
|
|
43,717
|
|
|
|
506
|
|
|
|
1.55
|
%
|
|
|
26,396
|
|
|
|
261
|
|
|
|
1.32
|
%
|
Federal funds and other
|
|
|
12,742
|
|
|
|
111
|
|
|
|
1.16
|
%
|
|
|
12,125
|
|
|
|
46
|
|
|
|
0.51
|
%
|
Total interest earning assets
|
|
|
405,320
|
|
|
|
12,703
|
|
|
|
4.19
|
%
|
|
|
372,514
|
|
|
|
11,890
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses and deferred fees
|
|
|
(3,317
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,543
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
15,198
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
12,858
|
|
|
|
|
|
|
|
|
|
|
|
13,315
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
25,557
|
|
|
|
|
|
|
|
|
|
|
|
26,372
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
450,441
|
|
|
|
|
|
|
|
|
|
|
$
|
423,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
45,677
|
|
|
$
|
61
|
|
|
|
0.18
|
%
|
|
$
|
42,910
|
|
|
$
|
58
|
|
|
|
0.18
|
%
|
Money market
|
|
|
77,319
|
|
|
|
225
|
|
|
|
0.39
|
%
|
|
|
67,562
|
|
|
|
187
|
|
|
|
0.37
|
%
|
Savings
|
|
|
22,373
|
|
|
|
29
|
|
|
|
0.17
|
%
|
|
|
19,941
|
|
|
|
27
|
|
|
|
0.18
|
%
|
Certificates
|
|
|
152,169
|
|
|
|
1,455
|
|
|
|
1.28
|
%
|
|
|
158,933
|
|
|
|
1,512
|
|
|
|
1.27
|
%
|
Total
|
|
|
297,538
|
|
|
|
1,770
|
|
|
|
0.80
|
%
|
|
|
289,346
|
|
|
|
1,784
|
|
|
|
0.82
|
%
|
Borrowings
|
|
|
12,879
|
|
|
|
227
|
|
|
|
2.36
|
%
|
|
|
14,740
|
|
|
|
174
|
|
|
|
1.58
|
%
|
Total interest bearing liabilities
|
|
|
310,417
|
|
|
|
1,997
|
|
|
|
0.86
|
%
|
|
|
304,086
|
|
|
|
1,958
|
|
|
|
0.86
|
%
|
Noninterest bearing deposits
|
|
|
92,851
|
|
|
|
|
|
|
|
|
|
|
|
80,005
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
3,481
|
|
|
|
|
|
|
|
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
406,749
|
|
|
|
|
|
|
|
|
|
|
|
392,172
|
|
|
|
|
|
|
|
|
|
Equity capital
|
|
|
43,692
|
|
|
|
|
|
|
|
|
|
|
|
31,684
|
|
|
|
|
|
|
|
|
|
Total liabilities and capital
|
|
$
|
450,441
|
|
|
|
|
|
|
|
|
|
|
$
|
423,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses
|
|
|
|
|
|
$
|
10,706
|
|
|
|
|
|
|
|
|
|
|
$
|
9,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net interest margin (net interest income expressed as percentage of average earning assets)
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
Provision for (recovery of) loan losses
The amount of the loan loss provision (recovery)
is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience,
delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment
of present and anticipated economic conditions.
The level of the allowance reflects changes
in the size of the portfolio or in any of its components as well as management’s continuing evaluation of industry concentrations,
specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions.
Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that,
in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the
ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance
of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward
loan classifications.
The Company did not record a provision for
loan losses for the three and nine months ended September 30, 2017 and 2016.
The provision for (recovery of) loan losses
by category is presented following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Year Ended
|
|
|
|
Nine Months Ended September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Provision
|
|
|
Loans
|
|
|
Provision
|
|
|
Loans
|
|
|
Provision
|
|
|
Loans
|
|
|
|
(Recovery)
|
|
|
Outstanding
|
|
|
(Recovery)
|
|
|
Outstanding
|
|
|
(Recovery)
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
(131
|
)
|
|
$
|
34,455
|
|
|
$
|
2
|
|
|
$
|
31,575
|
|
|
$
|
19
|
|
|
$
|
32,506
|
|
Commercial real estate
|
|
|
(89
|
)
|
|
|
136,578
|
|
|
|
(571
|
)
|
|
|
123,065
|
|
|
|
(730
|
)
|
|
|
124,659
|
|
Consumer real estate
|
|
|
(55
|
)
|
|
|
81,479
|
|
|
|
(131
|
)
|
|
|
81,772
|
|
|
|
(146
|
)
|
|
|
82,422
|
|
Commercial and industrial
|
|
|
209
|
|
|
|
40,019
|
|
|
|
42
|
|
|
|
28,930
|
|
|
|
44
|
|
|
|
29,738
|
|
Guaranteed student loans
|
|
|
56
|
|
|
|
47,521
|
|
|
|
101
|
|
|
|
52,685
|
|
|
|
149
|
|
|
|
50,694
|
|
Consumer
|
|
|
(5
|
)
|
|
|
2,000
|
|
|
|
13
|
|
|
|
2,127
|
|
|
|
10
|
|
|
|
1,918
|
|
Unallocated
|
|
|
15
|
|
|
|
-
|
|
|
|
544
|
|
|
|
-
|
|
|
|
654
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
342,052
|
|
|
$
|
-
|
|
|
$
|
320,154
|
|
|
$
|
-
|
|
|
$
|
321,937
|
|
The allowance for loan losses at each of the
periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion
of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and variability related
to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the
allowance is too high. We concluded that the unallocated portion of the allowance was acceptable given the continued higher level
of classified assets and was within a reasonable range around the estimate of losses. The allowance for loan losses included an
unallocated portion of approximately $728,000, $713,000, and $603,000 at September 30, 2017, December 31, 2016, and September 30,
2016, respectively.
Discussion of the provision for (recovery of) loan losses related
to specific loan types are provided following:
|
·
|
The recovery of loan losses totaling $102,000
for the consumer real estate portfolio for the three months ended September 30, 2017 was attributed to a decline in the general
component of the allowance for loan losses as a result of a decrease in the historical loss experience from 0.16% as of June 30,
2017 to 0.13% as of September 30, 2017.
|
|
·
|
The provision for loan losses totaling
$140,000 for the commercial and industrial loans (except those secured by real estate) for the three months ended September 30,
2017 was attributed to an increase of $172,000 in the specific reserve associated with loans evaluated individually for impairment.
|
|
·
|
The recovery of loan losses totaling $131,000
for the construction and land development portfolio for the nine months ended September 30, 2017 was attributed to a decline in
the general component of the allowance for loan losses as a result of a decrease in the historical loss experience from 0.38% as
of December 31, 2016 to 0.01% as of September 30, 2017.
