UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20192020

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission file number: 0-50765

 

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Virginia 16-1694602
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization) (I.R.S. Employer
Identification No.)
   
13319 Midlothian Turnpike, Midlothian, Virginia 23113
(Address of principal executive offices) (Zip code)

 

804-897-3900

(Registrant’s telephone number, including area code)

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

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $4.00 per shareVBFCNasdaq Capital Market

 

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx  No No¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes xNo¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer¨Accelerated Filer¨
Non-Accelerated FilerxSmaller Reporting Companyx

Emerging growth company ¨

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox

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

 

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

 

1,453,0091,466,074 shares of common stock, $4.00 par value, outstanding as of October 28, 2019August 3, 2020

 

 

 

 

Village Bank and Trust Financial Corp.

Form 10-Q

 

TABLE OF CONTENTS

 

Part I – Financial Information 
  
Item 1. Financial Statements 
 
Consolidated Balance Sheets
SeptemberJune 30, 20192020 (unaudited) and December 31, 20182019		3
 
Consolidated Statements of Income
For the Three and NineSix Months Ended September
June 30, 20192020 and 20182019 (unaudited)		4
 
Consolidated Statements of Comprehensive Income
For the Three and NineSix Months Ended September
June 30, 2020 and 2019 and 2018 (unaudited)		5
 
Consolidated Statements of Shareholders’ Equity
For the Three and NineSix Months Ended September
June 30, 20192020 and 20182019 (unaudited)		6
 
Consolidated Statements of Cash Flows
For the NineSix Months Ended September
June 30, 20192020 and 20182019 (unaudited)		7
  
Notes to Consolidated Financial Statements (unaudited)8
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations4240 
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk57
Item 4. Controls and Procedures57
Part II – Other Information
Item 1. Legal Proceedings58
  
Item 1A. Risk Factors4. Controls and Procedures58
  
Part II – Other Information
Item 1. Legal Proceedings59
Item 1A. Risk Factors59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds5859
  
Item 3. Defaults Upon Senior Securities5860
  
Item 4. Mine Safety Disclosures5860
  
Item 5. Other Information5860
  
Item 6. Exhibits5961
  
Signatures6062

 


Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
June 30, 2020 (Unaudited) and December 31, 2019*
(in thousands, except share and per share data)
       
  June 30,  December 31, 
  2020  2019 
Assets        
Cash and due from banks $11,361  $19,967 
Federal funds sold  23,593   - 
Total cash and cash equivalents  34,954   19,967 
Investment securities available for sale, at fair value  37,785   46,937 
Restricted stock, at cost  2,142   2,035 
Loans held for sale, at fair value  17,761   12,722 
Loans        
Outstandings  607,993   429,295 
Allowance for loan losses  (3,759)  (3,186)
Deferred fees and costs, net  (4,305)  764 
Total loans, net  599,929   426,873 
Other real estate owned, net of valuation allowance  336   526 
Assets held for sale, at fair value  514   514 
Premises and equipment, net  11,823   12,036 
Bank owned life insurance  7,706   7,612 
Accrued interest receivable  3,508   2,597 
Other assets  6,188   8,494 
         
Total Assets $722,646  $540,313 
         
Liabilities and Shareholders' Equity        
Liabilities        
Deposits        
Noninterest bearing demand $212,434  $131,228 
Interest bearing  367,361   311,980 
Total deposits  579,795   443,208 
Federal Home Loan Bank advances  31,000   29,000 
Long-term debt - trust preferred securities  8,764   8,764 
Subordinated debt, net  5,612   5,595 
Other borrowings  45,120   5,317 
Accrued interest payable  221   221 
Other liabilities  5,517   5,294 
Total liabilities  676,029   497,399 
         
Shareholders' equity        
Common stock, $4 par value, 10,000,000 shares authorized; 1,453,759 shares issued and outstanding at June 30, 2020 and 1,453,009 shares issued and outstanding at December 31, 2019  5,779   5,779 
Additional paid-in capital  54,414   54,285 
Accumulated deficit  (14,059)  (17,292)
Stock in directors rabbi trust  (771)  (856)
Directors deferred fees obligation  771   856 
Accumulated other comprehensive income  483   142 
Total shareholders' equity  46,617   42,914 
         
Total liabilities and shareholders' equity $722,646  $540,313 

* Derived from audited consolidated financial statements
See accompanying notes to consolidated financial statements.


Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Income
Three and Six Months Ended June 30, 2020 and 2019
(Unaudited)
(in thousands, except per share data)
             
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
Interest income                
Loans $5,945  $5,556  $11,314  $10,921 
Investment securities  240   271   510   564 
Federal funds sold  8   44   53   95 
Total interest income  6,193   5,871   11,877   11,580 
                 
Interest expense                
Deposits  875   909   1,775   1,791 
Borrowed funds  374   410   731   771 
Total interest expense  1,249   1,319   2,506   2,562 
                 
Net interest income  4,944   4,552   9,371   9,018 
Provision for loan losses  300   -   700   - 
Net interest income after provision for  loan losses  4,644   4,552   8,671   9,018 
                 
Noninterest income                
Service charges and fees  448   541   966   999 
Mortgage banking income, net  2,288   1,196   3,658   1,982 
Gain on sale of investment securities  -   -   12   101 
Gain on sale of Small Business Administration loans  -   136   86   228 
Other  79   75   153   156 
Total noninterest income  2,815   1,948   4,875   3,466 
                 
Noninterest expense                
Salaries and benefits  2,612   3,701   5,635   6,637 
Occupancy  313   323   639   672 
Equipment  214   210   414   436 
Supplies  53   42   91   83 
Professional and outside services  725   754   1,440   1,563 
Advertising and marketing  93   64   171   122 
Foreclosed assets, net  (156)  5   (156)  7 
FDIC insurance premium  60   68   120   158 
Other operating expense  545   516   1,054   1,004 
Total noninterest expense  4,459   5,683   9,408   10,682 
                 
Income before income tax expense  3,000   817   4,138   1,802 
Income tax expense  665   180   905   356 
                 
Net income $2,335  $637  $3,233  $1,446 
                 
Earnings per share, basic $1.61  $0.44  $2.22  $1.01 
Earnings per share, diluted $1.61  $0.44  $2.22  $1.01 

See accompanying notes to consolidated financial statements.


Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
Three and Six Months ended June 30, 2020
(Unaudited)
(in thousands)
             
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
Net income $2,335  $637  $3,233  $1,446 
Other comprehensive income                
Unrealized holding gains arising during the period  55   505   438   1,015 
Tax effect  12   106   92   213 
Net change in unrealized holding gains on securities available for sale, net of tax  43   399   346   802 
                 
Reclassification adjustment                
Reclassification adjustment for gains realized in income  -   -   (12)  (101)
Tax effect  -   -   3   21 
Reclassification for gains included in net income, net of tax  -   -   (9)  (80)
                 
Minimum pension adjustment  3   3   6   6 
Tax effect  1   1   2   2 
Minimum pension adjustment, net of tax  2   2   4   4 
                 
                 
Total other comprehensive income  45   401   341   726 
                 
Total comprehensive income $2,380  $1,038  $3,574  $2,172 
                 
See accompanying notes to consolidated financial statements.                

5

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Consolidated Balance Sheets

September 30, 2019 (Unaudited) and December 31, 2018*

(in thousands, except share and per share data)In thousands)

 

  September 30,  December 31, 
  2019  2018 
Assets        
Cash and due from banks $23,263  $12,717 
Federal funds sold  23,195   6,826 
Total cash and cash equivalents  46,458   19,543 
Investment securities available for sale, at fair value  46,031   44,253 
Restricted stock, at cost  1,695   1,661 
Loans held for sale  14,503   6,128 
Loans        
Outstandings  422,747   414,430 
Allowance for loan losses  (3,101)  (3,051)
Deferred fees and costs, net  754   713 
Total loans, net  420,400   412,092 
Other real estate owned, net of valuation allowance  526   526 
Assets held for sale  536   554 
Premises and equipment, net  12,097   12,455 
Bank owned life insurance  7,567   7,441 
Accrued interest receivable  2,630   2,662 
Other assets  7,486   7,551 
         
  $559,929  $514,866 
         
Liabilities and Shareholders' Equity        
Liabilities        
Deposits        
Noninterest bearing demand $147,969  $119,317 
Interest bearing  329,470   319,730 
Total deposits  477,439   439,047 
Federal Home Loan Bank advances  21,000   21,000 
Long-term debt - trust preferred securities  8,764   8,764 
Subordinated debt, net  5,587   5,563 
Accrued interest payable  223   221 
Other liabilities  5,400   3,138 
Total liabilities  518,413   477,733 
         
Shareholders' equity        
Common stock, $4 par value - 10,000,000 shares authorized; 1,453,009 shares issued and outstanding at
September 30, 2019 and 1,435,283 shares issued and outstanding at December 31, 2018		  5,779   5,707 
Additional paid-in capital  54,268   53,212 
Accumulated deficit  (18,596)  (21,769)
Common stock warrant  -   732 
Stock in directors rabbi trust  (856)  (883)
Directors deferred fees obligation  856   883 
Accumulated other comprehensive income (loss)  65   (749)
Total shareholders' equity  41,516   37,133 
         
  $559,929  $514,866 
  Three Months Ended June 30, 2020 
                 Directors  Accumulated    
     Additional     Common  Stock in  Deferred  Other    
  Common  Paid-in  Accumulated  Stock  Directors  Fees  Comprehensive    
  Stock  Capital  Deficit  Warrant  Rabbi Trust  Obligation  Income  Total 
Balance, March 31, 2020 $5,779  $54,339  $(16,394) $-  $(771) $771  $438  $44,162 
                                 
Stock based compensation  -   75   -   -   -   -   -   75 
Net income  -   -   2,335   -   -   -   -   2,335 
Other comprehensive income  -   -   -   -   -   -   45   45 
Balance, June 30, 2020 $5,779  $54,414  $(14,059) $-  $(771) $771  $483  $46,617 

  Six Months Ended June 30, 2020 
                 Directors  Accumulated    
     Additional     Common  Stock in  Deferred  Other    
  Common  Paid-in  Accumulated  Stock  Directors  Fees  Comprehensive    
  Stock  Capital  Deficit  Warrant  Rabbi Trust  Obligation  Income  Total 
Balance, December 31, 2019 $5,779  $54,285  $(17,292) $-  $(856) $856  $142  $42,914 
                                 
Vesting of restricted stock  -   -   -   -   85   (85)  -   - 
Stock based compensation  -   129   -   -   -   -   -   129 
Net income  -   -   3,233   -   -   -   -   3,233 
Other comprehensive income  -   -   -   -   -   -   341   341 
Balance, June 30, 2020 $5,779  $54,414  $(14,059) $-  $(771) $771  $483  $46,617 
                                 

  Three Months Ended June 30, 2019 
                 Directors  Accumulated    
     Additional     Common  Stock in  Deferred  Other    
  Common  Paid-in  Accumulated  Stock  Directors  Fees  Comprehensive    
  Stock  Capital  Deficit  Warrant  Rabbi Trust  Obligation  Loss  Total 
Balance, March 31, 2019 $5,720  $53,245  $(20,960) $732  $(856) $856  $(424) $38,313 
                                 
Vesting of restricted stock  59   (59)  -   -   -   -   -   - 
Stock based compensation  -   328   -   -   -   -   -   328 
Expiration of common stock warrant  -   732   -   (732)  -   -   -   - 
Net income  -   -   637   -   -   -   -   637 
Other comprehensive income  -   -   -   -   -   -   401   401 
Balance, June 30, 2019 $5,779  $54,246  $(20,323) $-  $(856) $856  $(23) $39,679 

    
  Six Months Ended June 30, 2019 
                 Directors  Accumulated    
     Additional     Common  Stock in  Deferred  Other    
  Common  Paid-in  Accumulated  Stock  Directors  Fees  Comprehensive    
  Stock  Capital  Deficit  Warrant  Rabbi Trust  Obligation  Loss  Total 
Balance, December 31, 2018 $5,707  $53,212  $(21,769) $732  $(883) $883  $(749) $37,133 
                                 
Restricted stock redemption  -   -   -   -   27   (27)  -   - 
Vesting of restricted stock  72   (72)  -   -   -   -   -   - 
Stock based compensation  -   374   -   -   -   -   -   374 
Expiration of common stock warrant  -   732   -   (732)  -   -   -   - 
Net income  -   -   1,446   -   -   -   -   1,446 
Other comprehensive income  -   -   -   -   -   -   726   726 
Balance, June 30, 2019 $5,779  $54,246  $(20,323) $-  $(856) $856  $(23) $39,679 

  

* Derived from audited consolidated financial statements

See accompanying notes to consolidated financial statements.

3

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2019 and 2018

(Unaudited)

(in thousands, except per share data)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2019  2018  2019  2018 
Interest income                
Loans $5,594  $5,192  $16,515  $14,552 
Investment securities  284   254   848   776 
Federal funds sold  132   34   227   81 
Total interest income  6,010   5,480   17,590   15,409 
                 
Interest expense                
Deposits  1,041   715   2,831   2,005 
Borrowed funds  357   332   1,129   732 
Total interest expense  1,398   1,047   3,960   2,737 
                 
Net interest income  4,612   4,433   13,630   12,672 
Provision for loan losses  -   -   -   - 
Net interest income after provision for loan losses  4,612   4,433   13,630   12,672 
                 
Noninterest income                
Service charges and fees  557   485   1,556   1,424 
Mortgage banking income, net  1,784   1,227   3,767   3,164 
Gain on sale of investment securities  -   -   101   - 
Other  125   83   508   207 
Total noninterest income  2,466   1,795   5,932   4,795 
                 
Noninterest expense                
Salaries and benefits  2,841   2,928   9,478   8,843 
Occupancy  338   316   1,010   991 
Equipment  208   228   644   658 
Supplies  73   44   156   147 
Professional and outside services  735   649   2,298   2,170 
Advertising and marketing  82   77   204   224 
Foreclosed assets, net  6   21   13   (53)
FDIC insurance premium  -   82   158   238 
Other operating expense  605   475   1,609   1,563 
Total noninterest expense  4,888   4,820   15,570   14,781 
                 
Income before income tax expense  2,190   1,408   3,992   2,686 
Income tax expense  463   280   819   505 
                 
Net income  1,727   1,128   3,173   2,181 
                 
Preferred stock dividends and amortization of discount  -   -   -   (113)
Net income available to common shareholders $1,727  $1,128  $3,173  $2,068 
                 
Earnings per common share, basic $1.19  $0.79  $2.20  $1.44 
Earnings per common share, diluted $1.19  $0.79  $2.20  $1.44 

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, 2019 and 2018

(Unaudited)

(in thousands)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2019  2018  2019  2018 
Net income $1,727  $1,128  $3,173  $2,181 
Other comprehensive income (loss)                
Unrealized holding gains (losses) arising during the period  109   (157)  1,124   (883)
Tax effect  23   (33)  236   (185)
Net change in unrealized holding gains (losses) on securities available for sale, net of tax  86   (124)  888   (698)
                 
Reclassification adjustment                
Reclassification adjustment for gains realized in income  -   -   (101)  - 
Tax effect  -   -   (21)  - 
Reclassification for gains included in net income, net of tax  -   -   (80)  - 
                 
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 (loss)  88   (122)  814   (692)
                 
Total comprehensive income $1,815  $1,006  $3,987  $1,489 

See accompanying notes to consolidated financial statements.


Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

(Unaudited)

(In thousands)

  Three Months Ended September 30, 2019 
                    Directors  Accumulated    
        Additional     Common  Stock in  Deferred  Other    
  Preferred  Common  Paid-in  Accumulated  Stock  Directors  Fees  Comprehensive    
   Stock   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Income   Total 
Balance, June 30, 2019 $-  $5,779  $54,246  $(20,323) $-  $(856) $856  $(23) $39,679 
                                     
Stock based compensation  -   -   22   -   -   -   -   -   22 
Net income  -   -   -   1,727   -   -   -   -   1,727 
Other comprehensive income  -   -   -   -   -   -   -   88   88 
Balance, September 30, 2019  -   5,779   54,268   (18,596)  -   (856)  856   65   41,516 

  Nine Months Ended September 30, 2019 
                           Directors   Accumulated     
           Additional       Common   Stock in   Deferred   Other     
   Preferred   Common   Paid-in   Accumulated   Stock   Directors   Fees   Comprehensive     
   Stock   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Income   Total 
Balance, December 31, 2018 $-  $5,707  $53,212  $(21,769) $732  $(883) $883  $(749) $37,133 
                                     
Restricted stock redemption  -   -   -   -   -   27   (27)  -   - 
Vesting of restricted stock  -   72   (72)  -   -   -   -   -   - 
Stock based compensation  -   -   396   -   -   -   -   -   396 
Expiration of common stock warrant  -   -   732   -   (732)  -   -   -   - 
Net income  -   -   -   3,173   -   -   -   -   3,173 
Other comprehensive income  -   -   -   -   -   -   -   814   814 
Balance, September 30, 2019  -   5,779   54,268   (18,596)  -   (856)  856   65   41,516 

  Three Months Ended September 30, 2018 
                           Directors   Accumulated     
           Additional       Common   Stock in   Deferred   Other     
   Preferred   Common   Paid-in   Accumulated   Stock   Directors   Fees   Comprehensive     
   Stock   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Loss   Total 
Balance, June 30, 2018 $-  $5,683  $53,154  $(23,753) $732  $(998) $998  $(1,022) $34,794 
                                     
Vesting of restricted stock  -   14   (14)  -   -   -   -   -   - 
Stock based compensation  -   -   19   -   -   -   -   -   19 
Net income  -   -   -   1,128   -   -   -   -   1,128 
Other comprehensive loss  -   -   -   -   -   -   -   (122)  (122)
Balance, September 30, 2018  -   5,697   53,159   (22,625)  732   (998)  998   (1,144)  35,819 

  Nine Months Ended September 30, 2018 
                    Directors  Accumulated    
        Additional     Common  Stock in  Deferred  Other    
  Preferred  Common  Paid-in  Accumulated  Stock  Directors  Fees  Comprehensive    
   Stock   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Loss   Total 
Balance, December 31, 2017 $20  $5,672  $58,055  $(24,693) $732  $(1,010) $1,010  $(452) $39,334 
Preferred stock redemption  (20)  -   (5,007)  -   -   -   -   -   (5,027)
Preferred stock dividend  -   -   -   (113)  -   -   -   -   (113)
Restricted stock redemption  -   -   -   -   -   12   (12)  -   - 
Vesting of restricted stock  -   25   (25)  -   -   -   -   -   - 
Stock based compensation  -   -   136   -   -   -   -   -   136 
Net income  -   -   -   2,181   -   -   -   -   2,181 
Other comprehensive loss  -   -   -   -   -   -   -   (692)  (692)
Balance, September 30, 2018 $-  $5,697  $53,159  $(22,625) $732  $(998) $998  $(1,144) $35,819 
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2020 and 2019
(Unaudited)
(in thousands)
 
  2020  2019 
Cash Flows from Operating Activities        
Net income $3,233  $1,446 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Depreciation and amortization  300   523 
Amortization of debt issuance costs  17   16 
Deferred income taxes  905   356 
Provision for loan losses  700   - 
Write-down of other real estate owned  16   - 
Gain on sale of investment securities  (12)  (101)
Gain on sales of loans held for sale  (4,429)  (2,405)
Gain on sale of other real estate owned  (175)  - 
Stock compensation expense  129   374 
Proceeds from sale of mortgage loans  141,495   78,167 
Origination of mortgage loans held for sale  (142,105)  (82,694)
Amortization of premiums and accretion of discounts on securities, net  110   81 
Increase in bank owned life insurance  (94)  (80)
Net change in:        
Interest receivable  (911)  (60)
Other assets  1,317   (1,101)
Interest payable  -   10 
Other liabilities  223   1,917 
Net cash provided by (used in) operating activities  719   (3,551)
         
Cash Flows from Investing Activities        
Purchases of available for sale securities  (1,013)  (7,088)
Proceeds from the sale of available for sale securities  7,936   6,491 
Proceeds from maturities, calls and paydowns of available for sale securities  2,556   2,369 
Net increase in loans  (173,756)  (5,447)
Proceeds from sale of other real estate owned  349   - 
Purchases of premises and equipment, net  (87)  (285)
Purchase of restricted stock  (107)  (459)
Net cash used in investing activities  (164,122)  (4,419)
         
Cash Flows from Financing Activities        
Net increase in deposits  136,587   7,179 
Net increase in Federal Home Loan Bank advances  2,000   10,000 
Net increase in other borrowings  39,803   - 
Net cash provided by financing activities  178,390   17,179 
         
Net increase in cash and cash equivalents  14,987   9,209 
Cash and cash equivalents, beginning of period  19,967   19,543 
         
Cash and cash equivalents, end of period $34,954  $28,752 
         
Supplemental Disclosure of Cash Flow Information        
Cash payments for interest $2,506  $2,552 
Supplemental Schedule of Non-Cash Activities        
Unrealized gains (losses) on securities available for sale $425  $914 
Right of use assets obtained in exchange for new operating lease liabilities $-  $1,405 
Minimum pension adjustment $6  $6 

 

See accompanying notes to consolidated financial statements.          

