Dear Shareholder,
Thank you for your support in 2016. We are pleased with the progress we made during the year
and grateful for the diligent work of the Village team members who helped us to achieve so
much during 2016.
We grew core commercial and consumer loans (excludes acquired student and USDA
loans) by 13.6% in the product categories we are emphasizing strategically;
We increased low cost relationship deposits (checking, savings and money market
accounts) 13.6% by adding and building business and consumer relationships;
Village Bank Mortgage Corporation increased loans purchased by investors by 4.9%
leading to 21.4% growth in pretax earnings;
Nonperforming assets and classified assets were reduced by 47% and 32%,
respectively, so that our asset quality metrics now fall comfortably in line with our peer
group;
We sold our former headquarters building and terminated the last of the regulatory
agreements under which we were operating; and
Our stock price increased by 41% from December 31, 2015 to December 31, 2016 and
as of this writing sits at $27.30, an increase of 97% from the offering price in our rights
offering on March 27, 2015.
While we are pleased with our progress, we are intensely focused on the journey ahead.
Please take a moment to read the strategy section of our 10-K for information on both our
destination and our plans for getting there. During 2016, we made several strategic hires to
ensure that we have the talent and depth to accomplish our aspirations.
We restructured our executive team to consolidate risk, technology and operations
functions under Jay Hendricks, a proven leader in team building and exceptional
execution, to help ensure that we excel in these critical areas;
We hired Price Beazley, an innovative and agile technology leader from Capital One. As
our Chief Technology Officer, we believe he can help us develop differentiated strategies
for meeting the needs of our clients and team members;
We hired a talented digital marketing manager, Jim Dingus, to strengthen our marketing
team and extend our reach;
We hired Kim Branco, who brings extensive operations experience to help lead our
compliance and risk management function;
We successfully navigated a leadership transition in human resources and were
fortunate to attract Lindsay Cheatham to serve as Director of Human Resources. We
believe she has the expertise to help us attract, develop and inspire the talented team
members we will need to achieve our aspirations; and
We hired George Karousos, a seasoned mortgage industry leader in our market, to
succeed Jerry Mabry, who retired in January from his position as Village Bank Mortgage
Corporation President. Jerry leaves behind a legacy of success and a strong team. We
believe that George has the vision and skills to grow our mortgage banking team and
footprint, streamline processes, explore ways to better serve the mortgage needs of
bank clients, and increase margins in the business.
During 2017, we plan to:
Launch the ability to open deposit accounts and apply for consumer loans online;
Enhance the impact of our Customer Care Team by expanding staffing and upgrading
technology to deliver a world class customer contact center;
Launch updated websites for the Bank and the Mortgage Company;
Hire additional relationship managers to grow our commercial banking team;
Expand our consumer loan offerings with a portfolio residential mortgage product;
Implement an end to end paperless loan origination process in mortgage banking;
Implement a new junior loan officer program and make strategic loan officer hires in
mortgage banking to grow production;
Increase our digital marketing reach and brand building effectiveness by fully utilizing
social media platforms;
Achieve core loan and low cost deposit growth comparable to 2016;
Improve our efficiency ratio through a combination of productivity initiatives and revenue
growth;
Reduce the burden of preferred stock dividends on earnings available to common
shareholders by redeeming preferred shares as rapidly as we believe is prudent. In
February, we paid all accrued, unpaid dividends on the preferred stock and redeemed
688 shares. These actions alone will reduce preferred dividends in 2017 by $313,000,
or $.22 per common share, from what they otherwise would have been;
Commit to a strategy for serving the financial advisory and investment needs of our
consumer and business owner clients;
Prepare and position for successful growth through mergers and acquisitions that can
complement solid, sustainable organic growth; and
Continue to strengthen the value proposition for our Village teammates by helping them
to be fit to thrive on their journey through life. We plan to offer an enhanced 401k plan,
financial education and planning and wellness initiatives.
It seems that the list of tasks and priorities never gets shorter.
As we look to the future, we want to honor two members of our board of directors who have
made a lasting and positive difference for the Company.