|
|
·
|
The recovery of loan losses totaling $89,000,
$730,000 and $571,000 for the commercial real estate portfolio for the nine months ended September 30, 2017, year ended December
31, 2016, and nine months ended September 30, 2016, respectively, was attributable to a decline in the general component of the
allowance for loan losses as a result of decreases in the historical loss experience from 0.20% as of September 30, 2016 to a net
recovery of 0.04% as of September 30, 2017. In addition, the portfolio was in a net-recovery position of $13,000 and $111,000 for
the nine months ended September 30, 2017 and year ended December 31, 2016, respectively.
|
|
·
|
The recovery of loan losses totaling $55,000
for the consumer real estate portfolio for the nine months ended September 30, 2017 was attributed to a decrease of $104,000 in
the specific reserve associated with loans evaluated individually for impairment. This decrease was offset by an increase in the
general component allocated to this portfolio as a result of increases in the historical loss experience from 0.0022% as of year
end December 31, 2016 to 0.13% for the nine months ended September 30, 2017. In addition, the portfolio was in a net charge-off
position of $48,000 for the nine months ended September 30, 2017.
|
|
·
|
The recovery of loan losses totaling $146,000
and $131,000 for the consumer real estate portfolio for the year ended December 31, 2016 and nine months ended September 30, 2016,
respectively, was attributable to a decline in the general component of the allowance for loan losses as a result of decreases
in the historical loss experience from 0.07% as of September 30, 2016 to 0.0022% as of December 31, 2016. In addition, the portfolio
was in a net-charge off position of $161,000 and $176,000 for the year ended December 31, 2016 and the nine months ended September
30, 2016.
|
|
·
|
The provision for loan losses totaling
$209,000 for the commercial and industrial loans (except those secured by real estate) for the nine months ended September 30,
2017 was attributed to an increase of $227,000 in the specific reserve associated with loans evaluated individually for impairment.
|
Noninterest income
Noninterest income includes service charges
and fees on deposit accounts, fee income related to loan origination, gains and losses on sale of mortgage loans and securities
held for sale, and rental income primarily on our previous headquarters building. The most significant noninterest income item
has been gain on loans sales generated by the mortgage company, representing 67% and 72% for the three month periods ended September
30, 2017 and 2016, respectively, and 67% and 58% for the nine month periods ended September 30, 2017 and 2016, respectively.
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
$
|
591
|
|
|
$
|
673
|
|
|
$
|
(82
|
)
|
|
|
(12.2
|
)%
|
Gain on sale of loans
|
|
|
1,395
|
|
|
|
2,043
|
|
|
|
(648
|
)
|
|
|
(31.7
|
)%
|
Gain (loss) on sale of investment securities
|
|
|
-
|
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
(100.0
|
)%
|
Other
|
|
|
92
|
|
|
|
114
|
|
|
|
(22
|
)
|
|
|
(19.3
|
)%
|
Total noninterest income
|
|
$
|
2,078
|
|
|
$
|
2,845
|
|
|
$
|
(767
|
)
|
|
|
(27.0
|
)%
|
|
·
|
The decrease in gain on sale of loans
is due to decreased activity by our mortgage banking segment as the mortgage market has been less favorable during the three months
ended September 30, 2017. The gain on sale is recognized at the date of sale to the investor and mortgage loans sales decreased
from $67,334,000 for the three months ended September 30, 2016 to $41,496,000 for the three months ended September 30, 2017. At
the end of the first quarter of 2017, we closed our Manassas, VA mortgage production office after the retirement of its long term
leader. The mortgage company has hired six new loan officers as well as a production manager who has extensive background in the
business and the local market. We expect the costs of hiring, training and other initiatives to have a negative impact on earnings
for the remainder of the year.
|
|
·
|
The Company sold approximately $4 million
in investment securities resulting in a gain of $15,000 during the three months ended September 30, 2016. These sales resulted
from managements’ efforts to reduce interest rate risk in our investment portfolio.
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
$
|
1,785
|
|
|
$
|
1,858
|
|
|
$
|
(73
|
)
|
|
|
(3.9
|
)%
|
Gain on sale of loans
|
|
|
4,195
|
|
|
|
4,630
|
|
|
|
(435
|
)
|
|
|
(9.4
|
)%
|
Gain on sale of assets
|
|
|
-
|
|
|
|
504
|
|
|
|
(504
|
)
|
|
|
(100.0
|
)%
|
Gain (loss) on sale of investment securities
|
|
|
(9
|
)
|
|
|
162
|
|
|
|
(171
|
)
|
|
|
(105.6
|
)%
|
Rental income
|
|
|
-
|
|
|
|
582
|
|
|
|
(582
|
)
|
|
|
(100.0
|
)%
|
Other
|
|
|
270
|
|
|
|
292
|
|
|
|
(22
|
)
|
|
|
(7.5
|
)%
|
Total noninterest income
|
|
$
|
6,241
|
|
|
$
|
8,028
|
|
|
$
|
(1,787
|
)
|
|
|
(22.3
|
)%
|
|
·
|
The decrease in gain on sale of loans
is due to decreased activity by our mortgage banking segment in the second and third quarters of 2017. At the end of the first
quarter of 2017, we closed our Manassas, VA mortgage production office after the retirement of its long term leader. Additionally,
the President of the mortgage banking segment retired in the first quarter of 2017. Both of these events had a negative impact
on the mortgage banking segments’ loan production. The gain on sale is recognized at the date of sale to the investor and
mortgage loans sales decreased from $152,689,000 for the nine months ended September 30, 2016 to $127,636,000 for the nine months
ended September 30, 2017.
|
|
·
|
The gain on sale of assets in 2016 relates
to the sale of our previous headquarters building and was a onetime event.
|
|
·
|
The Company sold approximately $2 million
and $22 million in investment securities resulting in a loss of $9,000 and a gain of $162,000 during the nine months ended 2017
and 2016, respectively. These sales resulted from management’s efforts to reduce interest rate risk in our investment portfolio.
|
|
·
|
The decline in rental income is a result
of the sale of our previous headquarters building in June 2016 that generated rental income from nonrelated entities.
|
Noninterest expense
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
2,985
|
|
|
$
|
3,045
|
|
|
$
|
(60
|
)
|
|
|
(2.0
|
)%
|
Commissions
|
|
|
431
|
|
|
|
533
|
|
|
|
(102
|
)
|
|
|
(19.1
|
)%
|
Occupancy
|
|
|
269
|
|
|
|
324
|
|
|
|
(55
|
)
|
|
|
(17.0
|
)%
|
Equipment
|
|
|
193
|
|
|
|
197
|
|
|
|
(4
|
)
|
|
|
(2.0
|
)%
|
Supplies
|
|
|
55
|
|
|
|
81
|
|
|
|
(26
|
)
|
|
|
(32.1
|
)%
|
Professional and outside services
|
|
|
742
|
|
|
|
743
|
|
|
|
(1
|
)
|
|
|
(0.1
|
)%
|
Advertising and marketing
|
|
|
134
|
|
|
|
76
|
|
|
|
58
|
|
|
|
76.3
|
%
|
Foreclosed assets, net
|
|
|
11
|
|
|
|
79
|
|
|
|
(68
|
)
|
|
|
(86.1
|
)%
|
FDIC insurance premium
|
|
|
69
|
|
|
|
90
|
|
|
|
(21
|
)
|
|
|
(23.3
|
)%
|
Other operating expense
|
|
|
502
|
|
|
|
541
|
|
|
|
(39
|
)
|
|
|
(7.2
|
)%
|
Total noninterest income
|
|
$
|
5,391
|
|
|
$
|
5,709
|
|
|
$
|
(318
|
)
|
|
|
(5.6
|
)%
|
|
·
|
The decrease in salaries and benefits
was due to staffing reductions associated with processing efficiencies gain in the mortgage segment.