 

67

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2019 and 2018

(Unaudited)

(in thousands)

  2019  2018 
Cash Flows from Operating Activities        
Net income $3,173  $2,181 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Depreciation and amortization  491   548 
Amortization of debt issuance costs  24   16 
Deferred income taxes  819   503 
Gain on sale of investment securities  (101)  - 
Gain on sales of loans held for sale  (4,605)  (4,131)
Gain on sale of other real estate owned  -   (69)
Stock compensation expense  396   136 
Proceeds from sale of mortgage loans  149,905   135,035 
Origination of mortgage loans for sale  (153,675)  (127,353)
Amortization of premiums and accretion of discounts on securities, net  137   85 
Increase in bank owned life insurance  (126)  (128)
Net change in:        
Interest receivable  32   (57)
Other assets  (945)  262 
Interest payable  2   103 
Other liabilities  2,262   (656)
Net cash (used in) provided by operating activities  (2,211)  6,475 
         
Cash Flows from Investing Activities        
Purchases of available for sale securities  (10,875)  - 
Proceeds from the sale of available for sale securities  6,491   - 
Proceeds from the sale of assets held for sale  -   - 
Proceeds from maturities, calls and paydowns of available for sale securities  3,593   2,758 
Net increase in loans  (8,308)  (47,019)
Proceeds from sale of other real estate owned  -   1,309 
Purchases of premises and equipment, net  (133)  (190)
Purchase of restricted stock  (34)  - 
Net cash used in investing activities  (9,266)  (43,142)
         
Cash Flows from Financing Activities        
Redeemption of preferred stock  -   (5,027)
Payment of preferred dividends  -   (113)
Net increase in deposits  38,392   25,242 
Net increase in Federal Home Loan Bank advances  -   10,200 
Net decrease in other borrowings  -   (1,568)
Issuance of subordinated debt, net  -   5,539 
Net cash provided by financing activities  38,392   34,273 
         
Net increase (decrease) in cash and cash equivalents  26,915   (2,394)
Cash and cash equivalents, beginning of period  19,543   17,810 
         
Cash and cash equivalents, end of period $46,458  $15,416 
         
Supplemental Disclosure of Cash Flow Information        
Cash payments for interest $3,958  $2,634 
Supplemental Schedule of Non-Cash Activities        
Unrealized gains (losses) on securities avalable for sale $1,023  $(883)
Right of use assets obtained in exchange for new operating lease liabilities $1,405  $- 

See accompanying notes to consolidated financial statements.


Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and NineSix Months Ended SeptemberJune 30, 20192020 and 20182019

(Unaudited)

 

Note 1 - Principles of presentation

 

Village Bank and Trust Financial Corp. (the “Company”) is the holding company of Village Bank (the “Bank”). The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s subsidiary, Village Bank Mortgage Corporation. All material intercompany balances and transactions have been eliminated in consolidation.

 

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the ninethree and six month periodperiods ended SeptemberJune 30, 2019 is2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.2020. 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, 20182019 as filed with the Securities and Exchange Commission (“SEC”).

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02“Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the optional transitional method provided by ASU 2018-11 and did not adjust prior periods for Accounting Standards Codification (“ASC”) Topic 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10-K, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $1.4 million at the date of adoption, which is related to the Company’s leases of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

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

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

 

Note 2 - Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of operationsincome for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses and its related provision including impaired loans and troubled debt restructurings (“TDRs”), the valuation allowance on the deferred tax asset, valuation of other real estate owned and the estimate of the fair value of assets held for sale.

8

 

Note 3 - Earnings per common share

 

The following table presents the basic and diluted earnings per common share computation (in thousands, except share and per share data):

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended June 30, Six Months Ended June 30, 
 2019  2018  2019  2018  2020  2019  2020  2019 
Numerator                         
Net income - basic and diluted $1,727  $1,128  $3,173  $2,181  $2,335  $637  $3,233  $1,446 
Preferred stock dividend  -   -   -   (113)
Net income available to common shareholders $1,727  $1,128  $3,173  $2,068 
                                
Denominator                                
Weighted average shares outstanding - basic  1,451   1,434   1,442   1,433   1,454   1,439   1,454   1,433 
Dilutive effect of common stock options  -   -   -   -   -   -   -   - 
                                
Weighted average shares outstanding - diluted  1,451   1,434   1,442   1,433   1,454   1,439   1,454   1,433 
                                
Earnings per share - basic $1.19  $0.79  $2.20  $1.44  $1.61  $0.44  $2.22  $1.01 
Earnings per share - diluted $1.19  $0.79  $2.20  $1.44  $1.61  $0.44  $2.22  $1.01 

 


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

 

As a result ofAt June 30, 2020 the Company’s largest shareholder’s ownership exceeding 50% during the second quarter of 2019 all non-vested restricted stock awards and units vested during that period.

The vesting of 4,155 and 14,560 at September 30, 2019 and 2018, respectively, of the unvested restricted units included in Note 1110 “Stock incentive plan” werewas dependent upon meeting certain performance criteria. As of SeptemberJune 30, 2019 and 2018,2020, it was indeterminable whether these unvested restricted units would vest and as such thosethe underlying shares were excluded from common shares issued and outstanding at such date and were not included in the computation of earnings per share for such period.

 

As a result of the Company’s largest shareholder’s ownership exceeding 50% during the second quarter of 2019 all non-vested restricted stock awards and units outstanding at that time vested during the period.

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 550653 and 563575 shares were not included in computing diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20192020, respectively, and stock options for 1,356536 and 1,398571 shares were not included in computing diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, because their effects were anti-dilutive. Additionally, the impact of warrantsthe warrant to acquire shares of the Company’s common stock in connection with the Company’s participation in the Troubled Asset Relief Program wereis not included for the three and nine monthsperiod ended SeptemberJune 30, 2018,2019, as the warrants were anti-dilutive. The warrantswarrant expired on May 1, 2019 and as such were not included in the three and nine months ended September 30, 2019.


Note 4 – Investment securities available for sale

 

The amortized cost and fair value of investment securities available for sale as of SeptemberJune 30, 20192020 and December 31, 20182019 are as follows (in thousands):

 

     Gross  Gross    
  Amortized  Unrealized  Unrealized    
   Cost   Gains   Losses   Fair Value 
September 30, 2019                
U.S. Government agency obligations $14,989  $61  $(30) $15,020 
Mortgage-backed securities  25,559   155   (41)  25,673 
Subordinated debt  5,342   87   (91)  5,338 
                 
  $45,890  $303  $(162) $46,031 
                 
December 31, 2018                
U.S. Government agency obligations $14,120  $-  $(269) $13,851 
Mortgage-backed securities  26,924   102   (576)  26,450 
Subordinated debt  4,089   11   (148)  3,952 
                 
  $45,133  $113  $(993) $44,253 

     Gross  Gross    
  Amortized  Unrealized  Unrealized    
  Cost  Gains  Losses  Fair Value 
June 30, 2020                
U.S. Government agency obligations $12,403  $162  $-  $12,565 
Mortgage-backed securities  16,953   697   -   17,650 
Subordinated debt  7,767   23   (220)  7,570 
                 
  $37,123  $882  $(220) $37,785 
                 
December 31, 2019                
U.S. Government agency obligations $14,797  $57  $(9) $14,845 
Mortgage-backed securities  25,124   204   (26)  25,302 
Subordinated debt  6,779   91   (80)  6,790 
                 
  $46,700  $352  $(115) $46,937 

 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had no investment securities with a fair value of approximately $8,140,000 and $8,004,000, respectively, pledged to secure borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”).

 


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

 

  Three Months  Nine Months 
  Ended September 30,  Ended September 30, 
   2019   2018   2019   2018 
Gross realized gains $-  $-  $101  $- 
Gross realized losses  -   -   -   - 
                 
  $-  $-  $101  $- 

  Three Months  Six Months 
  Ended June 30,  Ended June 30, 
  2020  2019  2020  2019 
Gross realized gains $-  $-  $39  $101 
Gross realized losses  -   -   (27)  - 
                 
  $-  $-  $12  $101 

   

The Company sold approximately $6.5 million$7,900,000 and $6,500,000 in the six months ended June 30, 2020 and 2019, respectively, of investment securities available for sale at a grossnet gain of $12,000 in 2020 and $101,000 duringin 2019. The sales of these securities, which had fixed interest rates, allowed the nine months ended September 30, 2019.Company to decrease its exposure to 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 SeptemberJune 30, 20192020 and December 31, 20182019 are detailed below (in thousands):

 

 Securities in a loss Securities in a loss                    
 position for less than position for more than       Securities in a loss  Securities in a loss      
 12 Months  12 Months  Total  position for less than  position for more than     
 Fair Unrealized Fair Unrealized Fair Unrealized  12 Months  12 Months  Total 
 Value  Losses  Value  Losses  Value  Losses  Fair Unrealized Fair Unrealized Fair Unrealized 
September 30, 2019                        
 Value Losses Value Losses Value Losses 
June 30, 2020                        
Subordinated debt $6,140  $(127) $407  $(93) $6,547  $(220)
                        
 $6,140  $(127) $407  $(93) $6,547  $(220)
                        
December 31, 2019                        
U.S. Government agency obligations $6,113  $(8) $5,403  $(22) $11,516  $(30) $2,001  $(1) $5,368  $(8) $7,369  $(9)
Mortgage-backed securities  5,407   (38)  401   (3)  5,808   (41)  2,747   (26)  -   -   2,747   (26)
Subordinated debt  1,930   (87)  512   (4)  2,442   (91)  759   (6)  940   (74)  1,699   (80)
                                                
 $13,450  $(133) $6,316  $(29) $19,766  $(162) $5,507  $(33) $6,308  $(82) $11,815  $(115)
                        
December 31, 2018                        
U.S. Government agency obligations $-  $-  $13,851  $(269) $13,851  $(269)
Mortgage-backed securities  -   -   18,397   (576)  18,397   (576)
Subordinated debt  1,915   (140)  512   (8)  2,427   (148)
                        
 $1,915  $(140) $32,760  $(853) $34,675  $(993)

 

As of SeptemberJune 30, 2019,2020, there were $6.3 million, or nine issues, of individualwas one investment available for sale securitiesof $407,000 that had been in a continuous loss position for more than 12 months. These securitiesThis security had an unrealized loss of $29,000 and consisted of U.S. Government agency obligations, mortgage-backed securities, and subordinated debt.$93,000.

 

All of the unrealized losses are attributable to increasesmovements in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at SeptemberJune 30, 2019.2020.

 

The amortized cost and estimated fair value of investment securities available for sale as of SeptemberJune 30, 2019,2020, by contractual maturity, are as follows (in thousands):

 

  Amortized  Fair 
   Cost   Value 
One to five years $12,865  $12,872 
Five to ten years  8,019   8,010 
More than ten years  25,006   25,149 
         
Total $45,890  $46,031 

11

  Amortized
Cost		  Fair Value 
Less than one year $6,208  $6,257 
One to five years  4,427   4,481 
Five to ten years  9,890   9,757 
More than ten years  16,598   17,290 
         
Total $37,123  $37,785 

  


 

Note 5 – Loans and allowance for loan losses

 

Loans classified by type as of SeptemberJune 30, 20192020 and December 31, 20182019 are as follows (dollars in thousands):

 

 September 30, 2019  December 31, 2018  June 30, 2020  December 31, 2019 
 Amount  %  Amount  %  Amount  %  Amount  % 
Construction and land development                                
Residential $7,803   1.85% $7,704   1.86% $8,067   1.33% $7,887   1.84%
Commercial  26,038   6.16%  33,904   8.18%  23,809   3.91%  24,063   5.60%
  33,841   8.01%  41,608   10.04%  31,876   5.24%  31,950   7.44%
Commercial real estate                                
Owner occupied  98,269   23.24%  98,153   23.68%  101,001   16.61%  98,353   22.91%
Non-owner occupied  108,601   25.69%  95,034   22.93%  119,998   19.74%  116,508   27.14%
Multifamily  14,101   3.34%  13,597   3.28%  9,880   1.63%  13,332   3.10%
Farmland  164   0.04%  185   0.04%  65   0.01%  156   0.04%
  221,135   52.31%  206,969   49.93%  230,944   37.99%  228,349   53.19%
Consumer real estate                                
Home equity lines  18,929   4.48%  20,675   4.99%  20,796   3.42%  21,509   5.01%
Secured by 1-4 family residential,                                
First deed of trust  60,028   14.20%  57,410   13.85%  57,055   9.38%  55,856   13.01%
Second deed of trust  11,505   2.72%  9,556   2.31%  11,012   1.81%  10,411   2.43%
  90,462   21.40%  87,641   21.15%  88,863   14.61%  87,776   20.45%
Commercial and industrial loans (except those secured by real estate)  40,345   9.54%  36,639   8.84%
Commercial and industrial loans                
(except those secured by real estate)  221,598   36.45%  45,074   10.50%
Guaranteed student loans  34,520   8.17%  39,315   9.49%  31,594   5.20%  33,525   7.81%
Consumer and other  2,444   0.57%  2,258   0.55%  3,118   0.51%  2,621   0.61%
                                
Total loans  422,747   100.0%  414,430   100.0%  607,993   100.0%  429,295   100.0%
Deferred fees and costs, net  754       713       (4,305)      764     
Less: allowance for loan losses  (3,101)      (3,051)      (3,759)      (3,186)    
                                
 $420,400      $412,092      $599,929      $426,873     

 

The Bank has a purchased portfolio of rehabilitated student loans guaranteed by the Department of Education (“DOE”). The guarantee covers approximately 98% of principal and accrued interest. The loans are serviced by a third-party servicer that specializes in handling the special needs of the DOE student loan programs.

 


The Bank had originated $184,478,000 in loans through the Small Business Administrations (“SBA”) Paycheck Protection Program (“PPP”) as of June 30, 2020, which have provided essential funds to approximately 1,500 businesses and nonprofits and protected more than 20,000 jobs in our community. The processing fees earned on the PPP loans will help to support the Bank’s loan deferral program and potential credit losses associated with the COVID-19 pandemic. Below is a breakdown of PPP loans by loan size including SBA fees earned as of June 30, 2020 (dollars in thousands):

Loan Size # of Loans  $ of Loans  $ SBA Fee 
< $350,000  1,403  $93,581  $4,426 
                 $350,000 - $2 million  94   67,795   1,853 
  > $2 million  6   23,102   184 
Total  1,503  $184,478  $6,463 

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $50,198,000$47,827,000 and $38,751,000$49,736,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.

 

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

 

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

 

 September 30,
 December 31,
  June 30, December 31, 
 2019  2018  2020  2019 
Construction and land development        
Commercial $-  $39 
  -   39 
Commercial real estate                
Non-owner occupied  503   515 
Owner occupied $311  $497 
  503   515   311   497 
Consumer real estate                
Home equity lines  417   125   300   300 
Secured by 1-4 family residential,        
Secured by 1-4 family residential        
First deed of trust  729   1,163   959   842 
Second deed of trust  63   154   62   63 
  1,209   1,442   1,321   1,205 
Commercial and industrial loans (except those secured by real estate)  167   255 
Consumer and other  11   8 
Commercial and industrial loans        
(except those secured by real estate)  199   166 
                
Total loans $1,890  $2,259  $1,831  $1,868 

 


The Company assigns risk rating classifications to its loans. These risk ratings are divided into the

following groups:

 

·Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;
·Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close attention;
·Risk rated 6 loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; and
·Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 


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

 

 Risk Rated Risk Rated Risk Rated Risk Rated Total  Risk Rated Risk Rated Risk Rated Risk Rated Total 
 1-4 5 6 7 Loans  1-4  5  6  7  Loans 
September 30, 2019                    
June 30, 2020                    
Construction and land development                                        
Residential $7,803  $-  $-  $-  $7,803  $8,067  $-  $-  $-  $8,067 
Commercial  25,728   -   310   -   26,038   23,412   103   294   -   23,809 
  33,531   -   310   -   33,841   31,479   103   294   -   31,876 
Commercial real estate                                        
Owner occupied  91,345   4,680   2,244       98,269   89,597   9,023   2,381   -   101,001 
Non-owner occupied  107,868   230   503   -   108,601   119,286   226   486   -   119,998 
Multifamily  13,951   150   -   -   14,101   9,741   139   -   -   9,880 
Farmland  74   90   -   -   164   65   -   -   -   65 
  213,238   5,150   2,747   -   221,135   218,689   9,388   2,867   -   230,944 
Consumer real estate                                        
Home equity lines  17,762   727   440   -   18,929   19,869   627   300   -   20,796 
Secured by 1-4 family residential                                        
First deed of trust  57,281   1,863   884   -   60,028   54,140   1,581   1,334   -   57,055 
Second deed of trust  9,834   1,555   116   -   11,505   10,807   12   193   -   11,012 
  84,877   4,145   1,440   -   90,462   84,816   2,220   1,827   -   88,863 
Commercial and industrial loans (except those secured by real estate)  35,678   3,294   1,373   -   40,345 
Commercial and industrial loans                    
(except those secured by real estate)  220,754   361   483   -   221,598 
Guaranteed student loans  34,520   -   -   -   34,520   31,594   -   -   -   31,594 
Consumer and other  2,433   -   11   -   2,444   3,073   45   -   -   3,118 
                                        
Total loans $404,277  $12,589  $5,881  $-  $422,747  $590,405  $12,117  $5,471  $-  $607,993 
                    