Cal Esleeck passed away in October of 2016 after a short battle with cancer. Cal had an
accountant’s business savvy combined with a generous spirit. A proud Marine who served in
Vietnam, he had a great appreciation for the importance of confident and effective leadership
and was a trusted coach to more than one executive and board member. He was a founding
member of the Families of the Wounded Fund, a nonprofit that provides financial resources to
families of active duty wounded service members who are being treated at Richmond VA
Medical Center in Richmond. In honor of Cal’s lifelong efforts to serve others in our community,
we have created the Cal Esleeck community champion award in his honor. The “CAL Award”
will be awarded annually to recognize a Village team member who goes above and beyond to
generously invest his or her time and talents to make a difference in our community.
As announced earlier, Bill Chandler has chosen not to stand for reelection at this shareholder
meeting. Bill has made numerous important contributions as a director. With his engineering
and production background, he brings a focus on the critical details that drive performance. As
a successful business owner, he is always sensitive to the things that impact the customer
experience, and he cares deeply about how we invest in our people and at the same time hold
them accountable to our high expectations. Perhaps the most important qualities these two
gentlemen shared are their authenticity and their willingness to speak their minds on difficult
matters. We will dearly miss both of them.
We apologize for the lengthy report, but we believe that you deserve a comprehensive review of
our progress and our plans. Because we have included statements about our plans and
objectives for the future, you will notice below the forward-looking disclaimer that we would
typically include in our earnings press releases. Please join us at our annual shareholder
meeting on May 30th at 10:00 a.m. at Brandermill Country Club to hear more of our story. We
hope to see you there.
Regards,
William G. Foster
President and Chief Executive Officer
Craig D. Bell
Chairman, Board of Directors
Forward-Looking Statements
In addition to historical information, this letter 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.
Additional Information
This letter may be deemed to be solicitation material in respect of the Company’s 2017 annual
meeting of shareholders. The Company filed a definitive proxy statement with the Securities
and Exchange Commission (the “SEC”) on April 17, 2017 in connection with the annual
meeting. Shareholders are urged to read the proxy statement and any other relevant
documents that the Company files with the SEC because they will contain important
information. The Company, its directors and certain of its executive officers will be participants
in the solicitation of proxies from shareholders in connection with the annual meeting.
Information about the Company’s directors and executive officers is included in the proxy
statement. Investors and shareholders may obtain a copy of the proxy statement and other
documents filed by the Company free of charge from the SEC’s website at www.sec.gov.
Shareholders may obtain a copy of the proxy statement free of charge by writing to C. Harril
Whitehurst, Jr., Executive Vice President and Chief Financial Officer, whose address is P.O.
Box 330, Midlothian, Virginia, 23113-0330, or from the Company’s website at
www.villagebank.com.
[This page intentionally left blank.]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 0-50765
VILLAGE BANK AND TRUST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
16-1694602
(I.R.S. Employer
Identification No.)
13319 Midlothian Turnpike, Midlothian, Virginia 23113
(Address of principal executive offices) (Zip Code)
Issuer’s telephone number: 804-897-3900
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Common Stock, $4.00 par value
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer (Do not check if smaller reporting company)
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the Registrant’s
most recent completed second fiscal quarter was approximately $14,696,000.
The number of shares of common stock outstanding as of February 28, 2017 was 1,428,261.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be used in conjunction with the 2017 Annual Meeting of Shareholders are incorporated
by reference into Part III of this Form 10-K.
Village Bank and Trust Financial Corp.
Form 10-K
TABLE OF CONTENTS
Part I
Business ........................................................................................................ 3
Item 1.
Item 1A. Risk Factors ................................................................................................ 17
Item 1B. Unresolved Staff Comments ...................................................................... 17
Properties .................................................................................................... 17
Item 2.
Legal Proceedings ...................................................................................... 17
Item 3.
Item 4. Mine Safety Disclosures ............................................................................. 17
Part II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities .................................... 18
Selected Financial Data .............................................................................. 19
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition
And Results of Operations .......................................................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................... 50
Item 8.