|
|
·
|
Commissions expense declined due to a
decrease in mortgage loan production from $67,233,000 for the three months ended September 30, 2016 to $36,363,000 for the three
months ended September 30, 2017.
|
|
·
|
Occupancy declined due to the sale of
our previous headquarters building in June 2016.
|
|
·
|
The increase in advertising and marketing
expense is related to the Company expanding its marketing efforts during the three months ended September 30, 2017.
|
|
·
|
The decrease in expenses related to foreclosed
assets is attributed to a decline in the other real estate owned balance from $3,621,000 at September 30, 2016 to $1,788,000 at
September 30, 2017.
|
|
·
|
The decrease in the FDIC insurance premium
was a result of a decrease in the Bank’s risk rating with the FDIC as of September 30, 2017.
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
9,042
|
|
|
$
|
8,463
|
|
|
$
|
579
|
|
|
|
6.8
|
%
|
Commissions
|
|
|
1,180
|
|
|
|
1,163
|
|
|
|
17
|
|
|
|
1.5
|
%
|
Occupancy
|
|
|
821
|
|
|
|
1,188
|
|
|
|
(367
|
)
|
|
|
(30.9
|
)%
|
Equipment
|
|
|
553
|
|
|
|
573
|
|
|
|
(20
|
)
|
|
|
(3.5
|
)%
|
Write down of assets held for sale
|
|
|
-
|
|
|
|
220
|
|
|
|
(220
|
)
|
|
|
(100.0
|
)%
|
Cease use lease obligation
|
|
|
(125
|
)
|
|
|
-
|
|
|
|
(125
|
)
|
|
|
(100.0
|
)%
|
Supplies
|
|
|
173
|
|
|
|
232
|
|
|
|
(59
|
)
|
|
|
(25.4
|
)%
|
Professional and outside services
|
|
|
2,254
|
|
|
|
2,220
|
|
|
|
34
|
|
|
|
1.5
|
%
|
Advertising and marketing
|
|
|
274
|
|
|
|
239
|
|
|
|
35
|
|
|
|
14.6
|
%
|
Foreclosed assets, net
|
|
|
(151
|
)
|
|
|
250
|
|
|
|
(401
|
)
|
|
|
(160.4
|
)%
|
FDIC insurance premium
|
|
|
207
|
|
|
|
287
|
|
|
|
(80
|
)
|
|
|
(27.9
|
)%
|
Other operating expense
|
|
|
1,460
|
|
|
|
1,484
|
|
|
|
(24
|
)
|
|
|
(1.6
|
)%
|
Total noninterest income
|
|
$
|
15,688
|
|
|
$
|
16,319
|
|
|
$
|
(631
|
)
|
|
|
(3.9
|
)%
|
|
·
|
The increase in salaries and benefits
was due to staffing changes in key management positions.
|
|
·
|
Occupancy declined due to the sale of
our previous headquarters building in June 2016.
|
|
·
|
Write down of assets held for sale decreased
due to previous write downs associated with the closure of a branch during the nine months ended September 30, 2016.
|
|
·
|
During the fourth quarter of 2016, the
Company recorded a loss from branch consolidation of $252,000 related to a future lease obligation, which was settled for a lower
amount late in the first quarter of 2016 resulting in a partial recovery of $125,000.
|
|
·
|
The decrease in expense related to foreclosed
real estate was due to the recognition of gains on the sale of foreclosed assets of $218,000 during the first quarter of 2017.
|
|
·
|
The decrease in the FDIC insurance premium
was a result of a decrease in the Bank’s risk rating with the FDIC as of September 30, 2017.
|
Income taxes
The net deferred tax asset is included in other
assets on the balance sheet. Accounting Standards Codification Topic 740,
Income Taxes
, requires that companies assess whether
a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence
using a “more likely than not” standard. Management considers both positive and negative evidence and analyzes changes
in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant
weight is given to evidence that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting
realization.
In assessing the Company’s ability to
realize its net deferred tax asset, management considers whether it is more likely than not that some portion or all of the net
deferred tax asset will or will not be realized. The Company’s ultimate realization of the net deferred tax asset is
dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.
Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred
tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of net deferred taxes
recognized could be impacted by changes to any of these variables.
Each quarter, the Company weighs both the positive
and negative information with respect to realization of the net deferred tax asset and analyzes its position as to whether or not
a valuation allowance is required. Over the past several quarters, the positive information has been increasing while the negative
information has been decreasing. Over the last eight quarters, the Company has demonstrated consistent earnings while its level
of non-performing assets, which was the primary cause of the Company’s losses, has steadily decreased. Additionally, the
Reserve Bank, the FDIC and the Virginia Bureau of Financial Institutions have terminated their formal agreements with the Company
and the Bank, reducing regulatory risk.
Given the consistent earnings and improving
asset quality, the Company’s analysis concluded that, it is more likely than not that the Company will generate sufficient
taxable income within the applicable carry-forward periods to realize its net deferred tax asset.
There was a $106,000 and $333,000 income tax
expense recorded for the three and nine month periods ended September 30, 2017, respectively, compared to an $11,352,000 income
tax benefit recorded for each of the three and nine month periods ended September 30, 2016. The Company recognized an income tax
benefit of $11,172,000 for the year ended December 31, 2016. The income tax benefit in 2016 was due to the reversal of the valuation
allowance previously recorded against the net deferred tax asset as of September 30, 2016, offset by tax on pretax earnings for
2016 of $825,000.
The net operating losses available to offset
future taxable income amounted to $23,028,000 at September 30, 2017 and begin expiring in 2028; $1,257,000 of such amount is subject
to a limitation by Section 382 of the Internal Revenue Code of 1986, as amended, to $908,000 per year.
Commercial banking organizations conducting
business in Virginia are not subject to Virginia income taxes. Instead, they are subject to a franchise tax based on bank capital.
The Company recorded franchise tax expense of approximately $85,000 and $256,000 for the three and nine months ended September
30, 2017, respectively, compared to $19,000 and $56,000 for the three and nine months ended September 30, 2016, respectively.
Balance Sheet Analysis
Investment securities
At September 30, 2017 and December 31, 2016,
all of our investment securities were classified as available for sale. Investment securities classified as available for sale
may be sold in the future, prior to maturity. These securities are carried at fair value. Net aggregate unrealized gains or losses
on these securities are included, net of taxes, as a component of shareholders’ equity. Given the generally high credit quality
of the portfolio, management expects to realize all of its investment upon market recovery or the maturity of such instruments,
and thus believes that any impairment in value is interest rate related and therefore temporary. Available for sale securities
included net unrealized losses of $186,000 and $275,000 at September 30, 2017 and December 31, 2016, respectively. As of September
30, 2017, management does not intend to sell any of the securities classified as available for sale and which have unrealized losses,
and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.