December 31, 2018                    
Construction and land development                    
Residential $6,957  $-  $747  $-  $7,704 
Commercial  33,432   6   466   -   33,904 
  40,389   6   1,213   -   41,608 
Commercial real estate                    
Owner occupied  88,484   6,540   3,129   -   98,153 
Non-owner occupied  94,519   -   515   -   95,034 
Multifamily  13,436   161   -   -   13,597 
Farmland  81   104   -   -   185 
  196,520   6,805   3,644   -   206,969 
Consumer real estate                    
Home equity lines  19,601   934   140   -   20,675 
Secured by 1-4 family residential                    
First deed of trust  53,994   1,612   1,804   -   57,410 
Second deed of trust  9,167   175   214   -   9,556 
  82,762   2,721   2,158   -   87,641 
Commercial and industrial loans (except those secured by real estate)  32,776   3,349   499   15   36,639 
Guaranteed student loans  39,315   -   -   -   39,315 
Consumer and other  2,239   8   11   -   2,258 
                    
Total loans $394,001  $12,889  $7,525  $15  $414,430 

 

  Risk Rated  Risk Rated  Risk Rated  Risk Rated  Total 
  1-4  5  6  7  Loans 
December 31, 2019                    
Construction and land development                    
Residential $7,887  $-  $-  $-  $7,887 
Commercial  23,758   -   305   -   24,063 
   31,645   -   305   -   31,950 
Commercial real estate                    
Owner occupied  90,146   8,072   135   -   98,353 
Non-owner occupied  115,781   230   497   -   116,508 
Multifamily  13,186   146   -   -   13,332 
Farmland  71   85   -   -   156 
   219,184   8,533   632   -   228,349 
Consumer real estate                    
Home equity lines  20,486   723   300   -   21,509 
Secured by 1-4 family residential                    
First deed of trust  53,200   1,660   996   -   55,856 
Second deed of trust  10,130   167   114   -   10,411 
   83,816   2,550   1,410   -   87,776 
Commercial and industrial loans                    
(except those secured by real estate)  41,837   2,891   346   -   45,074 
Guaranteed student loans  33,525   -   -   -   33,525 
Consumer and other  2,621   -   -   -   2,621 
                     
Total loans $412,628  $13,974  $2,693  $-  $429,295 


The following table presents the aging of the recorded investment in past due loans and leases as of the dates indicated (in thousands):

 

           Recorded              Recorded 
   Greater       Investment >      Greater       Investment > 
30-59 Days60-89 Days Than Total Past   Total 90 Days and  30-59 Days 60-89 Days Than Total Past   Total 90 Days and 
Past Due Past Due 90 Days  Due  Current  Loans  Accruing  Past Due Past Due 90 Days Due Current Loans Accruing 
September 30, 2019                       
June 30, 2020                            
Construction and land development                                                   
Residential$- $- $-  $-  $7,803  $7,803  $-  $-  $-  $-  $-  $8,067  $8,067  $- 
Commercial -  -  -   -   26,038   26,038   -   -   -   -   -   23,809   23,809   - 
 -  -  -   -   33,841   33,841   -   -   -   -   -   31,876   31,876   - 
Commercial real estate                                                   
Owner occupied -  - -   -   98,269   98,269   -   -   -   -   -   101,001   101,001   - 
Non-owner occupied -  - -   -   108,601   108,601   -   -   -   -   -   119,998   119,998   - 
Multifamily -  - -   -   14,101   14,101   -   -   -   -   -   9,880   9,880   - 
Farmland -  -  -   -   164   164   -   -   -   -   -   65   65   - 
 -  -  -   -   221,135   221,135   -   -   -   -   -   230,944   230,944   - 
Consumer real estate                                                   
Home equity lines 14  - -   14   18,915   18,929   -   -   -   -   -   20,796   20,796   - 
Secured by 1-4 family residential                                                   
First deed of trust 254  - -   254   59,774   60,028   -   -   138   -   138   56,917   57,055   - 
Second deed of trust -  -  -   -   11,505   11,505   -   -   -   -   -   11,012   11,012   - 
 268  -  -   268   90,194   90,462   -   -   138   -   138   88,725   88,863   - 
Commercial and industrial loans (except those secured by real estate) 479  - -   479   39,866   40,345   - 
Commercial and industrial loans                            
(except those secured by real estate)  -   2   -   2   221,596   221,598   - 
Guaranteed student loans 1,357  474 2,909   4,740   29,780   34,520   2,909   640   407   2,341   3,388   28,206   31,594   2,341 
Consumer and other -  -  -   -   2,444   2,444   -   -   -   -   -   3,118   3,118   - 
                                                   
Total loans$2,104 $      474 $2,909  $5,487  $417,260  $422,747  $2,909  $640  $547  $2,341  $3,528  $604,465  $607,993  $2,341 

 

  30-59 Days
Past Due		  60-89 Days
Past Due		  

Greater
Than
90 Days

  Total Past
Due  		  Current  Total
Loans		  Recorded
Investment >
90 Days and
Accruing		 
             Recorded 
December 31, 2018                            
     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, 2019                            
Construction and land development                                                        
Residential $-  $-  $-  $-  $7,704  $7,704  $-  $-  $-  $-  $-  $7,887  $7,887  $- 
Commercial  118   -   -   118   33,786   33,904   -   -   -   -   -   24,063   24,063   - 
  118   -   -   118   41,490   41,608   -   -   -   -   -   31,950   31,950   - 
Commercial real estate                                                        
Owner occupied  -   -   -   -   98,153   98,153   -   701   -   -   701   97,652   98,353   - 
Non-owner occupied  -   -   -   -   95,034   95,034   -   -   -   -   -   116,508   116,508   - 
Multifamily  -   -   -   -   13,597   13,597   -   -   -   -   -   13,332   13,332   - 
Farmland  -   -   -   -   185   185   -   -   -   -   -   156   156   - 
  -   -   -   -   206,969   206,969   -   701   -   -   701   227,648   228,349   - 
Consumer real estate                                                        
Home equity lines  -   315   -   315   20,360   20,675   -   52   -   -   52   21,457   21,509   - 
Secured by 1-4 family residential                                                        
First deed of trust  171   7   -   178   57,232   57,410   -   290   -   -   290   55,566   55,856   - 
Second deed of trust  162   -   -   162   9,394   9,556   -   133   -   -   133   10,278   10,411   - 
  333   322   -   655   86,986   87,641   -   475   -   -   475   87,301   87,776   - 
Commercial and industrial loans (except those secured by real estate)  312   433   -   745   35,894   36,639   - 
Commercial and industrial loans                            
(except those secured by real estate)  773   -   -   773   44,301   45,074   - 
Guaranteed student loans  1,946   971   5,573   8,490   30,825   39,315   5,573   1,694   1,309   2,567   5,570   27,955   33,525   2,567 
Consumer and other  9   1   -   10   2,248   2,258   -   4   -   -   4   2,617   2,621   - 
                                                        
Total loans $2,718  $1,727  $5,573  $10,018  $404,412  $414,430  $5,573  $3,647  $1,309  $2,567  $7,523  $421,772  $429,295  $2,567 

 

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

 

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

 


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

 

 September 30, 2019  December 31, 2018  June 30, 2020 December 31, 2019 
   Unpaid     Unpaid      Unpaid     Unpaid   
 Recorded Principal Related Recorded Principal Related  Recorded Principal Related Recorded Principal Related 
 Investment  Balance  Allowance  Investment  Balance  Allowance  Investment Balance Allowance Investment Balance Allowance 
With no related allowance recorded                                                
Construction and land development                                                
Residential $-  $-  $-  $747  $747  $- 
Commercial  310   408   -   360   458   -  $294  $294  $-  $337  $337  $- 
  310   408   -   1,107   1,205   -   294   294   -   337   337   - 
Commercial real estate                                                
Owner occupied  3,039   3,054   -   3,703   3,703   -   4,271   4,286   -   2,089   2,104   - 
Non-owner occupied  2,329   2,329   -   2,588   2,588   -   2,109   2,109   -   2,304   2,304   - 
  5,368   5,383   -   6,291   6,291   -   6,380   6,395   -   4,393   4,408   - 
Consumer real estate                                                
Home equity lines  431   431   -   684   684   -   300   300   -   300   300   - 
Secured by 1-4 family residential                                                
First deed of trust  2,196   2,218   -   3,057   3,057   -   2,116   2,116   -   1,752   1,774   - 
Second deed of trust  770   770   -   721   929   -   891   1,099   -   752   960   - 
  3,397   3,419   -   4,462   4,670   -   3,307   3,515   -   2,804   3,034   - 
Commercial and industrial loans(except those secured by real estate)  925   1,403   -   528   875   - 
Consumer and other  -   -   -   -   -   - 
Commercial and industrial loans                        
(except those secured by real estate)  155   155   -   211   373   - 
  10,000   10,613   -   12,388   13,041   -   10,136   10,359   -   7,745   8,152   - 
                                                
With an allowance recorded                                                
Construction and land development                        
Commercial  -   -   -   106   106   8 
  -   -   -   106   106   8 
Commercial real estate                                                
Owner occupied  1,426   1,426   18   1,459   1,459   25   -   -   -   1,414   1,414   15 
  1,426   1,426   18   1,459   1,459   25   -   -   -   1,414   1,414   15 
Consumer real estate                                                
Home equity lines  -   -   -   -   -   - 
Secured by 1-4 family residential                                                
First deed of trust  193   193   17   200   200   20   76   76   9   78   78   9 
Second deed of trust  79   79   1   161   161   4 
  272   272   18   361   361   24   76   76   9   78   78   9 
Commercial and industrial loans(except those secured by real estate)  334   334   1   8   8   8 
Consumer and other  11   11   11   9   9   9 
Commercial and industrial loans                        
(except those secured by real estate)  169   331   16   135   334   135 
  245   407   25   1,627   1,826   159 
  2,043   2,043   48   1,943   1,943   74                         
Total                                                
Construction and land development                                                
Residential  -   -   -   747   747   - 
Commercial  310   408   -   466   564   8   294   294   -   337   337   - 
  310   408   -   1,213   1,311   8   294   294   -   337   337   - 
Commercial real estate                                                
Owner occupied  4,465   4,480   18   5,162   5,162   25   4,271   4,286   -   3,503   3,518   15 
Non-owner occupied  2,329   2,329   -   2,588   2,588   -   2,109   2,109   -   2,304   2,304   - 
  6,794   6,809   18   7,750   7,750   25   6,380   6,395   -   5,807   5,822   15 
Consumer real estate                                                
Home equity lines  431   431   -   684   684   -   300   300   -   300   300   - 
Secured by 1-4 family residential,                                                
First deed of trust  2,389   2,411   17   3,257   3,257   20   2,192   2,192   9   1,830   1,852   9 
Second deed of trust  849   849   1   882   1,090   4   891   1,099   -   752   960   - 
  3,669   3,691   18   4,823   5,031   24   3,383   3,591   9   2,882   3,112   9 
Commercial and industrial loans(except those secured by real estate)  1,259   1,737   1   536   883   8 
Consumer and other  11   11   11   9   9   9 
Commercial and industrial loans                        
(except those secured by real estate)  324   486   16   346   707   135 
 $12,043  $12,656  $48  $14,331  $14,984  $74  $10,381  $10,766  $25  $9,372  $9,978  $159 

 


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

 

 For the Three Months For the Nine Months  For the Three Months For the Six Months 
 Ended September 30, 2019  Ended September 30, 2019  Ended June 30, 2020  Ended June 30, 2020 
 Average Interest Average Interest  Average Interest Average Interest 
 Recorded Income Recorded Income  Recorded Income Recorded Income 
 Investment  Recognized  Investment  Recognized  Investment  Recognized  Investment  Recognized 
With no related allowance recorded                                
Construction and land development                                
Residential $108  $-  $267  $- 
Commercial  326   -   335   -  $297  $-  $349  $- 
  434   -   602   -   297   -   349   - 
Commercial real estate                                
Owner occupied  2,896   66   3,098   112   3,427   53   3,277   82 
Non-owner occupied  2,477   29   2,505   91   2,119   20   2,574   52 
  5,373   95   5,603   203   5,546   73   5,851   134 
Consumer real estate                                
Home equity lines  325   5   415   15   300   4   479   8 
Secured by 1-4 family residential                                
First deed of trust  2,456   34   2,606   79   2,122   14   2,853   33 
Second deed of trust  698   2   704   25   898   12   694   26 
  3,479   41   3,725   119   3,320   30   4,026   67 
Commercial and industrial loans (except those secured by real estate)  907   10   812   25 
Commercial and industrial loans                
(except those secured by real estate)  158   -   688   - 
Consumer and other  -   -   -   1   -   -   -   - 
  10,193   146   10,742   348   9,321   103   10,914   201 
                                
With an allowance recorded                                
Construction and land development                                
Commercial  -   -   26   -   -   -   26   - 
                                
Commercial real estate                                
Owner occupied  1,438   15   1,443   45   702       1,453   15 
  1,438   15   1,443   45   702   -   1,453   15 
Consumer real estate                                
Home equity lines  -   -   -   - 
Secured by 1-4 family residential                                
First deed of trust  195   4   196   10   77   1   198   2 
Second deed of trust  132   -   139   4   -   -   160   - 
  327   4   335   14   77   1   358   2 
Commercial and industrial loans (except those secured by real estate)  111   -   86   - 
Commercial and industrial loans                
(except those secured by real estate)  -   -   77   6 
Consumer and other  9   -   7   -   175   -   12   - 
  1,885   19   1,897   59   954   1   1,926   23 
                                
Total                                
Construction and land development                                
Residential  108   -   267   -   -   -   -   - 
Commercial  326   -   361   -   297   -   375   - 
  434   -   628   -   297   -   375   - 
Commercial real estate                                
Owner occupied  4,334   81   4,541   157   4,129   53   4,730   97 
Non-owner occupied  2,477   29   2,505   91   2,119   20   2,574   52 
  6,811   110   7,046   248   6,248   73   7,304   149 
Consumer real estate                                
Home equity lines  325   5   415   15   300   4   479   8 
Secured by 1-4 family residential,                                
First deed of trust  2,652   38   2,802   89   2,199   15   3,051   35 
Second deed of trust  830   2   843   29   898   12   854   26 
  3,807   45   4,060   133   3,397   31   4,384   69 
Commercial and industrial loans (except those secured by real estate)  1,019   10   898   25 
Commercial and industrial loans                
(except those secured by real estate)  158   -   765   6 
Consumer and other  9   -   7   1   175   -   12   - 
 $12,080  $165  $12,639  $407  $10,275  $104  $12,840  $224 

 


  For the Three Months  For the Nine Months 
  Ended September 30, 2018  Ended September 30, 2018 
  Average  Interest  Average  Interest 
  Recorded  Income  Recorded  Income 
  Investment  Recognized  Investment  Recognized 
With no related allowance recorded                
Construction and land development                
Commercial $560  $-  $546  $13 
   560   -   546   13 
Commercial real estate                
Owner occupied  2,520   29   3,814   109 
Non-owner occupied  3,016   -   2,509   231 
   5,536   29   6,323   340 
Consumer real estate                
Home equity lines  464   -   497   - 
Secured by 1-4 family residential                
First deed of trust  1,957   25   3,234   71 
Second deed of trust  1,506   12   638   35 
   3,927   37   4,369   106 
Commercial and industrial loans (except those secured by real estate)  289   7   446   27 
Consumer and other  1   -   2   1 
   10,313   73   11,686   487 
                 
With an allowance recorded                
Construction and land development                
Commercial  -   -   -   - 
                 
Commercial real estate                
Owner occupied  978   26   1,477   48 
   978   26   1,477   48 
Consumer real estate                
Home equity lines  741   -   67   - 
Secured by 1-4 family residential                
First deed of trust  217   3   519   18 
Second deed of trust  154   2   145   6 
   1,112   5   731   24 
Commercial and industrial loans (except those secured by real estate)  288   -   544   - 
Consumer and other  316   -   15   - 
   2,694   31   2,767   72 
                 
Total                
Construction and land development                
Commercial  560   -   546   13 
   560   -   546   13 
Commercial real estate                
Owner occupied  3,498   55   5,291   157 
Non-owner occupied  3,016   -   2,509   231 
   6,514   55   7,800   388 
Consumer real estate                
Home equity lines  1,205   -   564   - 
Secured by 1-4 family residential,                
First deed of trust  2,175   28   3,753   89 
Second deed of trust  1,659   14   783   41 
   5,039   42   5,100   130 
Commercial and industrial loans (except those secured by real estate)  577   7   990   27 
Consumer and other  317   -   17   1 
  $13,007  $104  $14,453  $559 


Included in impaired loans are loans classified as TDRs. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or nonaccrual. To restore a nonaccrual loan that has been formally restructured in a TDR to accrual status, we perform a current, well documented credit analysis supporting a return to accrual status based on the borrower’s financial condition and prospects for repayment under the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis considers the borrower’s sustained historical repayment performance for a reasonable period to the return-to-accrual date, but may take into account payments made for a reasonable period prior to the restructuring if the payments are consistent with the modified terms. A sustained period of repayment performance generally would be a minimum of six months and would involve payments in the form of cash or cash equivalents.

 


An accruing loan that is modified in a TDR can remain in accrual status if, based on a current well-documented credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before modification. The following is a summary of performing and nonaccrual TDRs and the related specific valuation allowance by portfolio segment for the periods indicated (dollars in thousands).

 

           Specific 
           Valuation 
  Total  Performing  Nonaccrual  Allowance 
June 30, 2020                
Commercial real estate                
Owner occupied $3,753  $3,442  $311  $- 
Non-owner occupied  2,110   2,110   -   - 
   5,863   5,552   311   - 
Consumer real estate                
Secured by 1-4 family residential                
First deeds of trust  1,622   906   716   9 
Second deeds of trust  805   743   62   - 
   2,427   1,649   779   9 
Commercial and industrial loans                
(except those secured by real estate)  199   -   199   16 
  $8,489  $7,201  $1,288  $25 
                 
Number of loans  38   27   11   2 

        Specific         Specific 
        Valuation         Valuation 
 Total  Performing  Nonaccrual  Allowance  Total  Performing  Nonaccrual  Allowance 
September 30, 2019                
December 31, 2019                
Commercial real estate                                
Owner occupied $3,938  $3,938  $-  $18  $3,502  $3,502  $-  $15 
Non-owner occupied  2,329   1,826   503   -   2,304   1,807   497   - 
  6,267   5,764   503   18   5,806   5,309   497   15 
Consumer real estate                                
Secured by 1-4 family residential                                
First deeds of trust  2,197   1,550   647   17   1,641   881   760   9 
Second deeds of trust  763   700   63   1   752   689   63   - 
  2,960   2,250   710   18   2,393   1,570   823   9 
Commercial and industrial loans (except those secured by real estate)  300   268   32   - 
Commercial and industrial loans                
(except those secured by real estate)  211   180   31   - 
 $9,527  $8,282  $1,245  $36  $8,410  $7,059  $1,351  $24 
                                
Number of loans  41   32   9   5   38   29   9   3 

 


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

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

 

  Three Months Ended  Three Months Ended 
  September 30, 2019  September 30, 2018 
     Pre-  Post-     Pre-  Post- 
     Modification  Modification     Modification  Modification 
  Number of  Recorded  Recorded  Number of  Recorded  Recorded 
  Loans  Balance  Balance  Loans  Balance  Balance 
Secured by 1-4 family residential                        
First deed of trust          -  $                 -  $                 -   1  $73  $73 
   -  $-  $-   1  $73  $73 
  Three Months Ended  Three Months Ended 
  June 30, 2020  June 30, 2019 
     Pre-  Post-     Pre-  Post- 
     Modification  Modification     Modification  Modification 
  Number of  Recorded  Recorded  Number of  Recorded  Recorded 
  Loans  Balance  Balance  Loans  Balance  Balance 
Commercial real estate                        
Owner occupied  1  $311  $311   -  $-  $- 
   1  $311  $311   -  $-  $- 

 

 Nine Months Ended Nine Months Ended  Six Months Ended  Six Months Ended 
 September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019 
   Pre- Post-   Pre- Post-     Pre- Post-     Pre- Post- 
   Modification Modification   Modification Modification     Modification Modification     Modification Modification 
 Number of Recorded Recorded Number of Recorded Recorded  Number of Recorded Recorded Number of Recorded Recorded 
 Loans  Balance  Balance  Loans  Balance  Balance  Loans  Balance  Balance  Loans  Balance  Balance 
Commercial real estate                                                
Owner occupied  1  $311  $311   -  $-  $- 
Non-owner occupied  1  $507  $507   -  $-  $-   -   -   -   1   515   515 
                                                
Secured by 1-4 family residential                                                
First deed of trust  -   -   -   1   73   73   -   -   -   1   73   73 
  1  $507  $507   1  $73  $73   1  $311  $311   2  $588  $588 

 

There were no defaults on TDRs that were modified as TDRs during the prior twelve month period ended SeptemberJune 30, 20192020 and 2018.2019.