The Company sold approximately $2 million and
$22 million of investment securities available for sale at a loss of $9,000 and a gain of $162,000 during the nine months ended
2017 and 2016, respectively. The sale of these securities, which had fixed interest rates, allowed the Company to decrease its
exposure to the anticipated upward movement in interest rates that would result in unrealized losses being recognized in shareholders’
equity. In February 2017, the Company purchased approximately $2 million in investment securities available for sale to invest
liquidity in higher yielding assets. The securities purchased have durations of less than five years to minimize exposure to upward
movement in interest rates and, in some cases, have returning cash flows that can be reinvested should interest rates rise.
During the third quarter of 2017, the
Company began purchasing corporate debt, in its investment portfolio. Generally these investments have a ten year term
callable after five years, with an interest rate that is fixed for the first five years and variable tied to an index for the
last five years. The Company will only invest in corporate debt if, based on its own in-depth analysis, it determines that
the investment is investment grade as defined in regulations.
The following table presents the composition
of our investment portfolio at the dates indicated (dollars in thousands).
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
|
Par
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
$
|
27,400
|
|
|
$
|
27,558
|
|
|
$
|
-
|
|
|
$
|
(150
|
)
|
|
$
|
27,408
|
|
|
|
1.29
|
%
|
Five to ten years
|
|
|
2,000
|
|
|
|
2,049
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
2,045
|
|
|
|
2.00
|
%
|
More than ten years
|
|
|
2,548
|
|
|
|
2,553
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
2,538
|
|
|
|
1.78
|
%
|
|
|
|
31,948
|
|
|
|
32,160
|
|
|
|
-
|
|
|
|
(169
|
)
|
|
|
31,991
|
|
|
|
1.37
|
%
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
|
3,595
|
|
|
|
3,673
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
3,661
|
|
|
|
1.44
|
%
|
More than ten years
|
|
|
6,967
|
|
|
|
6,864
|
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
6,857
|
|
|
|
2.41
|
%
|
|
|
|
10,562
|
|
|
|
10,537
|
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
10,518
|
|
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five to ten years
|
|
|
2,300
|
|
|
|
2,323
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2,325
|
|
|
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
44,810
|
|
|
$
|
45,020
|
|
|
$
|
3
|
|
|
$
|
(189
|
)
|
|
$
|
44,834
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
$
|
29,400
|
|
|
$
|
29,607
|
|
|
$
|
-
|
|
|
$
|
(213
|
)
|
|
$
|
29,394
|
|
|
|
1.25
|
%
|
More than ten years
|
|
|
2,862
|
|
|
|
2,868
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
2,852
|
|
|
|
1.08
|
%
|
|
|
|
32,262
|
|
|
|
32,475
|
|
|
|
-
|
|
|
|
(229
|
)
|
|
|
32,246
|
|
|
|
1.24
|
%
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
|
3,457
|
|
|
|
3,524
|
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
3,491
|
|
|
|
1.78
|
%
|
More than ten years
|
|
|
8,253
|
|
|
|
8,170
|
|
|
|
1
|
|
|
|
(14
|
)
|
|
|
8,157
|
|
|
|
2.16
|
%
|
|
|
|
11,710
|
|
|
|
11,694
|
|
|
|
1
|
|
|
|
(47
|
)
|
|
|
11,648
|
|
|
|
2.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
43,972
|
|
|
$
|
44,169
|
|
|
$
|
1
|
|
|
$
|
(276
|
)
|
|
$
|
43,894
|
|
|
|
1.45
|
%
|
Loans
A management objective is to maintain the quality
of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with
regular evaluation of the creditworthiness of and the designation of lending limits for each borrower. The portfolio strategies
include seeking industry and loan size diversification in order to minimize credit exposure and originating loans in markets with
which the Company is familiar. Additionally, as a significant amount of the loan losses we have experienced in the past is attributable
to construction and land development loans, our strategy has shifted from reducing this type of lending to closely managing the
quality and concentration in these loan types.
Approximately 74% of all loans are secured
by mortgages on real property located principally in the Commonwealth of Virginia. We are much less reliant on real estate secured
lending than was the case in 2012 when 90% of our loan portfolio consisted of this type of lending. Approximately 14% of the loan
portfolio consists of rehabilitated student loans purchased by the Bank in 2017, 2016, 2015 and 2014 (see discussion following).
The Company’s commercial and industrial loan portfolio represents approximately 12% of all loans. Loans in this category
are typically made to individuals, and small and medium-sized businesses, and range between $250,000 and $2.5 million. Based on
underwriting standards, commercial and industrial loans may be secured in whole or in part by collateral such as liquid assets,
accounts receivable, equipment, inventory, and real property. The collateral securing any loan may depend on the type of loan and
may vary in value based on market conditions. The remainder of our loan portfolio is in consumer loans which represent less than
1% of the total.
The Bank purchased one portfolio of rehabilitated
student loans guaranteed by the DOE totaling approximately $7.4 million on August 10, 2017. The Bank had previously purchased one
portfolio totaling $7 million in 2016, two portfolios totaling approximately $23 million in 2015, and two portfolios totaling approximately
$33 million in 2014. 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. The Bank used excess liquidity to purchase
the loans.
The following table presents the composition
of our loan portfolio (excluding mortgage loans held for sale) at the dates indicated (dollars in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
6,327
|
|
|
|
1.82
|
%
|
|
$
|
6,770
|
|
|
|
2.01
|
%
|
Commercial
|
|
|
28,721
|
|
|
|
8.28
|
%
|
|
|
27,092
|
|
|
|
8.04
|
%
|
|
|
|
35,048
|
|
|
|
10.10
|
%
|
|
|
33,862
|
|
|
|
10.05
|
%
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
71,834
|
|
|
|
20.70
|
%
|
|
|
66,021
|
|
|
|
19.59
|
%
|
Non-owner occupied
|
|
|
61,831
|
|
|
|
17.82
|
%
|
|
|
57,944
|
|
|
|
17.19
|
%
|
Multifamily
|
|
|
6,114
|
|
|
|
1.76
|
%
|
|
|
8,824
|
|
|
|
2.62
|
%
|
Farmland
|
|
|
278
|
|
|
|
0.08
|
%
|
|
|
310
|
|
|
|
0.09
|
%
|
|
|
|
140,057
|
|
|
|
40.36
|
%
|
|
|
133,099
|
|
|
|
39.49
|
%
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
20,595
|
|
|
|
5.94
|
%
|
|
|
20,691
|
|
|
|
6.14
|
%
|
Secured by 1-4 family residential,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
54,820
|
|
|
|
15.80
|
%
|
|
|
54,791
|
|
|
|
16.25
|
%
|
Second deed of trust
|
|
|
6,293
|
|
|
|
1.81
|
%
|
|
|
5,768
|
|
|
|
1.71
|
%
|
|
|
|
81,708
|
|
|
|
23.55
|
%
|
|
|
81,250
|
|
|
|
24.10
|
%
|
Commercial and industrial loans (except those secured by real estate)
|
|
|
40,647
|
|
|
|
11.71
|
%
|
|
|
39,390
|
|
|
|
11.68
|
%
|
Guaranteed student loans
|
|
|
47,643
|
|
|
|
13.73
|
%
|
|
|
47,398
|
|
|
|
14.06
|
%
|
Consumer and other
|
|
|
1,899
|
|
|
|
0.55
|
%
|
|
|
2,101
|
|
|
|
0.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
347,002
|
|
|
|
100.0
|
%
|
|
|
337,100
|
|
|
|
100.0
|
%
|
Deferred loan cost, net
|
|
|
676
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(3,243
|
)
|
|
|
|
|
|
|
(3,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344,435
|
|
|
|
|
|
|
$
|
334,387
|
|
|
|
|
|
The Company assigns risk rating classifications
to its loans. These risk ratings are divided into the following groups:
|
·
|
Risk rated 1 to 4 loans are considered
of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying
capacity of the obligor or by the value of the asset or underlying collateral;
|
|
·
|
Risk rated 5 loans are defined as having
potential weaknesses that deserve management’s close attention;
|
|
·
|
Risk rated 6 loans are inadequately protected
by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any; 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.
|
Loans are considered impaired when, based on
current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original
contractual terms of the loan agreement, including scheduled principal and interest payments. 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.
Allowance for loan
losses
We monitor and maintain an allowance for loan
losses to absorb an estimate of probable losses inherent in the loan portfolio. We maintain policies and procedures that address
the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine
the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally
accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement
of impairment in the loan portfolio; and the loan grading system.
The allowance reflects management’s best
estimate of probable losses within the existing loan portfolio and of the risk inherent in various components of the loan portfolio,
including loans identified as impaired as required by FASB Codification Topic 310:
Receivables
. 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.
Loans are grouped by similar characteristics,
including the type of loan, the assigned loan classification and the general collateral type. A loss rate reflecting the expected
loss inherent in a group of loans is derived based upon historical net charge-off rates, the predominant collateral type for the
group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors
and other conditions of the portfolio of loans and leases, including: borrower and industry concentrations; levels and trends in
delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and
depth of lending management; and national and local economic conditions.
The amounts of estimated impairment for individually
evaluated loans and groups of loans are added together for a total estimate of loan losses. This estimate of losses is compared
to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional
provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance
exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. We recognize the inherent
imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable
range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions
or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses,
an additional provision for loan losses would be made, which amount may be material to the financial statements.
The allowance for loan losses at September
30, 2017 was $3,243,000, compared to $3,373,000 at December 31, 2016. The ratio of the allowance for loan losses to core portfolio
loans (excluding government guaranteed loans, net of unearned income and excluding mortgage loans held for sale) at September 30,
2017 and December 31, 2016 was 1.14% and 1.16%, respectively. We believe the amount of the allowance for loan losses at September
30, 2017 is adequate to absorb the losses that can reasonably be anticipated from the loan portfolio at that date.
The
following table presents an analysis of the changes in the allowance for loan losses for the periods indicated (dollars in thousands):
Analysis of Allowance
for Loan Losses
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,373
|
|
|
$
|
3,562
|
|
Provision for loan losses
|
|
|
-
|
|
|
|
-
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
Construction and land development Commercial
|
|
|
-
|
|
|
|
(10
|
)
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
-
|
|
|
|
(66
|
)
|
Non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
-
|
|
|
|
(53
|
)
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
(107
|
)
|
|
|
(140
|
)
|
Second deed of trust
|
|
|
-
|
|
|
|
(25
|
)
|
Commercial and industrial (except those secured by real estate)
|
|
|
|
|
|
|
(15
|
)
|
Guaranteed student loans
|
|
|
(115
|
)
|
|
|
(143
|
)
|
Consumer and other
|
|
|
(2
|
)
|
|
|
(14
|
)
|
|
|
|
(224
|
)
|
|
|
(466
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1
|
|
|
|
1
|
|
Commercial
|
|
|
2
|
|
|
|
5
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
13
|
|
|
|
-
|
|
Non-owner occupied
|
|
|
-
|
|
|
|
53
|
|
Farmland
|
|
|
-
|
|
|
|
125
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
Home equity lines
|
|
|
1
|
|
|
|
3
|
|
Secured by 1-4 family residential
|
|
|
|
|
|
|
|
|
First deed of trust
|
|
|
29
|
|
|
|
20
|
|
Second deed of trust
|
|
|
29
|
|
|
|
19
|
|
Commercial and industrial (except those secured by real estate)
|
|
|
13
|
|
|
|
90
|
|
Consumer and other
|
|
|
6
|
|
|
|
7
|
|
|
|
|
94
|
|
|
|
323
|
|
Net charge-offs
|
|
|
(130
|
)
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,243
|
|
|
$
|
3,419
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding at end of period
(1)
|
|
$
|
347,678
|
|
|
$
|
334,153
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding at end of period, excluding guaranteed loans
|
|
$
|
284,858
|
|
|
$
|
272,220
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses as a percent of loans outstanding at end of period
|
|
|
0.93
|
%
|
|
|
1.02
|
%
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses as a percent of loans outstanding at end of period, excluding guaranteed loans
|
|
|
1.14
|
%
|
|
|
1.26
|
%
|
|
|
|
|
|
|
|
|
|
Average loans outstanding for the period
(1)
|
|
$
|
342,157
|
|
|
$
|
321,008
|
|
Ratio of net charge-offs to average loans outstanding for the period
|
|
|
0.04
|
%
|
|
|
0.04
|
%
|
(1) Loans are net of unearned income.
Asset quality
The following table summarizes asset quality information at the
dates indicated (dollars in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
2,516
|
|
|
$
|
2,402
|
|
|
$
|
2,527
|
|
Foreclosed properties
|
|
|
1,788
|
|
|
|
2,926
|
|
|
|
3,620
|
|
Total nonperforming assets
|
|
$
|
4,304
|
|
|
$
|
5,328
|
|
|
$
|
6,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans (not included in nonaccrual loans above)
|
|
$
|
10,170
|
|
|
$
|
10,154
|
|
|
$
|
11,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days and still accruing
(1)
|
|
$
|
8,113
|
|
|
$
|
8,174
|
|
|
$
|
9,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to loans
(2)
|
|
|
1.24
|
%
|
|
|
1.58
|
%
|
|
|
1.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets
(3)
|
|
|
0.9
|
%
|
|
|
1.2
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonaccrual loans
|
|
|
128.9
|
%
|
|
|
140.4
|
%
|
|
|
135.3
|
%
|
(1)
All loans 90 days past due and still accruing
are rehabilitated student loans which have a 98% guarantee by the DOE.
(2)
Loans are net of unearned income and deferred
cost.
(3)
Nonperforming assets excludes performing troubled
debt restructurings.