 


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

 

 Allowance for Loan Losses     Provision for        
 (dollars in thousands)  Beginning (Recovery of)       Ending 
   Provision for        Balance  Loan Losses  Charge-offs  Recoveries  Balance 
 Beginning (Recovery of)     Ending 
 Balance  Loan Losses  Charge-offs  Recoveries  Balance 
Three Months Ended September 30, 2019                    
Three Months Ended June 30, 2020                    
Construction and land development                                        
Residential $31  $16  $-  $-  $47  $219  $(8) $-  $2  $213 
Commercial  159   2   -   -   161   270   25   -   -   295 
  190   18   -   -   208   489   17   -   2   508 
Commercial real estate                                        
Owner occupied  659   4   -   -   663   859   45   -   -   904 
Non-owner occupied  747   27   -   -   774   1,058   144   -   -   1,202 
Multifamily  85   5   -   -   90   68   (21)  -   -   47 
Farmland  2   -   -   -   2   1   (1)  -   -   - 
  1,493   36   -   -   1,529   1,986   167   -   -   2,153 
Consumer real estate                                        
Home equity lines  233   (13)  -   -   220   40   -   -   -   40 
Secured by 1-4 family residential                                        
First deed of trust  367   (1)  -   3   369   157   8   -   1   166 
Second deed of trust  60   (47)  -   55   68   76   (4)  -   3   75 
  660   (61)  -   58   657   273   4   -   4   281 
Commercial and industrial loans(except those secured by real estate)  385   (19)  -   6   372 
Commercial and industrial loans                    
(except those secured by real estate)  409   (110)  -   18   317 
Student loans  109   21   (23)  -   107   104   3   (6)  -   101 
Consumer and other  34   (9)  (7)  20   38   41   2   (3)  -   40 
Unallocated  176   14   -   -   190   142   217   -   -   359 
                                        
 $3,047  $-  $(30) $84  $3,101  $3,444  $300  $(9) $24  $3,759 

 

 Allowance for Loan Losses     Provision for        
 (dollars in thousands)  Beginning (Recovery of)       Ending 
   Provision for        Balance  Loan Losses  Charge-offs  Recoveries  Balance 
 Beginning (Recovery of)     Ending 
 Balance  Loan Losses  Charge-offs  Recoveries  Balance 
Three Months Ended September 30, 2018                    
Three Months Ended June 30, 2019                    
Construction and land development                                        
Residential $36  $46  $-  $-  $82  $46  $(21) $-  $6  $31 
Commercial  196   (31)  -   2   167   173   (15)  -   1   159 
  232   15   -   2   249   219   (36)  -   7   190 
Commercial real estate                                        
Owner occupied  719   (52)  -   -   667   710   (51)  -   -   659 
Non-owner occupied  567   47   -   -   614   692   55   -   -   747 
Multifamily  72   26   -   -   98   88   (3)  -   -   85 
Farmland  2   -   -   -   2   2   -   -   -   2 
  1,360   21   -   -   1,381   1,492   1   -   -   1,493 
Consumer real estate                                        
Home equity lines  237   92   (64)  -   265   240   (13)  -   6   233 
Secured by 1-4 family residential                                        
First deed of trust  476   (80)  -   2   398   395   (31)  -   3   367 
Second deed of trust  56   (8)  -   6   54   57   (3)  -   6   60 
  769   4   (64)  8   717   692   (47)  -   15   660 
Commercial and industrial loans(except those secured by real estate)  404   12   -   3   419 
Commercial and industrial loans                    
(except those secured by real estate)  352   11   -   22   385 
Student loans  91   33   (27)  -   97   121   8   (20)  -   109 
Consumer and other  30   13   (1)  2   44   30   8   (5)  1   34 
Unallocated  322   (98)  -   -   224   121   55   -   -   176 
                                        
 $3,208  $-  $(92) $15  $3,131  $3,027  $-  $(25) $45  $3,047 

 


   Provision for           Provision for        
 Beginning (Recovery of)     Ending  Beginning (Recovery of)       Ending 
 Balance  Loan Losses  Charge-offs  Recoveries  Balance  Balance  Loan Losses  Charge-offs  Recoveries  Balance 
Nine Months Ended September 30, 2019                    
Six Months Ended June 30, 2020                    
Construction and land development                                        
Residential $42  $(2) $-  $7  $47  $48  $162  $-  $3  $213 
Commercial  220   (61)  -   2   161   137   158   -   -   295 
  262   (63)  -   9   208   185   320   -   3   508 
Commercial real estate                                        
Owner occupied  673   (10)  -   -   663   671   233   -   -   904 
Non-owner occupied  673   101   -   -   774   831   371   -   -   1,202 
Multifamily  87   3   -   -   90   85   (38)  -   -   47 
Farmland  2   -   -   -   2   2   (2)  -   -   - 
  1,435   94   -   -   1,529   1,589   564   -   -   2,153 
Consumer real estate                                        
Home equity lines  244   (36)  -   12   220   271   (231)  -   -   40 
Secured by 1-4 family residential                                        
First deed of trust  385   (24)  -   8   369   343   (181)  -   4   166 
Second deed of trust  51   (48)  -   65   68   64   4   -   7   75 
  680   (108)  -   85   657   678   (408)  -   11   281 
Commercial and industrial loans(except those secured by real estate)  308   41   (15)  38   372 
Commercial and industrial loans                    
(except those secured by real estate)  572   (141)  (135)  21   317 
Student loans  121   63   (77)  -   107   108   19   (26)  -   101 
Consumer and other  34   (6)  (13)  23   38   30   11   (4)  3   40 
Unallocated  211   (21)  -   -   190   24   335   -   -   359 
                                        
 $3,051  $-  $(105) $155  $3,101  $3,186  $700  $(165) $38  $3,759 

 

   Provision for           Provision for        
 Beginning (Recovery of)     Ending  Beginning (Recovery of)       Ending 
 Balance  Loan Losses  Charge-offs  Recoveries  Balance  Balance  Loan Losses  Charge-offs  Recoveries  Balance 
Nine Months Ended September 30, 2018                    
Six Months Ended June 30, 2019                    
Construction and land development                                        
Residential $32  $49  $-  $1  $82  $42  $(18) $-  $7  $31 
Commercial  165   (3)  -   5   167   220   (63)  -   2   159 
  197   46   -   6   249   262   (81)  -   9   190 
Commercial real estate                                        
Owner occupied  624   43   -   -   667   673   (14)  -   -   659 
Non-owner occupied  500   (104)  -   218   614   673   74   -   -   747 
Multifamily  60   38   -   -   98   87   (2)  -   -   85 
Farmland  3   (1)  -   -   2   2   -   -   -   2 
  1,187   (24)  -   218   1,381   1,435   58   -   -   1,493 
Consumer real estate                                        
Home equity lines  268   60   (64)  1   265   244   (23)  -   12   233 
Secured by 1-4 family residential                                        
First deed of trust  502   (82)  (41)  19   398   385   (23)  -   5   367 
Second deed of trust  47   14   (45)  38   54   51   (1)  -   10   60 
  817   (8)  (150)  58   717   680   (47)  -   27   660 
Commercial and industrial loans(except those secured by real estate)  556   2   (314)  175   419 
Commercial and industrial loans                    
(except those secured by real estate)  308   59   (15)  33   385 
Student loans  108   76   (87)  -   97   121   41   (53)  -   109 
Consumer and other  27   31   (22)  8   44   34   5   (7)  2   34 
Unallocated  347   (123)  -   -   224   211   (35)  -   -   176 
                                        
 $3,239  $-  $(573) $465  $3,131  $3,051  $-  $(75) $71  $3,047 

 


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

     Provision for          
  Beginning  (Recovery of)        Ending 
  Balance  Loan Losses  Charge-offs  Recoveries  Balance 
Year Ended December 31, 2019                    
Construction and land development                    
Residential $42  $(1) $-  $7  $48 
Commercial  220   (85)  -   2   137 
   262   (86)  -   9   185 
Commercial real estate                    
Owner occupied  673   (2)  -   -   671 
Non-owner occupied  673   158   -   -   831 
Multifamily  87   (2)  -   -   85 
Farmland  2   -   -   -   2 
   1,435   154   -   -   1,589 
Consumer real estate                    
Home equity lines  244   50   (35)  12   271 
Secured by 1-4 family residential                    
First deed of trust  385   (56)  -   14   343 
Second deed of trust  51   (56)  -   69   64 
   680   (62)  (35)  95   678 
Commercial and industrial loans                    
(except those secured by real estate)  308   239   (64)  89   572 
Student loans  121   80   (93)  -   108 
Consumer and other  34   (3)  (26)  25   30 
Unallocated  211   (187)  -   -   24 
                     
  $3,051  $135  $(218) $218  $3,186 

The amount of the loan loss provision (recovery) is determined by an evaluation of the level of loans outstanding, the level of nonperforming 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 risk, loan loss experience, current loan portfolio quality, and 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 judgement, should be charged off. While management utilizes its best judgement 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 recorded a provision for loan losses of $700,000 for the six month period ended June 30 2020. The provision for loan losses was driven primarily by an increase in the qualitative factors as a result of the continued economic uncertainty surrounding COVID-19. The increase in the qualitative factors due to COVID-19 were a result of deterioration in local economic factors such as the higher levels of unemployment and the potential impact of elevated loan deferral requests. The Company believes the current level of allowance for loan loss reserves are adequate to cover anticipated losses. However, the full economic impact of the COVID-19 pandemic is currently unknown and the Company will continue to monitor our loan portfolio for loss indicators which may have the potential for further significant provisions for loan losses through 2020 and beyond. The Company recorded a provision for loan losses of $135,000 for the year ended December 31, 2019 because of an increase in the specific reserves associated with a relationship evaluated individually for impairment. The Company did not record a provision for loan losses for the six month period ended June 30, 2019 because of minimal net charge-offs, no significant changes in qualitative factors and stable asset quality.

 

The allowance for loan losses at each of the periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and the variability related to the factors used in calculation of the allowance. The allowance for loan losses included an unallocated portion of approximately $190,000, $211,000,$359,000, $24,000, and $224,000$176,000 at SeptemberJune 30, 2020, December 31, 2019, and June 30, 2019, December 31, 2018, and September 30, 2018, respectively.


21

 

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

 

 Recorded Investment in Loans  Recorded Investment in Loans 
 AllowanceLoans  Allowance  Loans 
 Ending
       Ending
       Ending       Ending      
 Balance  Individually  Collectively  Balance  Individually  Collectively  Balance  Individually  Collectively  Balance  Individually  Collectively 
As of September 30, 2019                        
Six Months Ended June 30, 2020                        
Construction and land development                                                
Residential $47  $-  $47  $7,803  $-  $7,803  $213  $-  $213  $8,067  $-  $8,067 
Commercial  161   -   161   26,038   310   25,728   295   -   295   23,809   294   23,515 
  208   -   208   33,841   310   33,531   508   -   508   31,876   294   31,582 
Commercial real estate                                                
Owner occupied  663   18   645   98,269   4,465   93,804   904   -   904   101,001   4,271   96,730 
Non-owner occupied  774   -   774   108,601   2,329   106,272   1,202   -   1,202   119,998   2,109   117,889 
Multifamily  90   -   90   14,101   -   14,101   47   -   47   9,880   -   9,880 
Farmland  2   -   2   164   -   164   -   -   -   65   -   65 
  1,529   18   1,511   221,135   6,794   214,341   2,153   -   2,153   230,944   6,380   224,564 
Consumer real estate                                                
Home equity lines  220   -   220   18,929   431   18,498   40   -   40   20,796   300   20,496 
Secured by 1-4 family residential                                                
First deed of trust  369   17   352   60,028   2,389   57,639   166   9   157   57,055   2,192   54,863 
Second deed of trust  68   1   67   11,505   849   10,656   75   -   75   11,012   891   10,121 
  657   18   639   90,462   3,669   86,793   281   9   272   88,863   3,383   85,480 
Commercial and industrial loans (except those secured by real estate)  372   1   371   40,345   1,259   39,086 
Commercial and industrial loans                        
(except those secured by real estate)  317   16   301   221,598   324   221,274 
Student loans  107   -   107   34,520   -   34,520   101   -   101   31,594   -   31,594 
Consumer and other  228   11   217   2,444   11   2,433   399   -   399   3,118   -   3,118 
                                                
 $3,101  $48  $3,053  $422,747  $12,043  $410,704  $3,759  $25  $3,734  $607,993  $10,381  $597,612 
                                                
Year Ended December 31, 2018                        
Year Ended December 31, 2019                        
Construction and land development                                                
Residential $42  $-  $42  $7,704  $747  $6,957  $48  $-  $48  $7,887  $-  $7,887 
Commercial  220   8   212   33,904   466   33,438   137   -   137   24,063   337   23,726 
  262   8   254   41,608   1,213   40,395   185   -   185   31,950   337   31,613 
Commercial real estate                                                
Owner occupied  673   25   648   98,153   5,162   92,991   671   15   656   98,353   3,503   94,850 
Non-owner occupied  673   -   673   95,034   2,588   92,446   831   -   831   116,508   2,304   114,204 
Multifamily  87   -   87   13,597   -   13,597   85   -   85   13,332   -   13,332 
Farmland  2   -   2   185   -   185   2   -   2   156   -   156 
  1,435   25   1,410   206,969   7,750   199,219   1,589   15   1,574   228,349   5,807   222,542 
Consumer real estate                                                
Home equity lines  244   -   244   20,675   684   19,991   271   -   271   21,509   300   21,209 
Secured by 1-4 family residential                                                
First deed of trust  385   20   365   57,410   3,257   54,153   343   9   334   55,856   1,830   54,026 
Second deed of trust  51   4   47   9,556   882   8,674   64   -   64   10,411   752   9,659 
  680   24   656   87,641   4,823   82,818   678   9   669   87,776   2,882   84,894 
Commercial and industrial loans (except those secured by real estate)  308   8   300   36,639   536   36,103 
Commercial and industrial loans                        
(except those secured by real estate)  572   135   437   45,074   346   44,728 
Student loans  121   -   121   39,315   -   39,315   108   -   108   33,525   -   33,525 
Consumer and other  245   9   236   2,258   9   2,249   54   -   54   2,621   -   2,621 
                                                
 $3,051  $74  $2,977  $414,430  $14,331  $400,099  $3,186  $159  $3,027  $429,295  $9,372  $419,923 

 


22

Note 6 – Deposits

 

Deposits as of SeptemberJune 30, 20192020 and December 31, 20182019 were as follows (dollars in thousands):

 

 September 30, 2019  December 31, 2018 
 Amount  %  Amount  %  June 30, 2020  December 31, 2019 
          Amount  %  Amount  % 
Demand accounts  147,969   31.0% $119,317   27.2%  212,434   36.6% $131,228   29.6%
Interest checking accounts  46,631   9.8%  49,188   11.2%  56,448   9.7%  48,427   10.9%
Money market accounts  113,061   23.7%  86,295   19.7%  143,177   24.7%  99,955   22.6%
Savings accounts  25,945   5.4%  28,693   6.5%  31,618   5.5%  26,396   6.0%
Time deposits of $250,000 and over  25,126   5.3%  24,160   5.5%  20,680   3.6%  22,327   5.0%
Other time deposits  118,707   24.8%  131,392   29.9%  115,438   19.9%  114,875   25.9%
                                
Total $477,439   100.0% $439,047   100.0% $579,795   100.0% $443,208   100.0%

 

Note 7 – Borrowings

 

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

 

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $1,354,000$1,802,000 in FHLB stock at SeptemberJune 30, 20192020 and $1,320,000$1,694,000 at December 31, 2018,2019, which is held at cost. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings are secured by the pledge of commercial, 1-4 family residential loans and investment securities. The Company had FHLB advances of $21,000,000$31,000,000 and $29,000,000 at SeptemberJune 30, 20192020 and December 31, 20182019, respectively, maturing through 2023.

 

The Company uses federal funds purchased and repurchase agreements for short-term borrowing needs. Securities sold under agreements to repurchase are classified as borrowings and generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The carrying value of these short term borrowing agreements was $5,317,000 at December 31, 2019. There were no borrowings against the lines at June 30, 2020.

We also have access to the Paycheck Protection Program Liquidity Facility (“PPPLF”) of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), from which applications for borrowings can be made. The Federal Reserve requires that PPP loans be pledged to secure any advances from the PPPLF. The Company currently has $45,120,000 in borrowings against the PPPLF and an unused borrowing capacity of $139,358,000 based on unpledged PPP loans available to secure any future borrowings. The Company has access to this facility until September 30, 20192020 at which time the Federal Reserve will no longer take requests for borrowings.

The Company’s unused lines of credit for future borrowings total approximately $48 million at June 30, 2020, which consists of $5.3 million available from the FHLB, $10 million on revolving bank line of credit, $7.8 million under secured federal funds agreements with third party financial institutions, and December 31, 2018.$25 million in repurchase lines of credit with third party financial institutions. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank of Richmond or the FHLB above the current lendable collateral value.

 

25

23

 

Note 8 – Leases

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

  September 30,
2019		 
Lease liabilities $1,123 
Right-of-use assets $1,113 
Weighted average remaining lease term  4.54 years 
Weighted average discount rate  2.98%

  For the Nine
Months Ended
 
  September 30,
2019		 
Lease cost    
Operating lease cost $320 
Total lease cost $320 

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

  As of
 
  September 30,
2019		 
Lease payments due    
Three months ending December 31, 2019 $105 
Twelve months ending December 31, 2020  416 
Twelve months ending December 31, 2021  277 
Twelve months ending December 31, 2022  120 
Twelve months ending December 31, 2023  44 
Twelve months ending December 31, 2024  48 
Thereafter  203 
Total undiscounted cash flows $1,213 
Discount  90 
Lease liabilities $1,123 

Cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2019 was $310,000. The Company adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Company measured lease expense in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 840. During the nine months ended September 30, 2018, the Company recognized lease expense of $320,000.