The following table presents an analysis of the changes in nonperforming
assets for the nine months ended September 30, 2017 (dollars in thousands):
|
|
Nonaccrual
|
|
|
Foreclosed
|
|
|
|
|
|
|
Loans
|
|
|
Properties
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2016
|
|
$
|
2,402
|
|
|
$
|
2,926
|
|
|
|
5,328
|
|
Additions
|
|
|
1,228
|
|
|
|
-
|
|
|
|
1,228
|
|
Loans placed back on accrual
|
|
|
(259
|
)
|
|
|
-
|
|
|
|
(259
|
)
|
Transfers to OREO
|
|
|
(285
|
)
|
|
|
285
|
|
|
|
-
|
|
Repayments
|
|
|
(479
|
)
|
|
|
-
|
|
|
|
(479
|
)
|
Charge-offs
|
|
|
(91
|
)
|
|
|
(20
|
)
|
|
|
(111
|
)
|
Sales
|
|
|
-
|
|
|
|
(1,403
|
)
|
|
|
(1,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2017
|
|
$
|
2,516
|
|
|
$
|
1,788
|
|
|
|
4,304
|
|
Nonperforming restructured loans are included in nonaccrual loans.
Until a nonperforming restructured loan has performed in accordance with its restructured terms for a minimum of six months, it
will remain on nonaccrual status.
Interest is accrued on outstanding loan principal
balances, unless the Company considers collection to be doubtful. Commercial and unsecured consumer loans are designated as non-accrual
when the Company considers collection of expected principal and interest doubtful. Mortgage loans and most other types of consumer
loans past due 90 days or more may remain on accrual status if management determines that concern over our ability to collect principal
and interest is not significant. When loans are placed on non-accrual status, previously accrued and unpaid interest is reversed
against interest income in the current period and interest is subsequently recognized only to the extent cash is received. Interest
accruals are resumed on such loans only when in the judgment of management, the loans are estimated to be fully collectible as
to both principal and interest.
Of the total nonaccrual loans of $2,516,000
at September 30, 2017 that were considered impaired, ten loans totaling $1,028,000 had specific allowances for loan losses totaling
$259,000. This compares to $2,402,000 in nonaccrual loans at December 31, 2016 of which eight loans totaling $660,000 had specific
allowances for loan losses of $97,000.
Cumulative interest income that would have
been recorded had nonaccrual loans been performing would have been approximately $145,000 and $121,000 for the nine months ended
September 30, 2017 and 2016, respectively.
Deposits
Deposits as of September 30, 2017 and December
31, 2016 were as follows (dollars in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand accounts
|
|
|
103,396
|
|
|
|
25.4
|
%
|
|
$
|
92,574
|
|
|
|
24.2
|
%
|
Interest checking accounts
|
|
|
48,673
|
|
|
|
11.9
|
%
|
|
|
44,390
|
|
|
|
11.6
|
%
|
Money market accounts
|
|
|
81,423
|
|
|
|
20.0
|
%
|
|
|
71,290
|
|
|
|
18.6
|
%
|
Savings accounts
|
|
|
27,601
|
|
|
|
6.8
|
%
|
|
|
26,598
|
|
|
|
6.9
|
%
|
Time deposits of $250,000 and over
|
|
|
15,348
|
|
|
|
3.8
|
%
|
|
|
13,372
|
|
|
|
3.5
|
%
|
Other time deposits
|
|
|
130,963
|
|
|
|
32.1
|
%
|
|
|
135,053
|
|
|
|
35.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
407,404
|
|
|
|
100.0
|
%
|
|
$
|
383,277
|
|
|
|
100.0
|
%
|
Total deposits increased by $24,127,000, or
6.29%, from $383,277,000 at December 31, 2016 to $407,404,000 at September 30, 2017, as compared to an increase of $14,372,000,
or 3.9%, during the first nine months of 2016. Checking and savings accounts increased by $16,108,000, money market accounts increased
by $10,133,000 and time deposits decreased by $2,114,000. The cost of our interest-bearing deposits decreased to 0.80% for the
first nine months of 2017 compared to 0.82% for the first nine months of 2016.
The variety of deposit accounts that we offer
has allowed us to be competitive in obtaining funds and has allowed us to respond with flexibility to, although not to eliminate,
the threat of disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment
vehicles such as government and corporate securities). Our ability to attract and retain deposits, and our cost of funds, has been,
and is expected to continue to be, significantly affected by money market conditions.
Borrowings
We utilize borrowings to supplement deposits
when they are available at a lower overall cost to us or they can be invested at a positive rate of return.
As a member of the FHLB, the Bank is required
to own capital stock in the FHLB and is authorized to apply for borrowings from the FHLB. 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. Borrowings from the FHLB were $1,600,000
and $2,400,000 at September 30, 2017 and December 31, 2016, respectively. The FHLB advances are secured by the pledge of loans.
Available borrowings at September 30, 2017 were approximately $16 million based on currently pledged collateral. However, with
additional pledges, the Company could be granted up to 25% of assets in advances.
Capital resources
On May 1, 2009, the Company received a $14,738,000
investment by the United States Department of the Treasury under the TARP Program. The TARP Program was a voluntary program designed
to provide capital for healthy banks to improve the flow of funds from banks to their customers. Under the TARP Program, the Company
issued to the Treasury $14,738,000 of preferred stock and a 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. 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 preferred stock issued by the Company under the TARP Program carried a 5%
dividend until May 1, 2014, and now carries a 9% dividend. In November 2013, the Company participated in a successful auction of
the Company’s preferred stock securities by the Treasury that resulted in the purchase of the securities by private and institutional
investors. The Treasury continues to own the Warrant. This freed the Company from some constraints and costs that were in place
while the Treasury held the securities.
During the first quarter of 2005, the Company
issued $5.2 million in Trust Preferred Capital Notes to increase its regulatory capital and to help fund its expected growth in
2005. During the third quarter of 2007, the Company issued $3.6 million in Trust Preferred Capital Notes to partially fund the
construction of an 80,000 square foot headquarters building at the Watkins Centre completed in July 2008. 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. See Note 7 of the
Notes to Consolidated Financial Statements
for a more detailed discussion of the Trust
Preferred Capital Notes.
The Company was previously prohibited by its
Written Agreement with the Reserve Bank from paying dividends on capital stock, including the preferred stock, or interest payments
on the trust preferred capital notes without prior regulatory approval. The Written Agreement was terminated by the Reserve Bank
as of July 28, 2016. With the termination of the Written Agreement, the Company is not required to defer the quarterly cash dividends
on the preferred stock.
on price of $1,000 per share plus accrued dividends
from February 15, 2017 to the redemption date.
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 dividend to the Company.
At September 30, 2017, the aggregate amount
of the Company’s total accrued dividend payments on the preferred stock was $56,000 and reflected as a reduction of retained
earnings. This amount was accrued for and included in other liabilities on the Balance Sheet in the
Consolidated Financial Statements.
The Company received notification on February
26, 2016 from the Reserve Bank approving the payment of all accrued and deferred interest payments on trust preferred securities
bringing the Company current as of March 2016.
On December 4, 2013, the Company issued 67,907
(after the reverse stock split) new shares of common stock through a private placement to directors and executive officers. The
sale raised $1,684,075 in new capital for the Company. The $24.80 (after the reverse stock split) sale price for the common shares
was equal to the stock’s book value at September 30, 2013, which represented a 30% premium over the closing price of the
stock on December 3, 2013.
On August 6,
2014, the Company filed Articles of Amendment to its Articles of Incorporation with the Virginia State Corporation Commission to
effect a 1-for-16 reverse stock split of its outstanding common stock. The Articles of Amendment became effective on August 8,
2014. As a result of the reverse split, every sixteen shares of the Company’s issued and outstanding common stock were consolidated
into one issued and outstanding share of common stock
.
On March 27, 2015, the Company completed a
rights offering to shareholders and concurrent standby offering to Kenneth R. Lehman, in which the Company issued an aggregate
of 1,051,866 shares of common stock (the total number of shares offered) at $13.87 per share for aggregate gross proceeds of $14,589,381
(including the value of the Company’s preferred stock exchanged by Mr. Lehman for shares of common stock of $4,618,813).
In connection with the Rights Offering, 283,293 shares were issued to shareholders upon exercise of their basic subscription rights
and 191,773 shares were issued to shareholders upon exercise of their oversubscription privileges (approximately 36.9% of the total
number of shares requested pursuant to oversubscription privileges). In connection with the Standby Offering, Mr. Lehman purchased
an aggregate of 576,800 shares of the Company’s common stock, 333,007 of which were issued in exchange for 9,023 shares of
the Company’s preferred stock and 243,793 of which were purchased for cash. Also, as part of the Standby Offering, Mr. Lehman
forgave $2,215,009 in accrued and unpaid dividends on the preferred stock.
On December 22, 2015, the Bank received notification
from the FDIC and the Virginia Bureau of Financial Institutions that the Consent Order under which the Bank had been operating
since February 3, 2012 was terminated effective December 14, 2015. The Consent Order was terminated as a result of the steps the
Company and the Bank took to, among other things, improve asset quality, increase capital, augment management and board oversight,
and increase earnings. In place of the Consent Order, the Bank’s board of directors made certain written assurances to the
FDIC and Virginia Bureau of Financial Institutions in the MOU concerning asset quality, earnings, regulatory violations, minimum
capital levels, asset growth, restrictions on paying dividends and a requirement to furnish progress reports to the FDIC and Virginia
Bureau of Financial Institutions. Due to further improvements by the Company and the Bank in asset quality and earnings, and the
correction of a prior Regulation W violation, the MOU was terminated effective May 12, 2016, and the Written Agreement was terminated
effective July 28, 2016. With the terminations of the MOU and the Written Agreement, neither the Company nor the Bank is under
any formal or informal agreements with its regulators.
The following table presents the composition
of regulatory capital and the capital ratios for the Bank at the dates indicated (dollars in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
|
|
|
|
|
|
Total bank equity capital
|
|
$
|
47,707
|
|
|
$
|
50,231
|
|
Net unrealized loss on available-for-sale securities
|
|
|
122
|
|
|
|
181
|
|
Defined benefit postretirement plan
|
|
|
54
|
|
|
|
60
|
|
Dissallowed deferred tax asset
|
|
|
(4,818
|
)
|
|
|
(4,619
|
)
|
Disallowed intangible assets
|
|
|
-
|
|
|
|
(1
|
)
|
Total Tier 1 capital
|
|
|
43,065
|
|
|
|
45,852
|
|
|
|
|
|
|
|
|
|
|
Tier 2 capital
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
3,243
|
|
|
|
3,373
|
|
Total Tier 2 capital
|
|
|
3,243
|
|
|
|
3,373
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
46,308
|
|
|
|
49,225
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
$
|
325,503
|
|
|
$
|
321,166
|
|
|
|
|
|
|
|
|
|
|
Average assets
|
|
$
|
452,651
|
|
|
$
|
438,069
|
|
|
|
|
|
|
|
|
|
|
Capital ratios
|
|
|
|
|
|
|
|
|
Leverage ratio (Tier 1 capital to average assets)
|
|
|
9.51
|
%
|
|
|
10.47
|
%
|
Common equity tier 1 capital ratio (CET 1)
|
|
|
13.23
|
%
|
|
|
14.28
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
13.23
|
%
|
|
|
14.28
|
%
|
Total capital to risk-weighted assets
|
|
|
14.23
|
%
|
|
|
15.33
|
%
|
Equity to total assets
|
|
|
10.34
|
%
|
|
|
11.37
|
%
|
Under new capital guidelines discussed more
fully following, the Bank must identify high volatility commercial real estate (“HVCRE”) loans, which are defined as
a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction
of real property, unless the facility finances (1) one to four family residential properties; (2) certain community development
projects; (3) the purchase or development of agricultural land; (4) commercial real estate projects that meet the criteria in the
rule, including criteria regarding the loan-to-value ratio and capital contributions to the project. Under the new guidelines,
HVCRE loans are risk weighted at 150% for capital ratios purposes, rather than 100% as with other loans.
Federal regulatory agencies are required by
law to adopt regulations defining five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. The Bank is considered well-capitalized at September 30, 2017 and December 31,
2016.
When capital falls below the “well capitalized”
requirement, consequences can include: new branch approval could be withheld; more frequent examinations by the FDIC; brokered
deposits cannot be renewed without a waiver from the FDIC; and other potential limitations as described in FDIC Rules and Regulations
Sections 337.6 and 303, and FDI Act Section 29. In addition, the FDIC insurance assessment increases when an institution falls
below the “well capitalized” classification.
Liquidity
Liquidity represents the ability of a company
to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing
liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements
while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject
to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable
and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are
far less predictable and are not subject to the same degree of control.
At September 30, 2017, our liquid assets, consisting
of cash, cash equivalents and investment securities available for sale totaled $75,544,000, or 16% of total assets. Investment
securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. There
were no securities pledged as collateral on borrowings as of September 30, 2017.
Our holdings of liquid assets plus the ability
to maintain and expand our deposit base and borrowing capabilities serve as our principal sources of liquidity. We plan to meet
our future cash needs through the liquidation of temporary investments, the generation of deposits, and from additional borrowings.
In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain two
federal funds lines of credit with correspondent banks totaling $15 million for which there were no borrowings against the lines
at September 30, 2017.
We are also a member of the FHLB, from which
applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned
by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at
September 30, 2017 was $16 million, based on the Bank's qualifying collateral available to secure any future borrowings. However,
we are able to pledge additional collateral to the FHLB in order to increase our available borrowing capacity up to 25% of assets.
Liquidity provides us with the ability to meet normal deposit withdrawals, while also providing for the credit needs of customers.
We are committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully
comply with all regulatory requirements.
At September 30, 2017, we had commitments to
originate $77,693,000 of loans. Fixed commitments to incur capital expenditures were approximately $100,000 at September 30, 2017.