 

Note 98 – Trust preferred securities

 

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at SeptemberJune 30, 20192020 was 4.28%2.46%. 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 SeptemberJune 30, 20192020 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 unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at SeptemberJune 30, 20192020 was 3.53%1.71%. 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 SeptemberJune 30, 20192020 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 109 – Subordinated Debt

 

On March 21, 2018, the Company issued $5,700,000 of fixed-to-floating rate subordinated notes due March 31, 2028 in a private placement. The Company received $5,539,000 in net proceeds after deducting issuance costs. The subordinated notes accrue interest at a fixed rate of 6.50% for the first five years until March 31, 2023; thereafter, the subordinated notes will accrue interest at an annual floating rate equal to three-month LIBOR plus a spread of 3.73% until maturity or early redemption. The Company may redeem the subordinated notes in whole or in part, on or after March 31, 2023. The subordinated notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior indebtedness, whether secured or unsecured, including claims of depositors and general creditors, and rank equally in right of payment with any unsecured, subordinated indebtedness that the Company may incur in the future. The carrying value of the notes totaled $5,587,000$5,612,000 and $5,563,000$5,595,000 at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.

24

 

Note 1110 – Stock incentive plan

 

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

 


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

 

 Nine Months Ended September 30,  Six Months Ended June 30, 
 2019  2018  2020  2019 
   Weighted     Weighted       Weighted         Weighted      
   Average     Average       Average         Average      
   Exercise Fair Value Intrinsic   Exercise Fair Value Intrinsic     Exercise Fair Value Intrinsic     Exercise Fair Value Intrinsic 
 Options  Price  Per Share  Value  Options  Price  Per Share  Value  Options  Price  Per Share  Value  Options  Price  Per Share  Value 
Options outstanding, beginning of period  734  $25.63  $9.76      2,245  $24.17  $12.88      734  $25.63  $9.76       734  $25.63  $9.76     
Granted  -   -   -      -   -   -      -   -   -       -   -   -     
Forfeited  -   -   -      -   -   -      -   -   -       -   -   -     
Exercised  -   -   -      -   -   -      -   -   -       -   -   -     
Options outstanding, end of period 734  $25.63  $9.76 $  -   2,245  $24.17  $12.88 $  -   734  $25.63  $9.76  $-   734  $25.63  $9.76  $- 
Options exercisable, end of period 734              2,245            
Options exercisable,end of period  734                       734                      

 

During the third quarter of 2019, we granted certain officers 4,155 target performance-based restricted shares of common stock with a weighted average fair value of $33.82 on the date of grant. These performance awards have a two-year performance period beginning on January 2, 2020. The performance targets are based on return on tangible common equity and the adversely classified items ratio over the performance period with possible payouts ranging from 0% to 150% of the target awards.

During the third quarter of 2019, we granted certain officers 8,155 time-based restricted shares of common stock with a weighted average fair value of $33.82 on the date of grant. These restricted stock awards vest ratably over three years.

 

During the first quarter of 2018,2020, we granted certain officers 1,590750 time-based restricted shares of common stock with a weighted average fair market value of $32.42$42.99 per share on the date of grant. These restricted stock awards were scheduled to vest ratably over three years.a three-year period provided the officer is employed with the Company on the applicable vesting date.

 

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 12,110 and 25,02613,060 at SeptemberJune 30, 2019 and 2018, respectively.

2020. There were no non-vested restricted stock awards outstanding as of June 30, 2019. 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 non-vested share basedshare-based compensation arrangements granted under the stock incentive plan as of SeptemberJune 30, 2019 and 20182020 was $387,256 and $522,100, respectively. The time-based$271,600. As of June 30, 2020, the time based unrecognized compensation expense of $246,734$211,738 is expected to be recognized over a weighted average period 2.75of 2.07 years.


A summary There were no forfeitures for the period ended June 30, 2020. For the period ended June 30, 2019 there were forfeitures of changes in the Company’s non-vested8,074 shares of restricted stock awards for the nine months ended September 30, 2019 follows:awards.

  Shares  Weighted-
Average
Grant-Date
Fair-Value		  Aggregate
Intrinsic
Value		 
December 31, 2018  23,449  $32.46  $806,411 
Granted  12,310   33.82   423,341 
Vested  (18,567)  29.89   (638,519)
Forefited  (8,274)  27.98   (284,543)
Other  3,192   33.75   109,773 
             
September 30, 2019  12,110  $33.82  $416,463 

 

During the second quarter of 2019, the Company’s largest shareholder’s ownership exceeded 50% of the Company’s outstanding common stock, which triggered change in control provisions included in the Company’s stock incentive plans. The award agreements provided for the acceleration of the vesting of restricted stock awards and units in the event of a change in control, with the restricted stock units vesting at the maximum potential value of the awards. The vesting

25

A summary of changes in the Company’s non-vested restricted stock units was dependent uponawards for the Company meeting certain performance criteria over the vesting period, and the units included in the non-vested balance as of December 31, 2018 assumed the probable outcome of performance conditions was equal to the targeted potential value of the awards. The 3,192 shares included in the above table as other represent the incremental increase in shares that vested based on the restricted stock units vesting at the maximum potential value as opposed to the targeted potential value of the award.six months ended June 30, 2020 follows:

   Shares  Weighted-
Average Grant-
Date Fair-Value		  Aggregate
Intrinsic Value		 
December 31, 2019   12,310  $33.83  $380,133 
Granted   750   42.99   23,160 
Vested   -   -   - 
Forfeited   -   -   - 
Other   -   -   - 
June 30, 2020   13,060  $34.36  $403,293 

 

Stock-based compensation expense was approximately $396,000$129,000 and $136,000$374,000 for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.

 

Note 12 —11 – Fair value

 

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

 

ASC 820 establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

 

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

 

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

 

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

 


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

 

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Levels 1 and 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).

 


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

 

Loans held for sale: LoansDuring the first quarter of 2020, the Company elected to begin using fair value accounting for its entire portfolio of loans held for sale are carried at cost which approximates estimated fair value. Thesein accordance with ASC 820 - Fair Value Measurement and Disclosures. Fair value of the Company's loans currently consist of one-to-four family residential loans originatedheld for sale is based on observable market prices for similar instruments traded in the secondary market. Fairmortgage loan markets in which the Company conducts business. The Company's portfolio of loans held for sale is classified as Level 2. At December 31, 2019, these loans were carried at the lower of cost or estimated fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2).an aggregate basis as determined by outstanding commitments from investors. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

 

Derivative asset – IRLCs: Beginning with the first quarter of 2020, the Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company's IRLCs are classified as Level 2. The fair value of interest rate lock commitments was considered immaterial at December 31, 2019.

Derivative asset/liability – forward sale commitments: During the first quarter of 2020, the Company elected to begin using fair value accounting for its forward sales commitments related to IRLCs and LHFS. Best efforts sale commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All of the Company’s forward sale commitments are classified as Level 2.

Other Real Estate Owned (“OREO”):Owned: OREO assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Subsequently, OREO assets are carried at lower of cost or fair value less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

 

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

 


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

 

 Fair Value Measurement  Fair Value Measurement 
 at September 30, 2019 Using  at June 30, 2020 Using 
    Quoted Prices         Quoted Prices         
    in Active Other Significant    in Active Other Significant 
    Markets for Observable Unobservable    Markets for Observable Unobservable 
 Carrying Identical Assets Inputs Inputs  Carrying Identical Assets Inputs Inputs 
 Value  (Level 1)  (Level 2)  (Level 3)   Value  (Level 1)  (Level 2)  (Level 3) 
Financial Assets - Recurring                                
U.S. Government agency obligations $15,020  $-  $15,020  $- 
US Government Agencies $12,565  $-  $12,565  $- 
Mortgage-backed securities  25,673   -   25,673   -   17,650   -   17,650   - 
Subordinated debt  5,338   -   5,338   -   7,570   -   7,570   - 
Loans held for sale  17,761   -   17,761   - 
IRLC  174   -   174   - 
                
Financial Liabilities - Recurring                
Forward sales commitment  421   -   421   - 
                                
Financial Assets - Non-Recurring                                
Impaired loans  1,995   -   -   1,995   220   -   -   220 
Assets held for sale  536          -   -   536   514   -   -   514 
Other real estate owned  526   -   -   526   336   -   -   336 

 

  Fair Value Measurement 
  at December 31, 2018 Using 
     Quoted Prices
       
     in Active
  Other
  Significant
 
     Markets for
  Observable
  Unobservable
 
  Carrying
  Identical Assets
  Inputs
  Inputs
 
  Value  (Level 1)  (Level 2)  (Level 3) 
Financial Assets - Recurring                
U.S. Government agency obligations $13,851  $-  $13,851  $- 
Mortgage-backed securities  26,450   -   26,450   - 
Subordinated debt  3,952   -   3,452   500 
                 
Financial Assets - Non-Recurring                
Impaired loans  1,868         -   -   1,868 
Assets held for sale  554   -   -   554 
Other real estate owned  526   -   -   526 

  Fair Value Measurement 
  at December 31, 2019 Using 
     Quoted Prices       
     in Active  Other  Significant 
     Markets for  Observable  Unobservable 
  Carrying  Identical Assets  Inputs  Inputs 
  Value  (Level 1)  (Level 2)  (Level 3) 
Financial Assets - Recurring                
US Government Agencies $14,845  $-  $14,845  $- 
Mortgage-backed securities  25,302   -   25,302   - 
Subordinated debt  6,790   -   6,540   250 
                 
Financial Assets - Non-Recurring                
Impaired loans  1,468   -   -   1,468 
Assets held for sale  514   -   -   514 
Other real estate owned  526   -   -   526 

The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at SeptemberJune 30, 20192020 and December 31, 20182019 (dollars in thousands):

 

 June 30, 2020 
 September 30, 2019       Range 
 

Fair Value

 Valuation Unobservable Range
(Weighted		 Fair Value Valuation Unobservable (Weighted 
 

Estimate

  Techniques Input Average) Estimate Techniques Input Average) 
Impaired loans - real estate secured $1,995  Appraisal or Internal Valuation (1) 

Selling costs

 

Discount for lack of marketability and age of appraisal

 

6%-10% (7%)

 

 

 

6%-30% (10%)

 $220  

Appraisal (1) or Internal

Valuation (2)

 Selling costs  6%-10% (7%) 
               

Discount for lack of marketability and age of appraisal

  6%-30% (10%) 
            
Assets held for sale $536  Appraisal or Internal Valuation (1) 

Selling costs

 

Discount for lack of marketability and age of appraisal

 

6%-10% (7%)

 

 

 

6%-30% (15%)

 $514  

Appraisal (1) or Internal

Valuation (2)

 Selling costs  6%-10% (7%) 
            

Discount for lack of marketability and age of appraisal

  6%-30% (15%) 
            
Other real estate owned $526  Appraisal or Internal Valuation (1) Selling costs 6%-10% (7%) $336  

Appraisal (1) or Internal

Valuation (2)

 Selling costs  6%-10% (7%) 

 

 

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

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

 

  December 31, 2018
         Range
  Fair Value  Valuation Unobservable (Weighted
  Estimate  Techniques Input Average)
Impaired loans - real estate secured $1,868  Appraisal or Internal Valuation (1) 

Selling costs

 

Discount for lack of marketability and age of appraisal

 

6%-10% (7%)

 

 

 

6%-30% (10%)

        

  
Assets held for sale $554  Appraisal or Internal Valuation (1) 

Selling costs

 

Discount for lack of marketability and age of appraisal

 

6%-10% (7%)

 

 

 

6%-30% (15%)

           
Other real estate owned $526  Appraisal or Internal Valuation (1) Selling costs 6%-10% (7%)
(2)Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances

  December 31, 2019 
         Range 
  Fair Value  Valuation Unobservable (Weighted 
  Estimate  Techniques Input Average) 
Impaired loans - real estate secured $1,468  Appraisal (1) or Internal Valuation (2) Selling costs  6%-10% (7%) 
        

Discount for lack of marketability and age of appraisal

  6%-30% (10%) 
             
Assets held for sale $514  Appraisal (1) or Internal Valuation (2) Selling costs  6%-10% (7%) 
        

Discount for lack of marketability and age of appraisal

  6%-30% (15%) 
             
Other real estate owned $526  Appraisal (1) or Internal Valuation (2) Selling costs 6%-10% (7%) 

 

 

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

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

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

 

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

 


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

 

  September 30, December 31,    June 30,December 31,
   2019  2018    2020 2019
 Level in Fair          Level in Fair         
 Value Carrying Estimated Carrying Estimated  Value Carrying Estimated Carrying Estimated 
 Hierarchy Value  Fair Value  Value  Fair Value  Hierarchy Value  Fair Value  Value  Fair Value 
 (In thousands)   (In thousands)  
Financial assets                                  
Cash Level 1 $23,263  $23,263  $12,717  $12,717  Level 1 $11,361  $11,361  $19,967  $19,967 
Cash equivalents Level 2  23,195   23,195   6,826   6,826  Level 2  23,593   23,593   -   - 
Investment securities available for sale Level 2  46,031   46,031   43,753   43,753  Level 2  37,785   37,785   46,687   46,687 
Investment securities available for sale Level 3  -   -   500   500  Level 3  -   -   250   250 
Federal Home Loan Bank stock Level 2  1,354   1,354   1,320   1,320  Level 2  2,014   2,014   1,694   1,694 
Loans held for sale Level 2  14,503   14,503   6,128   6,128  Level 2  17,761   17,761   12,722   12,722 
Loans Level 3  420,752   418,809   412,562   409,939  Level 3  607,773   608,244   427,827   429,254 
Impaired loans Level 3  1,995   1,995   1,868   1,868  Level 3  220   220   1,468   1,468 
Assets held for sale Level 3  536   536   554   554  Level 3  514   514   514   514 
Other real estate owned Level 3  526   526   526   526  Level 3  336   336   526   526 
Bank owned life insurance Level 3  7,567   7,567   7,441   7,441  Level 3  7,706   7,706   7,612   7,612 
Accrued interest receivable Level 2  2,630   2,630   2,662   2,662  Level 2  3,508   3,508   2,597   2,597 
Interest rate lock commitments Level 2  174   174   -   - 
                                  
Financial liabilities                                  
Deposits Level 2  477,439   478,229   439,047   439,125  Level 2  579,795   580,533   443,208   443,645 
FHLB borrowings Level 2  21,000   21,295   21,000   21,093  Level 2  31,000   26,476   29,000   29,285 
Trust preferred securities Level 2  8,764   9,633   8,764   8,852  Level 2  8,764   9,847   8,764   9,812 
Other borrowings Level 2  5,587   5,587   5,563   5,563  Level 2  50,732   50,732   10,912   10,912 
Accrued interest payable Level 2  223   223   221   221  Level 2  221   221   221   221 
Forward sales commitment Level 2  421   421   -   - 

 

Note 1312 – 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 ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):

 

 Commercial Mortgage     Consolidated  Commercial Mortgage     Consolidated 
 Banking  Banking  Eliminations  Totals  Banking  Banking  Eliminations  Totals 
Three Months Ended September 30, 2019                
Three Months Ended June 30, 2020                
                                
Revenues                                
Interest income $5,879  $197  $(66) $6,010  $6,087  $136  $(30) $6,193 
Gain on sale of loans  -   2,200   -   2,200   -   2,804   -   2,804 
Other revenues  725   250   (52)  923   571   277   (60)  788 
Total revenues  6,604   2,647   (118)  9,133   6,658   3,217   (90)  9,785 
                                
Expenses                                
Provision for loan losses  300   -   -   300 
Interest expense  1,398   66   (66)  1,398   1,249   30   (30)  1,249 
Salaries and benefits  2,009   832   -   2,841   1,628   984   -   2,612 
Commissions  -   657   -   657   -   777   -   777 
Other expenses  1,821   278   (52)  2,047   1,605   302   (60)  1,847 
Total operating expenses  5,228   1,833   (118)  6,943   4,782   2,093   (90)  6,785 
                                
Income before income taxes  1,376   814   -   2,190   1,876   1,124   -   3,000 
Income tax expense  292   171   -   463   429   236   -   665 
Net income $1,084  $643  $-  $1,727  $1,447  $888  $-  $2,335 
                                
Total assets $561,453  $10,854  $(12,378) $559,929  $723,802  $12,716  $(13,872) $722,646 

  Commercial  Mortgage     Consolidated 
  Banking  Banking  Eliminations  Totals 
Three Months Ended June 30, 2019                
                 
Revenues                
Interest income $5,771  $124  $(24) $5,871 
Gain on sale of loans  -   1,477   -   1,477 
Other revenues  796   200   (53)  943 
Total revenues  6,567   1,801   (77)  8,291 
                 
Expenses                
Interest expense  1,319   24   (24)  1,319 
Salaries and benefits  2,848   853   -   3,701 
Commissions  -   472   -   472 
Other expenses  1,757   278   (53)  1,982 
Total operating expenses  5,924   1,627   (77)  7,474 
                 
Income before income taxes  643   174   -   817 
Income tax expense  143   37       180 
Net income $500  $137  $-  $637 
                 
Total assets $537,356  $10,911  $(11,733) $536,534 

 


 Commercial Mortgage     Consolidated  Commercial Mortgage     Consolidated 
 Banking  Banking  Eliminations  Totals  Banking  Banking  Eliminations  Totals 
Three Months Ended September 30, 2018                
Six Months Ended June 30, 2020                
                                
Revenues                                
Interest income $5,387  $98  $(5) $5,480  $11,677  $245  $(45) $11,877 
Gain on sale of loans  -   1,679   -   1,679   -   4,429   -   4,429 
Other revenues  609   186   (56)  739   1,304   473   (116)  1,661 
Total revenues  5,996   1,963   (61)  7,898   12,981   5,147   (161)  17,967 
                                
Expenses                                
Provision for loan losses  700   -   -   700 
Interest expense  1,047   5   (5)  1,047   2,506   45   (45)  2,506 
Salaries and benefits  2,080   848   -   2,928   3,836   1,799   -   5,635 
Commissions  -   623   -   623   -   1,215   -   1,215 
Other expenses  1,674   274   (56)  1,892   3,313   576   (116)  3,773 
Total operating expenses  4,801   1,750   (61)  6,490   10,355   3,635   (161)  13,829 
                                
Income before income taxes  1,195   213   -   1,408   2,626   1,512   -   4,138 
Income tax expense  233   47   -   280 
Income tax espense  588   317   -   905 
Net income $962  $166  $-  $1,128  $2,038  $1,195  $-  $3,233 
                                
Total assets $516,962  $9,476  $(14,119) $512,319  $723,802  $12,716  $(13,872) $722,646 

  Commercial  Mortgage     Consolidated 
  Banking  Banking  Eliminations  Totals 
Six Months Ended June 30, 2019                
                 
Revenues                
Interest income $11,417  $187  $(24) $11,580 
Gain on sale of loans  -   2,405   -   2,405 
Other revenues  1,571   312   (110)  1,773 
Total revenues  12,988   2,904   (134)  15,758 
                 
Expenses                
Interest expense  2,562   24   (24)  2,562 
Salaries and benefits  5,048   1,589   -   6,637 
Commissions  -   712   -   712 
Other expenses  3,640   515   (110)  4,045 
Total operating expenses  11,250   2,840   (134)  13,956 
                 
Income before income taxes  1,738   64   -   1,802 
Income tax espense  343   13   -   356 
Net income $1,395  $51  $-  $1,446 
                 
Total assets $537,356  $10,911  $(11,733) $536,534 

 

  Commercial  Mortgage     Consolidated 
  Banking  Banking  Eliminations  Totals 
Nine Months Ended September 30, 2019                
                 
Revenues                
Interest income $17,296  $384  $(90) $17,590 
Gain on sale of loans  -   4,605   -   4,605 
Other revenues  2,296   562   (162)  2,696 
Total revenues  19,592   5,551   (252)  24,891 
                 
Expenses                
Interest expense  3,960   90   (90)  3,960 
Salaries and benefits  7,057   2,421   -   9,478 
Commissions  -   1,369   -   1,369 
Other expenses  5,462   792   (162)  6,092 
Total operating expenses  16,479   4,672   (252)  20,899 
                 
Income before income taxes  3,113   879   -   3,992 
Income tax expense  633   186   -   819 
Net income $2,480  $693  $-  $3,173 
                 
Total assets $561,453  $10,854  $(12,378) $559,929 

32

 


  Commercial  Mortgage     Consolidated 
  Banking  Banking  Eliminations  Totals 
Nine Months Ended September 30, 2018                
                 
Revenues                
Interest income $15,197  $218  $(6) $15,409 
Gain on sale of loans  -   4,131   -   4,131 
Other revenues  1,756   492   (155)  2,093 
Total revenues  16,953   4,841   (161)  21,633 
                 
Expenses                
Interest expense  2,737   6   (6)  2,737 
Salaries and benefits  6,344   2,499   -   8,843 
Commissions  -   1,426   -   1,426 
Other expenses  5,277   819   (155)  5,941 
Total operating expenses  14,358   4,750   (161)  18,947 
                 
Income before income taxes  2,595   91   -   2,686 
Income tax expense  483   22   -   505 
Net income $2,112  $69  $-  $2,181 
                 
Total assets $516,962  $9,476  $(14,119) $512,319 


 

Note 1413 – Shareholders’ Equity and Regulatory Matters

 

Preferred Stock

 

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

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

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

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

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

During the second quarter of 2019, the Company received approval from state and federal regulators allowing the Bank to pay a special dividend to the Company for the purpose of servicing the trust preferred securities and subordinated debt. The Warrant expired on May 1, 2019.