Certificates of deposit scheduled to mature in the 12-month period ending September 30, 2018 totaled $64,442,000. We believe that
a significant portion of such deposits will remain with us. We further believe that deposit growth, loan repayments and other sources
of funds will be adequate to meet our foreseeable short-term and long-term liquidity needs.
Interest rate sensitivity
An important element of asset/liability management
is the monitoring of our sensitivity to interest rate movements. In order to measure the effects of interest rates on our net interest
income, management takes into consideration the expected cash flows from the securities and loan portfolios and the expected magnitude
of the repricing of specific asset and liability categories. We evaluate interest sensitivity risk and then formulate guidelines
to manage this risk based on management’s outlook regarding the economy, forecasted interest rate movements and other business
factors. Our goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.
Contractual principal repayments of loans do
not necessarily reflect the actual term of our loan portfolio. The average lives of mortgage loans are substantially less than
their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which gives us the right
to declare a loan immediately due and payable in the event, among other things, the borrower sells the real property subject to
the mortgage and the loan is not repaid. In addition, certain borrowers increase their equity in the security property by making
payments in excess of those required under the terms of the mortgage.
The sale of fixed rate loans is intended to
protect us from precipitous changes in the general level of interest rates. The valuation of adjustable rate mortgage loans is
not as directly dependent on the level of interest rates as is the value of fixed rate loans. As with other investments, we regularly
monitor the appropriateness of the level of adjustable rate mortgage loans in our portfolio and may decide from time to time to
sell such loans and reinvest the proceeds in other adjustable rate investments.
Critical accounting policies
General
The accounting and reporting policies of the
Company and its subsidiary are in accordance with accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. The Company’s financial position and results of operations are
affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive
at the carrying value of assets and liabilities, and amounts reported for revenues, expenses and related disclosures. Different
assumptions in the application of these policies could result in material changes in the Company’s consolidated financial
position and/or results of operations.
The more critical accounting and reporting
policies include the Company’s accounting for the allowance for loan losses, TDRs, real estate acquired in settlement of
loans and income taxes. The Company’s accounting policies are fundamental to understanding the Company’s consolidated
financial position and consolidated results of operations.
The following is a summary of the Company’s
critical accounting policies that are highly dependent on estimates, assumptions, and judgments.
Allowance for loan losses
We monitor and maintain an allowance for loan
losses to absorb an estimate of probable losses inherent in the loan portfolio. We maintain policies and procedures that address
the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine
the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally
accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement
of impairment in the loan portfolio; and the loan grading system.
The allowance reflects management’s best
estimate of probable losses within the existing loan portfolio and of the risk inherent in various components of the loan portfolio,
including loans identified as impaired as required by FASB Codification Topic 310:
Receivables.
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.
Loans are grouped by similar characteristics,
including the type of loan, the assigned loan classification and the general collateral type. A loss rate reflecting the expected
loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral
type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental
factors and other conditions of the portfolio of loans and leases, including: borrower and industry concentrations; levels and
trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience,
ability and depth of lending management; and national and local economic conditions.
The amounts of estimated impairment for individually
evaluated loans and groups of loans are added together for a total estimate of loan losses. This estimate of losses is compared
to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional
provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance
exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses
is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses.
We recognize the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors
used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is
too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb
the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the
financial statements.
During the fourth quarter of 2015, we adopted
a software solution for the analysis of the allowance for loan losses. While our methodology of evaluating the adequacy of the
allowance for loan losses generally did not change, the software is more robust in that it:
|
·
|
allows us to take a more measurable approach
to our evaluation of qualitative factors such as economic conditions that may affect loss experience; and
|
|
·
|
is widely used by community banks which
provides peer data that can be used as a benchmark for comparison to our analysis.
|
In addition to the adoption of the software
solution for our analysis, we reviewed the last twenty years of historical loss data for peer banks in Virginia to assist us in
our evaluation of environmental factors and other conditions that could affect the loan portfolio and the overall adequacy of the
allowance for loan losses.
Troubled debt restructurings
A loan is accounted for as a TDR if we, for
economic or legal reasons, grant a concession to a borrower considered to be experiencing financial difficulties that we would
not otherwise consider. A TDR may involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or
a modification of terms such as a reduction of the stated interest rate or balance of the loan, a reduction of accrued interest,
an extension of the maturity date or renewal of the loan at a stated interest rate lower than the current market rate for a new
loan with similar risk, or some combination of these concessions. TDRs can be in either accrual or nonaccrual status. Nonaccrual
TDRs are included in nonperforming loans. Accruing TDRs are generally excluded from nonperforming loans as it is considered probable
that all contractual principal and interest due under the restructured terms will be collected. TDRs generally remain categorized
as nonperforming loans and leases until a six-month payment history has been maintained.
In accordance with current accounting guidance,
loans modified as TDRs are, by definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-loan
basis similar to other impaired loans as described above under
Allowance for loan losses
. Certain loans modified
as TDRs may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time
the loan is modified as a TDR the allowance will be impacted by the difference between the results of these two measurement methodologies.
Loans modified as TDRs that subsequently default are factored into the determination of the allowance in the same manner as other
defaulted loans.
Real estate acquired in settlement of
loans
Real estate acquired in settlement of loans
represent properties acquired through foreclosure or physical possession. Write-downs to fair value less cost to sell of
foreclosed assets at the time of transfer are charged to allowance for loan losses. Subsequent to foreclosure, the Company
periodically evaluates the value of foreclosed assets held for sale and records an impairment charge for any subsequent declines
in fair value less selling costs. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through
expense. Operating costs after acquisition are expensed as incurred. The valuation allowance was $281,000 and $612,000 at September
30, 2017 and December 31, 2016, respectively. Fair value is based on an assessment of information available at the end of a reporting
period and depends upon a number of factors, including historical experience, economic conditions, and issues specific to individual
properties. The evaluation of these factors involves subjective estimates and judgments that may change.
Income taxes
Deferred income taxes are recognized for the
tax consequences of “temporary differences” by applying enacted tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The primary temporary differences
are the allowance for loan losses and depreciation and amortization. The effect on recorded deferred income taxes of a change in
tax laws or rates is recognized in income in the period that includes the enactment date. To the extent that available evidence
about the future raises doubt about the realization of a deferred income tax asset, a valuation allowance is established. A tax
position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that
is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded. Interest and penalties associated with unrecognized tax benefits are classified as taxes other
than income in the statement of income. The Company has no uncertain tax positions.
During 2016, the Internal Revenue Service completed
an examination of the Company’s federal income tax return for the year ended December 31, 2013. No changes to the return
were proposed.
Impact
of inflation and changing prices
The Company’s consolidated financial
statements included herein have been prepared in accordance with generally accepted accounting principles in the United States
of America, which require the Company to measure financial position and operating results primarily in terms of historical dollars.
Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation
on the operations of the Company is reflected in increased operating costs. In management’s opinion, changes in interest
rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While
interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the
same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company,
including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and
fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.