 

Accumulated Other Comprehensive Income (Loss)

 

The following table presents the cumulative balances of the components of accumulated other comprehensive income, (loss), net of deferred taxes of $17,000$128,000 and $199,000$38,000 as of SeptemberJune 30, 20192020 and December 31, 20182019, respectively (in thousands):

 

  September 30,  December 31, 
  2019  2018 
Net unrealized gains (losses) on securities $112  $(696)
Net unrecognized losses on defined benefit plan  (47)  (53)
Total other comprehensive incom (loss) $65  $(749)
  June 30,  December 31, 
  2020  2019 
Net unrealized gains on securities $523  $186 
Net unrecognized losses on defined benefit plan  (40)  (44)
Total accumulated other comprehensive income $483  $142 

 


Regulatory Matters

 

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

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

 


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

The Company meets the eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement (the “SBHC Policy Statement”). On August 28, 2018, the Federal Reserve issued an interim final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which was signed into law on May 24, 2018 (the “EGRRCPA”), that expands the applicability of the SBHC Policy Statement to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules. As of SeptemberJune 30, 2019,2020, the Bank exceeded the minimum ratios under the Basel III Capital Rules.

 

The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act of 1950. To be well capitalized under these regulations, a bank must have the following minimum capital ratios: (1) a common equity Tier 1 capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least 8.0%; (3) a total risk-based capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%. As of SeptemberJune 30, 2019,2020, the Bank exceeded the minimum ratios to be classified as well capitalized.

 

On September 17, 2019, the federal bank regulators issued a final rule required by the EGRRCPA that permits qualifying banks and bank holding companies that have less than $10 billion of assets, like the Company and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or “CBLR”). Under the rule, which isbecame effective January 1, 2020, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework. [The CompanyIn April 2020, as required by the Coronavirus Aid, Relief, and Economic Security Act, which was passed in response to the COVID-19 pandemic, federal bank regulators issued two interim final rules related to the CBLR framework. One interim final rule provides that, as of the second quarter of 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. The Bank have decidedelected not to opt into the CBLR framework.framework as of June 30, 2020.

 


The capital amounts and ratios at SeptemberJune 30, 20192020 and December 31, 20182019 for the Bank are presented in the table below (dollars in thousands):

 

        For Capital       
  Actual  Adequacy Purposes  To be Well Capitalized 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
September 30, 2019                        
Total capital (to risk-weighted assets) Village Bank $53,879   12.63% $34,140   8.00% $42,676   10.00%
                         
Tier 1 capital (to risk-weighted assets) Village Bank  50,980   11.95%  25,605   6.00%  34,140   8.00%
                         
Leverage ratio (Tier 1 capital to average assets) Village Bank  50,980   9.35%  21,805   4.00%  27,257   5.00%
                         
Common equity tier 1 (to risk-weighted assets) Village Bank  50,980   11.95%  19,204   4.50%  27,739   6.50%
                         
                         
December 31, 2018                        
Total capital (to risk-weighted assets) Village Bank $49,926   12.46% $32,051   8.00% $40,064   10.00%
                         
Tier 1 capital (to risk-weighted assets) Village Bank  46,875   11.70%  24,038   6.00%  32,051   8.00%
                         
Leverage ratio (Tier 1 capital to average assets) Village Bank  46,875   9.15%  20,502   4.00%  25,628   5.00%
                         
Common equity tier 1 (to risk-weighted assets) Village Bank  46,875   11.70%  18,029   4.50%  26,042   6.50%

        For Capital       
  Actual  Adequacy Purposes  To be Well Capitalized 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
June 30, 2020                        
Total capital (to risk- weighted assets) Village Bank $61,060   13.69% $35,669   8.00% $44,587   10.00%
Tier 1 capital (to risk- weighted assets) Village Bank  57,301   12.85%  26,752   6.00%  35,669   8.00%
Leverage ratio (Tier 1 capital to average assets) Village Bank  57,301   8.61%  26,631   4.00%  33,289   5.00%
Common equity tier 1 (to risk- weighted assets) Village Bank  57,301   12.85%  20,064   4.50%  28,981   6.50%
December 31, 2019                        
Total capital (to risk- weighted assets) Village Bank $54,653   12.56% $34,807   8.00% $43,508   10.00%
Tier 1 capital (to risk- weighted assets) Village Bank  52,867   12.15%  26,015   6.00%  34,807   8.00%
Leverage ratio (Tier 1 capital to average assets) Village Bank  52,867   9.69%  21,823   4.00%  27,278   5.00%
Common equity tier 1 (to risk- weighted assets) Village Bank  52,867   12.15%  19,579   4.50%  28,280   6.50%

 


Note 1514 – Commitments and contingencies

 

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

 

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

 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

 

  September 30,  December 31, 
  2019  2018 
Undisbursed credit lines $77,086  $66,057 
Commitments to extend or originate credit  20,543   12,738 
Standby letters of credit  4,301   3,999 
         
Total commitments to extend credit $101,930  $82,794 

  June 30,  December 31, 
  2020  2019 
Undisbursed credit lines $96,863  $83,366 
Commitments to extend or originate credit  41,497   15,722 
Standby letters of credit  6,394   6,732 
Total commitments to extend credit $144,754  $105,820 

 

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

 

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

 

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

 

4036

 

Note 15 – Mortgage Banking and Derivatives

Loans held for sale. The Company, through the Bank’s mortgage banking subsidiary, the Mortgage Company, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. During the first quarter of 2020, the Company elected to begin using fair value accounting for its entire portfolio of loans held for sale (“LHFS”) in accordance with ASC 820 - Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business and totaled $17.8 million as of June 30, 2020, of which $17.6 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2. These loans were previously carried as of December 31, 2019 at the lower of cost or estimated fair value on an aggregate basis as determined by outstanding commitments from investors and totaled $12.7 million.

Interest Rate Lock Commitments and Forward Sales Commitments. The Company, through the Mortgage Company, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (“IRLCs”). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment). The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation.  The Company determines the fair value of IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at June 30, 2020, and totaled $174,000, with a notional amount of $41.5 million and total positions of 169. The fair value of IRLCs was considered immaterial at December 31, 2019. Changes in fair value are recorded as a component of mortgage banking income, net in the Consolidated Income Statement for the period ended June 30, 2020. The Company’s IRLCs are classified as Level 2. At June 30, 2020 and December 31, 2019, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

During the first quarter of 2020, the Company elected to begin using fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments is reported in “Other Liabilities” in the Consolidated Balance Sheet at June 30, 2020, and totaled $421,000, with a notional amount of $59.1 million and total positions of 250. The fair value of the forward sales commitments was considered immaterial at December 31, 2019.

 

Note 16 – Recent accounting pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. AtThe FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the FASB’s October 16, 2019 meeting,codification as well as other transition matters. Smaller reporting companies who file with the board amended the effective date of this ASU for many companies.   Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Allall other entities includingwho do not file with the Company, will beSEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. This guidance may result in material changes in the Company's accounting for credit losses on financial instruments.

 


In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework— - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modifyMeasurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements in Topic 820 to addon fair value measurements by requiring that Level 3 fair value disclosures regarding changes in unrealized gains and losses,include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty.measurements. Certain disclosure requirements in Topic 820 arewere also removed or modified. The amendments areASU 2018-13 was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted.Company on January 1, 2020. The Company does not expect the adoption of ASU 2018-13 todid not have a material impact on itsthe Company’s consolidated financial statements.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development governance, and documentation of systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

 

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

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, such as the Company, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2020-01 amends ASU 2016-01, which made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments in ASU 2020-01 clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, such as the Company, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.


In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has a team to assess ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In March 2020 (Revised in April 2020), various regulatory agencies, including the Federal Reserve and the FDIC, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of June 30 2020, the Company had a total of $3,528,000 in loans past due greater than 30 days of which $3,388,000 were rehabilitated student loans which have a 98% guarantee by the DOE of principal and interest. For more financial data and other information about loan deferrals refer to section, “Response to COVID-19” under Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. This interagency guidance is expected to have an impact on the Company’s financial statements; however, this impact cannot be quantified at this time.


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

 

Caution about forward-looking statements

 

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

 

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

 

·changes in assumptions underlying the establishment of allowances for loan losses, and other estimates;
·the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;
·the effects of future economic, business and market conditions;
·legislative and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;
·our inability to maintain our regulatory capital position;
·the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions despite security measures implemented by the Company;
·changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions we do business with;
·risks inherent in making loans such as repayment risks and fluctuating collateral values;
·changes in operations of the mortgage company as a result of the activity in the residential real estate market;
·exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;
·governmental monetary and fiscal policies;
·changes in accounting policies, rules and practices;
·reliance on our management team, including our ability to attract and retain key personnel;
·competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
·demand, development and acceptance of new products and services;
·problems with technology utilized by us;
·natural disasters, war, terrorist activities, pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which the Company operates;


·adverse effects due to COVID-19 on the Company and its customers, counterparties, employees, and third-party service providers, and the adverse impacts to our business, financial position, results of operations, and prospects;
·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.

 

Response to COVID-19

As the circumstances with the COVID-19 pandemic began to unfold, the Company rapidly mobilized over 80% of non-branch team members, went to drive-thru only at our branches with lobby access by appointment and actively began working with borrowers to defer loan payments for up to six months to allow the COVID-19 pandemic to stabilize and operations return to some level of normalcy. We believe that we are well positioned to weather the storm created by the COVID-19 pandemic and have built the balance sheet around a philosophy of prudent risk taking.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)

The Company was successful in getting SBA PPP funds out to our community under the Coronavirus Aid, Relief, Economic Security (“CARES”) Act, which was designed to protect jobs and provide economic relief to small business that were negatively impacted by the COVID-19 pandemic. Through June 30, 2020, the Bank had garnered approval for approximately $185 million in PPP loans; however, the final funded amount of loans may be lower as some borrowers may not finalize the closing process. The PPP loans provided essential funds to over 1,500 businesses and nonprofits and protected more than 20,000 jobs in our community. The processing fees we earn on these loans will help to support our loan deferral program and reserve building associated with the crisis. We expect that our community leadership during the crisis and our PPP lending activity will open the door to a number of new commercial and consumer banking relationships.

41

Supporting customers through payment deferrals

In response to the COVID-19 pandemic, we began deferring payments for up to six months for impacted customers. Below is a breakdown of the loan portfolio as of June 30, 2020 showing the percentage of loans deferred in each category (dollars in thousands):

  June 30,  Deferred Loans(2) 
Loan Type 2020(1)  Amount  Number 
C&I + Owner occupied commercial real estate $138,121   22.75%  9.66%
Nonowner occupied commercial real estate  129,943   30.88%  20.61%
Acquisition, development and construction  31,876   17.46%  1.53%
Total commercial loans  299,940   25.71%  10.08%
Consumer/Residential  88,863   7.53%  4.46%
Student  31,594   0.00%  0.00%
Other  3,118   0.74%  1.18%
Total loans $423,515   19.80%  6.60%

(1) The table excludes PPP loans of $184,478 as the inclusion of these loans dilutes the impact of the deferral program.
(2) The SBA is providing a financial reprieve to small business during the COVID-19 pandemic.  The SBA will automatically pay the principal, interest, and fees on current 7(a) loans for a period of six months. These loans have been excluded from the above metrics.

Below is a breakdown of a portion of the loan portfolio as of June 30, 2020 organized by industry showing the percentage of loans deferred in each category (dollars in thousands):

  June 30,  Deferred Loans(1) 
Select Industries 2020  Amount  Number 
Hotels $23,461   73.71%  62.50%
Food Service  22,594   35.75%  32.61%
Retail(2)  18,895   20.14%  5.77%
Medical and Child Care  11,844   35.13%  17.50%
Total $76,794   43.41%  16.67%
 
(1) The SBA is providing a financial reprieve to small business during the COVID-19 pandemic.  The SBA will automatically pay the principal, interest, and fees on current 7(a) loans for a period of six months. These loans have been excluded from the above metrics.
(2) Loans within this group include business such as grocery, convenience stores, drug stores, consumer durables, apparel, and personal services.

Liquidity Risk Management

Over the past eight years, the Company has worked to fund the balance sheet with core deposits and reserve wholesale funding capacity for short periods of rapid loan growth or for crises such as the current economic environment.

During the three month period ended March 31, 2020, the Company took aggressive measures to bolster its liquidity to ensure it could meet customer demands in the event customers made significant deposit withdrawals and fully drew on lines of credit. The Company increased liquid assets by $20,155,000, or 30.12% from $66,904,000 at December 31, 2019 to $87,079,000 at March 31, 2020 which was partially accomplished by raising an additional $3,733,000 in internet listing service time deposits, $15,000,000 in FHLB Advances and $6,136,000 in brokered time deposits, which were at zero at December 31, 2019.

During the three month period ended June 30, 2020 the Company did not experience excessive demand for deposit withdrawals or advances under lines of credit; however, the Company did experience significant growth in low cost relationship deposits (i.e. noninterest bearing, NOW, money market and savings) of $111,930,000 from the period ended March 31, 2020. This growth in low cost relationship deposits was the result of the Company converting a significant portion on non-customer PPP loan applicants into customers and the migration of customer funds from time deposits into money market deposits during the three month period ended June 30, 2020. The Company acquired $45,120,000 in funds through the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) during the three month period ended June 30, 2020 to support the origination of PPP loans.


As of June 30, 2020, the Company had on balance sheet liquid assets of $72,739,000 which the Company believes are sufficient to cover its current liquidity needs. However, if the need were to arise the Company could access liquidity of approximately $139,358,000 in PPPLF through September 30, 2020, it could pledge additional collateral to the FHLB in order to increase its available borrowing capacity up to 25% of assets, it could access the two federal funds lines of credit with correspondent banks totaling $15,000,000 for which there were no borrowings against the lines at June 30, 2020 and it could add additional funding through raising internet listing service and brokered time deposits.

Capital Risk Management

The Bank maintains a strong, well capitalized position with a common equity Tier 1 capital ratio of 12.85%, a Tier 1 risk-based capital ratio of 12.85%, a total risk-based capital ratio of 13.69% and a leverage ratio of 8.61% as of June 30, 2020. The most significant risk to capital as a result of the COVID-19 pandemic is the risk of default within our loan portfolio and the potential loan losses as a result of those defaults. The Company has taken several steps to mitigate this risk to our capital by building a diversified loan portfolio over the years to be capable of sustaining through a crisis, working with our customers during this time to defer loan payments for up to six months to allow time for economic stabilization and participating in the SBA PPP loan program to help provide much needed funds to our borrowers and the community. While there will be pressure on capital levels as a result of the COVID-19 pandemic, the Company believes the actions we are taking will protect our capital levels and allow the Company to support all stakeholders through this difficult time.

While the long-term economic impacts from the COVID-19 pandemic are unknown at this time, we believe that our culture of disciplined and conservative risk taking across the balance sheet has the Company well positioned to not only carry through the current crisis but to be a pillar of support for our employees, our customers, and our communities.

Results of operations

 

The following presents management’s discussion and analysis of the financial condition of the Company at SeptemberJune 30, 20192020 and December 31, 20182019 and the results of operations for the Company for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. The first six months of 2020 results of operations were negatively impacted by the deteriorating economic environment as a result of the COVID-19 pandemic, which resulted in the Company recognizing $700,000 in provision for loan losses. For more financial data and other information about the provision for loan losses refer to section, “Provision for Loan Losses” under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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 SeptemberJune 30, 2019,2020, the Company had net income and net income available to common shareholders of $1,727,000,$2,335,000, or $1.19$1.61 per fully diluted share, compared to net income of $1,128,000$637,000 or $0.79$0.44 per fully diluted share, for the same period in 2018.2019. For the ninesix months ended SeptemberJune 30, 2019,2020, the Company had net income of $3,173,000$3,233,000 or $2.20$2.22 per fully diluted share compared to net income of $2,181,000 and net income available to common shareholders of $2,068,000$1,446,000 or $1.44$1.01 per fully diluted share for the same period in 2018.2019.

 


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,  For the Three Months Ended June 30, 
 2019  2018  Change  2020  2019  Change 
 (dollars in thousands)  (dollars in thousands) 
Average interest-earning assets $509,690  $472,182  $37,508  $658,025  $483,163  $174,862 
Interest income $6,010  $5,480  $530  $6,193  $5,871  $322 
Yield on interest-earning assets  4.68%  4.60%  0.08%  3.79%  4.87%  (1.08)%
Average interest-bearing liabilities $367,503  $352,321  $15,182  $438,183  $356,396  $81,787 
Interest expense $1,398  $1,047  $351  $1,249  $1,319  $(70)
Cost of interest-bearing liabilities  1.51%  1.18%  0.33%  1.15%  1.48%  (0.33)%
Net interest income $4,612  $4,433  $179  $4,944  $4,552  $392 
Net interest margin  3.59%  3.72%  (0.13)%  3.02%  3.78%  (0.76)%

 

The increase in net interest income of $179,000$392,000 in the thirdsecond quarter of 20192020 was aprimarily the result of positive movements in interest income. Interest income increased by $530,000 with interest income on loans held for investment increasing by $304,000 and interest income on investment securities increasing by $30,000. The increase in interest income on loans held for investment was attributable to an increase in average loans outstanding of $9,838,000 and an increase in the yield of 17 basis points. Interest expense increased by $351,000 because of an increase in average interest bearing liabilities of $15,182,000 and an increase in the cost of interest bearing liabilities of 33 basis points.following:

 

  For the Nine Months Ended September 30, 
  2019  2018  Change 
  (dollars in thousands) 
Average interest-earning assets $488,603  $452,784  $35,819 
Interest income $17,590  $15,409  $2,181 
Yield on interest-earning assets  4.81%  4.55%  0.26%
Average interest-bearing liabilities $361,470  $340,838  $20,632 
Interest expense $3,960  $2,737  $1,223 
Cost of interest-bearing liabilities  1.46%  1.07%  0.39%
Net interest income $13,630  $12,672  $958 
Net interest margin  3.73%  3.74%  (0.01)%
·Interest income on loans held for investment increased by $377,000 compared to the same period in 2019 because of a $142,405,000 increase in the average balance outstanding which was partially offset by a decrease in the yield of 103 basis points. The increase in the average balance outstanding was mainly a result of the origination of $184,478,000 in PPP loans. The decrease in the yield was primarily because of the PPP loans carrying a stated interest rate of 1.00% and the 225 basis points drop in the Federal Reserve’s target federal funds rate from March 31, 2019.
·During the second quarter of 2020, the Company made the decision to carry a larger portion of its liquidity in federal funds sold in response to the economic crisis and to support the funding needs of its PPP loan originations. This increased liquidity earned a yield of eight basis points compared to 228 basis points during the same period in 2019.
·Interest expense on interest bearing liabilities decreased by $70,000 compared to the same period in 2019 because of a decrease in the cost of interest bearing liabilities of 33 basis points which was partially offset by an $81,787,000 increase in the average balance outstanding. The decrease in the cost of interest bearing liabilities was the result of a disciplined approached to pricing as well as continued success in growing lower costs relationship deposits. The increase in the average balance of interest bearing liabilities was the result of a $44,946,000 increase in the average balance of low cost relationship deposits and an increase of $41,538,000 in other borrowings due to the Company’s usage of the PPPLF. The PPPLF carried a balance of $45,120,000 as of June 30, 2020.


  For the Six Months Ended June 30, 
  2020  2019  Change 
  (dollars in thousands) 
Average interest-earning assets $580,031  $477,885  $102,146 
Interest income $11,877  $11,580  $297 
Yield on interest-earning assets  4.13%  4.89%  (0.76)%
Average interest-bearing liabilities $397,792  $355,388  $42,404 
Interest expense $2,506  $2,562  $(56)
Cost of interest-bearing liabilities  1.27%  1.45%  (0.18)%
Net interest income $9,371  $9,018  $353 
Net interest margin  3.25%  3.81%  (0.56)%

 

The increase in net interest income of $958,000$353,000 for the ninesix months ended SeptemberJune 30, 20192020 was aprimarily the result of positive movements in interest income. Interest income increased $2,181,000 with interest income on loans held for investment increasing by $1,797,000 and interest income on investments increasing by $72,000. The increase in interest income on loans held for investment was attributable to an increase in average loans outstanding of $25,729,000 and an increase in the yield of 28 basis points. The increase in interest income on securities was due to an increase in the yield of 39 basis points despite a decrease in average investment securities of $3,628,000. Interest expense increased by $1,223,000 as a result of an increase in average interest bearing liabilities of $20,632,000 and an increase in the cost of interest bearing liabilities of 39following:

·Interest income on loans held for investment increased by $335,000 compared to the same period in 2019 because of a $79,232,000 increase in the average balance outstanding which was partially offset by a decrease in the yield of 70 basis points. The increase in the average balance outstanding was mainly a result of the origination of $184,478,000 in PPP loans during the second quarter of 2020. The decrease in the yield was primarily because of the PPP loans carrying a stated interest rate of 1.00% and the 225 basis points drop in the Federal Reserve’s target federal funds rate from March 31, 2019.
·During the first half of 2020, the Company made the decision to carry a larger portion of its liquidity in federal funds sold in response to the economic crisis and to support the funding needs of its PPP loan originations. This increased liquidity earned a yield of 38 basis points compared to 250 basis points during the same period in 2019.
·Interest expense on interest bearing liabilities decreased by $56,000 compared to the same period in 2019 because of a decrease in the cost of interest bearing liabilities of 18 basis points which was partially offset by a $42,404,000 in the average balance outstanding. The decrease in the cost of interest bearing liabilities was the result of a disciplined approached to pricing as well as continued success in growing lower costs relationship deposits. The increase in the average balance of interest bearing liabilities was the result of a $31,855,000 increase in the average balance of low cost relationship deposits and an increase of $22,874,000 in other borrowings due to the Company’s usage of the PPPLF during the second quarter of 2020. The PPPLF carried a balance of $45,120,000 as of June 30, 2020.


 

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

 

Average Balance Sheets, Income and Expense, Yields and Rates

  Three Months Ended June 30, 2020  Three Months Ended June 30, 2019 
     Interest  Annualized     Interest  Annualized 
  Average  Income/  Yield  Average  Income/  Yield 
  Balance  Expense  Rate  Balance  Expense  Rate 
Loans net of deferred fees $562,751  $5,809   4.15% $420,346  $5,432   5.18%
Loans held for sale  15,758   136   3.47%  11,576   124   4.30%
Investment securities  38,657   240   2.50%  43,499   271   2.50%
Federal funds and other  40,859   8   0.08%  7,742   44   2.28%
Total interest earning assets  658,025   6,193   3.79%  483,163   5,871   4.87%
                         
Allowance for loan losses and deferred fees  (3,454)          (3,052)        
Cash and due from banks  10,057           8,456         
Premises and equipment, net  12,783           13,570         
Other assets  23,369           19,955         
Total assets $700,780          $522,092         
                         
Interest bearing deposits                        
Interest checking $53,882  $24   0.18% $48,606  $21   0.17%
Money market  126,178   245   0.78%  90,058   154   0.69%
Savings  27,024   11   0.16%  23,474   10   0.17%
Certificates  146,455   595   1.63%  151,152   724   1.92%
Total  353,539   875   1.00%  313,290   909   1.16%
Borrowings  84,644   374   1.78%  43,106   410   3.82%
Total interest bearing liabilities  438,183   1,249   1.15%  356,396   1,319   1.48%
Noninterest bearing deposits  209,876           121,901         
Other liabilities  6,033           4,584         
Total liabilities  654,092           482,881         
Equity capital  46,688           39,211         
Total liabilities and capital $700,780          $522,092         
                         
Net interest income     $4,944          $4,552     
                         
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities          2.65%          3.39%
                         
Annualized net interest margin (net interest income expressed as percentage of average earning assets)          3.02%          3.78%


46

 

Average Balance Sheets, Income and Expense, Yields and Rates

 

 Three Months Ended September 30, 2019  Three Months Ended September 30, 2018  Six Months Ended June 30, 2020  Six Months Ended June 30, 2019 
   Interest Annualized   Interest Annualized     Interest Annualized     Interest Annualized 
 Average Income/ Yield Average Income/ Yield  Average Income/ Yield Average Income/ Yield 
 Balance  Expense  Rate  Balance  Expense  Rate  Balance  Expense  Rate  Balance  Expense  Rate 
Loans net of deferred fees $421,522  $5,398   5.08% $411,684  $5,094   4.91% $497,181  $11,069   4.48% $417,949  $10,734   5.18%
Loans held for sale  19,998   196   3.89%  7,986   98   4.87%  13,440   245   3.67%  8,458   187   4.46%
Investment securities  45,038   284   2.50%  46,776   254   2.15%  41,710   510   2.46%  43,824   564   2.60%
Federal funds and other  23,132   132   2.26%  5,736   34   2.35%  27,700   53   0.38%  7,654   95   2.50%
Total interest earning assets  509,690   6,010   4.68%  472,182   5,480   4.60%  580,031   11,877   4.13%  477,885   11,580   4.89%
                                                
Allowance for loan losses and deferred fees  (3,068)          (3,197)          (3,319)          (3,050)        
Cash and due from banks  9,103           9,408           9,708           8,698         
Premises and equipment, net  12,177           12,726           12,877           13,679         
Other assets  20,974           20,674           21,463           20,017         
Total assets $548,876          $511,793          $620,760          $517,229         
                                                
Interest bearing deposits                                                
Interest checking $48,705  $22   0.18% $48,386  $22   0.18% $51,971  $45   0.17% $48,072  $41   0.17%
Money market  109,865   264   0.95%  83,742   97   0.46%  115,980   461   0.80%  89,559   292   0.66%
Savings  22,896   10   0.17%  24,441   11   0.18%  25,357   21   0.17%  23,822   20   0.17%
Certificates  150,558   745   1.96%  157,992   585   1.47%  142,082   1,248   1.77%  154,407   1,438   1.88%
Total  332,024   1,041   1.26%  314,561   715   0.90%  335,390   1,775   1.06%  315,860   1,791   1.14%
Borrowings  35,479   357   3.99%  37,760   332   3.49%  62,402   731   2.36%  39,528   771   3.93%
Total interest bearing liabilities  367,503   1,398   1.51%  352,321   1,047   1.18%  397,792   2,506   1.27%  355,388   2,562   1.45%
Noninterest bearing deposits  135,548           121,021           172,078           118,714         
Other liabilities  5,121           2,879           5,615           4,643         
Total liabilities  508,172           476,221           575,485           478,745         
Equity capital  40,704           35,642           45,275           38,484         
Total liabilities and capital $548,876          $511,863          $620,760          $517,229         
                                                
Net interest income before provision for loan losses     $4,612          $4,433          $9,371          $9,018     
                                                
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities          3.17%          3.42%          2.86%          3.44%
                                                
Annualized net interest margin (net interest income expressed as percentage of average earning assets)          3.59%          3.72%          3.25%          3.81%

 


47

Average Balance Sheets, Income and Expense, Yields and Rates

 

  Nine Months Ended September 30, 2019  Nine Months Ended September 30, 2018 
     Interest  Annualized     Interest  Annualized 
  Average  Income/  Yield  Average  Income/  Yield 
  Balance  Expense  Rate  Balance  Expense  Rate 
Loans net of deferred fees $419,153  $16,131   5.15% $393,424  $14,334   4.87%
Loans held for sale  12,347   384   4.16%  6,113   218   4.77%
Investment securities  44,233   848   2.56%  47,861   776   2.17%
Federal funds and other  12,870   227   2.36%  5,386   81   2.01%
Total interest earning assets  488,603   17,590   4.81%  452,784   15,409   4.55%
                         
Allowance for loan losses and deferred fees  (3,056)          (3,278)        
Cash and due from banks  8,835           10,276         
Premises and equipment, net  12,308           12,860         
Other assets  21,205           20,832         
Total assets $527,895          $493,474         
                         
Interest bearing deposits                        
Interest checking $48,285  $63   0.17% $48,194  $65   0.18%
Money market  96,402   556   0.77%  82,992   267   0.43%
Savings  25,510   30   0.16%  24,231   31   0.17%
Certificates  153,110   2,182   1.91%  155,034   1,642   1.42%
Total  323,307   2,831   1.17%  310,451   2,005   0.86%
Borrowings  38,163   1,129   3.96%  30,387   732   3.22%
Total interest bearing liabilities  361,470   3,960   1.46%  340,838   2,737   1.07%
Noninterest bearing deposits  124,387           113,204         
Other liabilities  3,554           2,917         
Total liabilities  489,411           456,959         
Equity capital  38,484           36,515         
Total liabilities and capital $527,895          $493,474         
                         
Net interest income before provision for loan losses     $13,630          $12,672     
                         
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities          3.35%          3.48%
                         
Annualized net interest margin (net interest income expressed as percentage of average earning assets)          3.73%          3.74%

 


Provision for (recovery of) loan losses

 

The amount of the allowance for loan losses 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, and 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 recorded a provision for loan losses of $300,000 and $700,000 for the three and six month periods ended June 30, 2020, respectively, as a result of growth in the loan portfolio and an increase in the qualitative factors due to the anticipated economic impact of COVID-19. The increase in the qualitative factors due to COVID-19 were a result of deterioration in local economic factors such as the higher levels of unemployment and the potential impact of elevated loan deferral requests. The Company believes the current level of allowance for loan loss reserves are adequate to cover anticipated losses. However, the full economic impact of the COVID-19 pandemic is currently unknown and the Company will continue to monitor our loan portfolio for loss indicators which may have the potential for further significant provisions for loan losses through 2020 and beyond. The Company did not record a provision for loan losses for the three and nine monthssix month period ended SeptemberJune 30, 2019 and 2018 because of minimal net charge-offs, no significant changes in qualitative factors and stable asset quality.

 

For more financial data and other information about the Allowanceallowance for loan losses refer to section, “Balance Sheet Analysis “ under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Note 5 “Loans and allowance for loan losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

 

Noninterest income

 

Noninterest income includes service charges and fees on deposit accounts, fee income related to loan origination, mortgage banking income, net, and gains and losses on securities available for sale. The most significant noninterest income item has been mortgage banking income, net, representing 72%81% and 68%61% for the three month periods ended SeptemberJune 30, 20192020 and 2018,2019, respectively, and 63%75% and 66%57% for the ninesix month periods ended SeptemberJune 30, 20192020 and 2018,2019, respectively.

 

 For the Three Months Ended       For the Three Months Ended      
 September 30,  Change  June 30,  Change 
 2019  2018  $  %  2020  2019  $  % 
 (dollars in thousands)  (dollars in thousands) 
Service charges and fees $557  $485  $72   14.8% $448  $541  $(93)  (17.2)%
Mortgage banking income, net  1,784   1,227   557   45.4%  2,288   1,196   1,092   91.3%
Gain on sale of SBA loans  -   136   (136)  100.0%
Other  125   83   42   50.6%  79   75   4   5.3%
Total noninterest income $2,466  $1,795  $671   37.4% $2,815  $1,948  $867   44.5%

48

The increase in noninterest income of $867,000 for the three months ended June 30, 2020, was the result of the following:

 

·ServiceDecrease of $93,000 in service charges and fees increased primarily because ofdue to lower transaction volumes during the growth in deposit transaction accounts andquarter due the implementation of an updated pricing structure for services and fees.COVID-19 pandemic.
·The $1,092,000 increase in mortgage banking income, net is a result of increased loan originations and sales compared to the prior year.
·Other income increased because ofyear due to the Company executing the sale of a Small Business Administration loan guaranteed strip and the sale of United States Department of Agriculture guaranteed loans producing a gain on sale of $43,000.


  For the Nine Months Ended       
  September 30,  Change 
  2019  2018  $  % 
  (dollars in thousands) 
Service charges and fees $1,556  $1,424  $132   9.3%
Mortgage banking income, net  3,767   3,164   603   19.1%
Gain on sale of investment securities  101   -   101   100.0%
Other  508   207   301   145.4%
Total noninterest income $5,932  $4,795  $1,137   23.7%

·Service charges and fees increased primarily because of the growth in deposit transaction accounts and the implementation of an updated pricing structure for services and fees.low rate environment.
·The Company made the decision not to sell any SBA loan guarantee strips during the second quarter of 2020, compared the recognition of $136,000 gain on sale during the same period in the prior year.

  For the Six Months Ended      
  June 30,  Change 
  2020  2019  $  % 
  (dollars in thousands) 
Service charges and fees $966  $999  $(33)  (3.3)%
Mortgage banking income, net  3,658   1,982   1,676   84.6%
Gain on sale of investment securities  12   101   (89)  (88.1)%
Gain on sale of SBA loans  86   228   (142)  (62.3)%
Other  153   156   (3)  (1.9)%
Total noninterest income $4,875  $3,466  $1,409   40.7%

The increase in noninterest income of $1,409,000 for the six months ended June 30, 2020, was the result of the following:

·The $1,676,000 increase in mortgage banking income, net is a result of a 21% increase inincreased loan origination volumeoriginations and sales compared to the prior year.year due to the low rate environment
·The Company sold approximately $7.9 million and $6.5 million in securities resulting in a gain of $12,000 in 2020 and $101,000 during the nine months ended September 30,in 2019.
·Other income increased becauseThe Company made the decision not to sell any SBA loan guarantee strips during the second quarter of 2020 which resulted in the Company executingrecognition of $86,000 for the salesix months ended June 30, 2020, compared to the recognition of Small Business Administration loan guaranteed strips and the sale of United States Department of Agriculture guaranteed loans producing a$228,000 gain on sale of $271,000.during the same period in the prior year.

 

Noninterest expense

 For the Three Months Ended       For the Three Months Ended      
 September 30,  Change  June 30,  Change 
 2019  2018  $  %  2020  2019  $  % 
 (dollars in thousands)  (dollars in thousands) 
Salaries and benefits $2,841  $2,928  $(87)  (3.0)% $2,612  $3,701  $(1,089)  (29.4)%
Occupancy  338   316   22   7.0%  313   323   (10)  (3.1)%
Equipment  208   228   (20)  (8.8)%  214   210   4   1.9%
Supplies  73   44   29   65.9%  53   42   11   26.2%
Professional and outside services  735   649   86   13.3%  725   754   (29)  (3.8)%
Advertising and marketing  82   77   5   6.5%  93   64   29   45.3%
Foreclosed assets, net  6   21   (15)  (71.4)%  (156)  5   (161)  (3220.0)%
FDIC insurance premium  -   82   (82)  (100.0)%  60   68   (8)  (11.8)%
Other operating expense  605   475   130   27.4%  545   516   29   5.6%
Total noninterest expense $4,888  $4,820  $68   1.4% $4,459  $5,683  $(1,224)  (21.5)%

49

The decrease in noninterest expense of $1,224,000 for the three months ended June 30, 2020, was the result of the following:

 

·The increasedecrease in professionalsalaries and outside services isbenefits was primarily driven by the resultdeferral of an increase$1,052,000 in customer accountssalary and transaction volumes comparedbenefits costs associated with the prior period.origination of over 1,500 PPP loans during the quarter, which was partially offset by increased salaries and benefits cost due to increased employee levels to support PPP originations. The deferred costs will be recognized over the life of the PPP loans as a component of interest income along with the origination fees. This level of deferred costs is not expected to be recognized in future quarters and the recognition of the deferred costs and fees will accelerate as PPP loans are forgiven or repaid.
·The decrease in foreclosed assets, net expense was the FDIC insurance premium is related to the receiptresult of the small bank credit fromsale of two foreclosed properties resulting in a gain of $175,000.

  For the Six Months Ended       
  June 30,  Change 
  2020  2019  $  % 
  (dollars in thousands) 
Salaries and benefits $5,635  $6,637  $(1,002)  (15.1)%
Commissions  639   672   (33)  (4.9)%
Occupancy  414   436   (22)  (5.0)%
Supplies  91   83   8   9.6%
Professional and outside services  1,440   1,563   (123)  (7.9)%
Advertising and marketing  171   122   49   40.2%
Foreclosed assets, net  (156)  7   (163)  (2328.6)%
FDIC insurance premium  120   158   (38)  (24.1)%
Other operating expense  1,054   1,004   50   5.0%
Total noninterest expense $9,408  $10,682  $(1,274)  (11.9)%

The decrease in noninterest expense of $1,274,000 for the six months ended June 30, 2020, was the result of the following:

·The decrease in salaries and benefits was primarily driven by the FDICdeferral of $1,052,000 in salary and benefits costs associated with the origination of over 1,500 PPP loans during the quarter.quarter ended June 30, 2020, which was partially offset by increased salaries and benefits cost due to increased employee levels to support PPP originations. The deferred costs will be recognized over the life of the PPP loans as a component of interest income along with the origination fees. This level of deferred costs is not expected to be recognized in future quarters and the recognition of the deferred costs and fees will accelerate as PPP loans are forgiven or repaid.

·The increasedecrease in other operatingforeclosed assets, net expense is primarily related to costs associated with loan originations during the quarter.


  For the Nine Months Ended       
  September 30,  Change 
  2019  2018  $  % 
  (dollars in thousands) 
Salaries and benefits $9,478  $8,843  $635   7.2%
Occupancy  1,010   991   19   1.9%
Equipment  644   658   (14)  (2.1)%
Supplies  156   147   9   6.1%
Professional and outside services  2,298   2,170   128   5.9%
Advertising and marketing  204   224   (20)  (8.9)%
Foreclosed assets, net  13   (53)  66   (124.5)%
FDIC insurance premium  158   238   (80)  (33.6)%
Other operating expense  1,609   1,563   46   2.9%
Total noninterest expense $15,570  $14,781  $789   5.3%

·The increase in salaries and benefits is primarilywas the result of the recognitionsale of $814,000two foreclosed properties resulting in a gain of additional compensation expense as a result of the triggering of change in control provisions included in the Company’s supplemental executive retirement plan and stock incentive plans, during the nine months ended September 30, 2019 as discussed in Note 11 “Stock incentive plan” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.$175,000.

·The change in expense related to foreclosed real estate was due to the recognition of a gain on sale during the nine months ended September 30, 2018. There were no sales of other real estate owned during the nine months ended September 30, 2019.
·The decrease in the FDIC insurance premium is related to the receipt of the small bank credit from the FDIC during the period.

Income taxes

 

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent difference and available tax credits. Income tax expense for the three and ninesix months ended SeptemberJune 30, 20192020 was $463,000$665,000 and $819,000,$905,000, respectively, resulting in an effective tax rate of 21.1%22.2% and 20.5%21.9%, respectively, compared to $280,000$180,000 and $505,000,$356,000 or 19.9%22.0% and 18.8%19.8%, for the same periods in 2018.2019. The higherincrease in the effective tax rate was primarily related to a reduction in the threetax credit received related to state taxes attributed to the Company and nine months ended September 30, 2019the mortgage banking segment. The Bank is primarily because of an increase in pre-taxnot subject Virginia income during those periods.taxes, and instead is subject to a franchise tax based on bank capital.

 

49

50

 

 

Balance Sheet Analysis

 

Investment securities

 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, all of our investment securities were classified as available for sale.

 

For more financial data and other information about investment securities refer to Note 4 “Investment Securities Available for Sale” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this FromForm 10-Q.

 

Loans

 

One of management’s objectives is to improve 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, loan type and loan size diversification in order to minimize credit concentration risk. Management also focuses on 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 82%58% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. We are 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 8%5% of the loan portfolio consists of rehabilitated student loans purchased by the Bank infrom 2014 to 2017 2016, 2015 and 2014 (see discussion following). The Company’s commercial and industrial loan portfolio represents approximately 10%36% 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.million; however, the increase in the portfolio during the quarter was the result of the Company originating $184,478,000 in PPP loans during the quarter, which are 100% guaranteed by the SBA. 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.

 


Loans classified by type as of SeptemberJune 30, 20192020 and December 31, 20182019 are as follows (dollars in thousands):

 

 September 30, 2019  December 31, 2018  June 30, 2020  December 31, 2019 
 Amount  %  Amount  %  Amount  %  Amount  % 
Construction and land development                                
Residential $7,803   1.85% $7,704   1.86% $8,067   1.33% $7,887   1.84%
Commercial  26,038   6.16%  33,904   8.18%  23,809   3.91%  24,063   5.60%
  33,841   8.01%  41,608   10.04%  31,876   5.24%  31,950   7.44%
Commercial real estate                                
Owner occupied  98,269   23.24%  98,153   23.68%  101,001   16.61%  98,353   22.91%
Non-owner occupied  108,601   25.69%  95,034   22.93%  119,998   19.74%  116,508   27.14%
Multifamily  14,101   3.34%  13,597   3.28%  9,880   1.63%  13,332   3.10%
Farmland  164   0.04%  185   0.04%  65   0.01%  156   0.04%
  221,135   52.31%  206,969   49.93%  230,944   37.99%  228,349   53.19%
Consumer real estate                                
Home equity lines  18,929   4.48%  20,675   4.99%  20,796   3.42%  21,509   5.01%
Secured by 1-4 family residential,                                
First deed of trust  60,028   14.20%  57,410   13.85%  57,055   9.38%  55,856   13.01%
Second deed of trust  11,505   2.72%  9,556   2.31%  11,012   1.81%  10,411   2.43%
  90,462   21.40%  87,641   21.15%  88,863   14.61%  87,776   20.45%
Commercial and industrial loans (except those secured by real estate)  40,345   9.54%  36,639   8.84%
Commercial and industrial loans                
(except those secured by real estate)  221,598   36.45%  45,074   10.50%
Guaranteed student loans  34,520   8.17%  39,315   9.49%  31,594   5.20%  33,525   7.81%
Consumer and other  2,444   0.57%  2,258   0.55%  3,118   0.51%  2,621   0.43%
                                
Total loans  422,747   100.0%  414,430   100.0%  607,993   100.0%  429,295   99.8%
Deferred fees and costs, net  754       713       (4,305)      764     
Less: allowance for loan losses  (3,101)      (3,051)      (3,759)      (3,186)    
                                
 $420,400      $412,092      $599,929      $426,873     

The Bank had $184,478,000 in PPP loans as of June 30, 2020, which have provided essential funds to approximately 1,500 businesses and nonprofits and protected more than 20,000 jobs in our community. The processing fees earned on the PPP loans will help to support the Bank’s loan deferral program and potential credit losses associated with the COVID-19 pandemic. Below is a breakdown of PPP loans by loan size including SBA fees earned as of June 30, 2020 (dollars in thousands):

Loan Size # of Loans  $ of Loans  $ SBA Fee 
< $350,000  1,403  $93,581  $4,426 
                $350,000 - $2 million  94   67,795   1,853 
 > $2 million  6   23,102   184 
Total  1,503  $184,478  $6,463 

 

For more financial data and other information about loans refer to Note 5 “Loans and allowance for loan losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

 

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. For more financial data and other information about loans refer to Note 5 “Loans and allowance for loan losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

51

 


Asset quality

 

The following table summarizes asset quality information at the dates indicated (dollars in thousands):

 

 September 30, December 31, September 30,  June 30, December 31, June 30, 
 2019  2018  2018  2020  2019  2019 
Nonaccrual loans $1,890  $2,259  $2,079  $1,831  $1,868  $1,746 
Foreclosed properties  526   526   548   336   526   526 
Total nonperforming assets $2,416  $2,785  $2,627  $2,167  $2,394  $2,272 
            
                        
Restructured loans (not included in nonaccrual loans above) $8,282  $8,672  $9,097  $7,201  $7,059  $8,714 
                        
Loans past due 90 days and still accruing(1) $2,909  $5,573  $6,661  $2,341  $2,567  $4,259 
                        
Nonperforming assets to loans(2)  0.57%  0.67%  0.63%  0.36%  0.56%  0.54%
                        
Nonperforming assets to total assets  0.43%  0.54%  0.51%  0.30%  0.44%  0.42%
                        
Allowance for loan losses to nonaccrual loans  164.11%  135.04%  150.60%  205.33%  170.57%  174.50%
            

 

 

(1)

(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.

Nonperforming assets totaled $2,167,000 at June 30, 2020, compared to $2,394,000 at December 31, 2019. Nonperforming assets at June 30, 2020 consisted primarily of $1,831,000 in nonaccrual loans, 90 days past due and still accruing are rehabilitated student loanswhich have a 98% guarantee by the DOE.

(2)Loans are net of unearned income and deferred cost.compared to $1,868,000 at December 31, 2019.

 

The following table presents an analysis of the changes in nonperforming assets for the ninesix months ended SeptemberJune 30, 20192020 (in thousands):

 

 Nonaccrual Foreclosed     Nonaccrual Foreclosed    
 Loans  Properties  Total  Loans  Properties  Total 
Balance December 31, 2018 $2,259  $526  $2,785 
Balance December 31, 2019 $1,868  $526  $2,394 
Additions  477   -   477   1,034   -   1,034 
Loans placed back on accrual  (618)  -   (618)  (910)  -   (910)
Transfers to OREO  -   -   -   -   -   - 
Repayments  (159)  -   (159)  (22)  -   (22)
Charge-offs  (69)  -   (69)  (139)  (17)  (156)
Sales  -   -   -   -   (173)  (173)
                        
Balance September 30, 2019 $1,890  $526  $2,416 
Balance June 30, 2020 $1,831  $336  $2,167 

 

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 $1,890,000$1,831,000 at SeptemberJune 30, 20192020 that were considered impaired, two loansone loan totaling $11,000$169,000 had a specific allowances for loan losses totaling $11,000.$16,000. This compares to $2,259,000$1,868,000 in nonaccrual loans at December 31, 20182019 of which three loansone loan totaling $17,000$135,000 had specific allowancesallowance for loan lossesloss of $17,000.$135,000. This loan was charged off during the six months ended June 30, 2020.

 

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $135,000$90,000 and $212,000$120,000 for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.

 

Deposits

 

Deposits as of SeptemberJune 30, 20192020 and December 31, 20182019 were as follows (dollars in thousands):

 

 September 30, 2019  December 31, 2018  June 30, 2020  December 31, 2019 
 Amount  %  Amount  %  Amount  %  Amount  % 
Demand accounts  147,969   31.0% $119,317   27.2%  212,434   36.6% $131,228   29.6%
Interest checking accounts  46,631   9.8%  49,188   11.2%  56,448   9.7%  48,427   10.9%
Money market accounts  113,061   23.7%  86,295   19.7%  143,177   24.7%  99,955   22.6%
Savings accounts  25,945   5.4%  28,693   6.5%  31,618   5.5%  26,396   6.0%
Time deposits of $250,000 and over  25,126   5.3%  24,160   5.5%  20,680   3.6%  22,327   5.0%
Other time deposits  118,707   24.8%  131,392   29.9%  115,438   19.9%  114,875   25.9%
                                
Total $477,439   100.0% $439,047   100.0% $579,795   100.0% $443,208   100.0%

 

Total deposits increased by $38,392,000,$136,587,000, or 8.7%30.8%, from $439,047,000$443,208,000 at December 31, 20182019 to $477,439,000$579,795,000 at SeptemberJune 30, 2019,2020. Variances of note are as compared to an increase of $25,242,000, or 6.12%, during the first nine months of 2018. Checking and savings accounts increased by $26,095,000, money market accounts increased by $26,765,000 and time deposits decreased by $11,719,000 during the first nine months of 2019. The cost of our interest-bearing deposits increased to 1.17% for the first nine months of 2019 compared to 0.86% for the first nine months of 2018.follows:

 

·Noninterest bearing demand account balances increased $81,206,000 from December 31, 2019, and represented 36.6% of total deposits at June 30, 2020 compared to 29.6% as of December 31, 2019. The increase in noninterest bearing deposits for the six month period ended June 30, 2020 was a result of the Bank converting a significant portion of non-customer PPP loan applicants into customers during the three month period ended June 30, 2020.

·Low cost relationship deposit accounts (i.e. interest bearing checking, money market, and savings) balances increased $56,465,000 from December 31, 2019, and represented 39.9% of total deposits at June 30, 2020 compared to 39.4% as of December 31, 2019. The increase was primarily a result of growth in accounts from accounts from non-customer PPP loan applicants and the migration of customer funds from time deposits.

·Time deposits decreased by $1,084,000 from December 31, 2019, and represented 23.5% of total deposits at June 30, 2020 compared to 30.9% as of December 2019. The decrease in time deposits is a result of our continued focus on building low cost relationship deposits and working to improve our deposits mix and cost of funds. Wholesale time deposits were $22,732,000 as of June 30, 2020 compared to $1,494,000 as of December 31, 2019. The increase in wholesale time deposits was a result of the Bank bolstering its liquidity position early in the second quarter of 2020 to help support its participation in the PPP loan program, and meet other liquidity needs that might arise during the economic crisis.


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 market conditions.


 

Borrowings

 

We utilize borrowings to supplement deposits to address funding or liability duration needs. For more financial data and other information about borrowings refer to Note 7 “Borrowings” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

 

Capital resources

 

Shareholders’ equity at SeptemberJune 30, 20192020 was $41,516,000$46,617,000 compared to $37,133,000$42,914,000 at December 31, 2018.2019. The $4.4$3.7 million increase in shareholders’ equity during the ninesix months ended SeptemberJune 30, 20192020 is primarily due to net income of $3,173,000.$3,233,000.

 

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,  June 30,  December 31, 
 2019  2018  2020  2019 
Tier 1 capital                
Total bank equity capital $52,204  $48,272  $57,784  $53,768 
Net unrealized (gain) loss on available-for-sale securities  (112)  696   (523)  (186)
Defined benefit postretirement plan  47   53   40   44 
Dissallowed deferred tax asset  (1,159)  (2,146)  -   (759)
Total Tier 1 capital  50,980   46,875   57,301   52,867 
                
Tier 2 capital                
Allowance for loan losses  3,101   3,051   3,759   3,186 
Tier 2 capital deduction  (202)  -   -   (1,400)
Total Tier 2 capital  2,899   3,051   3,759   1,786 
                
Total risk-based capital  53,879   49,926   61,060   54,653 
                
Risk-weighted assets $426,756  $400,639  $445,685  $435,082 
                
Average assets $545,134  $512,558  $665,774  $545,567 
                
Capital ratios                
Leverage ratio (Tier 1 capital to average assets)  9.35%  9.15%  8.61%  9.69%
Common equity tier 1 capital ratio (CET 1)  11.95%  11.70%  12.85%  12.15%
Tier 1 capital to risk-weighted assets  11.95%  11.70%  12.85%  12.15%
Total capital to risk-weighted assets  12.63%  12.46%  13.69%  12.56%
Equity to total assets  9.37%  9.42%  7.98%  10.00%


 

For more financial data and other information about capital resources, refer to Note 1413 “Shareholders’ Equity and Regulatory Matters” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

54

 

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 SeptemberJune 30, 2019,2020, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $92,489,000,$72,739,000, or 16.5%10.1% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately $8,140,000 of these securities are pledged against current and potential fundings.

 

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 SeptemberJune 30, 20192020 and $5,317,000 borrowings against the line at December 31, 2018.2019.

 

We are also a member of the Federal Home Loan Bank of Atlanta, (“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 SeptemberJune 30, 20192020 was $23.9$5.3 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.

We also have access to the Federal Reserve’s PPPLF, from which applications for borrowings can be made. The Federal Reserve requires that PPP loans be pledged to secure any advances from the PPPLF. The Company currently has $45,120,000 in borrowings against the PPPLF and an unused borrowing capacity of $139,358,000 based on unpledged PPP loans available to secure any future borrowings. The Company has access to this facility until September 30, 2020 at which time the Federal Reserve will no longer take requests for borrowings.

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 SeptemberJune 30, 2019,2020, we had commitments to originate $101,930,000$144,754,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at SeptemberJune 30, 2019.2020. Certificates of deposit scheduled to mature in the 12-month period ending SeptemberJune 30, 20202021 totaled $80,257,000.$82,737,000. 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.

56

 

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.

 

Impact of inflation and changing prices

 

The Company’s financial statements included herein have been prepared in accordance with GAAP, 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.

 

LIBOR and Other Benchmark Rates

 

Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021, central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (“IBOR”) and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates (“ARRs”) and could cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.

 

To facilitate an orderly transition from IBORs and other benchmark rates to ARRs, the Company has established a company-wide initiative led by senior management. The objective of this initiative is to identify and assess the Company’s exposure and develop an appropriate action plan to address prior to transition.

 


ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of SeptemberJune 30, 2019.2020. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 20192020 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. There were no changes in our internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 


PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

In the course of its operations, the Company may become a party to legal proceedings. There are no material pending legal proceedings to which the Company is party or of which the property of the Company is subject.

 

ITEM 1A – RISK FACTORS

 

The impacts of COVID-19, or the outbreak of another highly infectious or contagious disease, could adversely affect the Company’s business, financial condition and results of operations.

The Company’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. Since the beginning of January 2020, the COVID-19 outbreak has caused significant disruption in the financial markets both globally and in the United States. The continuing spread of COVID-19 and the related government actions to mandate or encourage quarantines and social distancing has resulted in a significant decrease in commercial activity nationally and in the Company’s markets, and may cause customers, vendors, and counterparties to be unable to meet existing payment or other obligations to the Company and the Bank.

The national public health crisis arising from the COVID-19 pandemic (and public expectations about it), combined with certain pre-existing factors, including, but not limited to, international trade disputes, inflation risks, and oil price volatility, could further destabilize the financial markets and the markets in which the Company operates. The resulting impacts on consumers, including the sudden increase in the unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services the Company offers, as well as the creditworthiness of potential and current borrowers. Borrower loan defaults that adversely affect the Company’s earnings correlate with deteriorating economic conditions, which, in turn, may impact borrowers’ creditworthiness and the Bank’s ability to make loans.

The use of quarantines and social distancing methods to curtail the spread of COVID-19 – whether mandated by governmental authorities or recommended as a public health practice – may adversely affect the Company’s operations as key personnel, employees and customers avoid physical interaction. In response to the COVID-19 pandemic, the Bank has been directing branch customers to use drive-thru windows and online banking services, and many employees are telecommuting. It is not yet known what impact these operational changes may have on the Company’s financial performance. The continued spread of COVID-19 (or an outbreak of a similar highly contagious disease) could also negatively impact the business and operations of third-party service providers who perform critical services for the Company’s business.

As a result, if COVID-19 continues to spread or the response to contain the COVID-19 pandemic is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, and results of operations.

Except as previously disclosed,set forth above, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC on March 29, 2019.16, 2020.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not applicable.


ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5 – OTHER INFORMATION

 

Not applicable.

 

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ITEM 6 – EXHIBITS

10.1Employment Agreement, dated July 28, 2020, by and between Village Bank and Trust Financial Corp. and James E. Hendricks, Jr. (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on July 31, 2020).

10.2Transition and Consulting Agreement, dated August 4, 2020, by and between Village Bank and Trust Financial Corp. and William G. Foster, Jr. (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on August 10, 2020).

 

31.1Certification of Chief Executive Officer

 

31.2Certification of Chief Financial Officer

 

32.1Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

101The following materials from the Village Bank and Trust Financial Corp. Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20192020 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

 


SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 VILLAGE BANK AND TRUST FINANCIAL CORP.
 
Date:November 12, 2019August 14, 2020By:/s/ William G. Foster, Jr.
 William G. Foster, Jr.
 President and Chief Executive Officer
 
 
Date:November 12, 2019August 14, 2020By:/s/ Donald M. Kaloski, Jr.
 Donald M. Kaloski, Jr.
 Executive Vice President and Chief Financial Officer

 

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