Financial Statements and Supplementary Data ......................................... 50
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ................................................... 106
Item 9A. Controls and Procedures .......................................................................... 106
Item 9B. Other Information ...................................................................................... 106
Part III
Item 10. Directors, Executive Officers, and Corporate Governance ...................... 107
Item 11. Executive Compensation .......................................................................... 107
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters....................................... 107
Item 13. Certain Relationships and Related Transactions,
and Director Independence....................................................................... 107
Item 14. Principal Accounting Fees and Services .................................................. 107
Part IV
Item 15. Exhibits, Financial Statement Schedules ................................................. 108
Form 10-K Summary…………………………………………………………..110
Item 16
Signatures
................................................................................................................... 111
2
PART I
In addition to historical information, the following report contains forward-looking statements that are
subject to risks and uncertainties that could cause Village Bank and Trust Financial Corp.’s actual
results to differ materially from those anticipated. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management’s analysis only as of the date of the
report. For discussion of factors that may cause our actual future results to differ materially from those
anticipated, please see “ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS” herein.
ITEM 1. BUSINESS
Village Bank and Trust Financial Corp. (“Company”) was incorporated in January 2003 and was
organized under the laws of the Commonwealth of Virginia as a bank holding company. The Company
has three active wholly owned subsidiaries: Village Bank (the “Bank”), Southern Community Financial
Capital Trust I, and Village Financial Statutory Trust II. The Bank has one active wholly owned
subsidiary: Village Bank Mortgage Corporation (“the mortgage company”), a full service mortgage
banking company. The Company is the holding company of and successor to the Bank. Effective
April 30, 2004, the Company acquired all of the outstanding stock of the Bank in a statutory share
exchange transaction. Unless the context suggest otherwise, the terms “we”, “us” and “our” refer
collectively to the Company, the Bank, and the Mortgage Company.
The Bank is the primary operating business of the Company. The Bank offers a wide range of banking
and related financial services, including checking, savings, certificates of deposit and other depository
services, and commercial, real estate and consumer loans, primarily in the Richmond, Virginia
metropolitan area. The Bank was organized in 1999 as a Virginia chartered bank to engage in a
general banking business to serve the communities in and around Richmond, Virginia. Deposits with
the Bank are insured to the maximum amount provided by the Federal Deposit Insurance Corporation
(“FDIC”). The Bank offers a comprehensive range of financial services and products and specializes
in providing customized financial services to small and medium sized businesses, professionals, and
individuals. The Bank provides its customers with personal customized service utilizing the latest
technology and delivery channels.
Bank revenues are derived from interest and fees received in connection with loans, deposits, and
mortgage services. Administrative and operating expenses are the major expenses, followed by
interest paid on deposits and borrowings. Revenues from the mortgage company consist primarily of
gains from the sale of loans and loan origination fees and its major expenses consist of personnel,
occupancy, data processing, and other operating expenses. In 2016, revenue (after intercompany
eliminations) generated by the Bank totaled $19.5 million and the mortgage company generated $7.6
million in revenue.
Segment Reporting
In previous reports, the Company concluded that it had one operating and reportable segment,
“Community Banking”. This conclusion was based on the fact that the Company’s activities are
interrelated, and each activity is dependent and assessed based on how each of the activities supports
the others. The Company has re-assessed its segment reporting and decided to report two segments:
traditional commercial banking and mortgage banking, as management has changed the information
it reviews to make decisions. 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
3
transactions are eliminated in the consolidation process.
Business Strategy
We are implementing strategies that we believe will help us achieve our goal of delivering long-term
total shareholder returns that rank in the top quartile of a nationwide peer group. To achieve this goal,
we believe that we will need to become a top performer in return on equity, produce sustainable
earnings growth, achieve best quartile earnings volatility in our industry and deliver best quartile asset
quality in the worst part of the economic cycle. Our current business strategies include the following:
• Build full service banking relationships with high quality local companies by being problem
solvers and business builders, not just bankers. We will continue to build a team of
bankers and leaders who are both great bankers and exceptional business people. We
will have the capital, capabilities and connections to help business owners achieve their
goals and overcome obstacles to their success. We target win-win outcomes. We expect
to be disciplined lenders during the good times so that during difficult times we can support
our good clients, win high quality relationships and recruit talented bankers while other
banks focus on their own challenges. Real estate lending will continue to be an important
part of our business. We intend to be diligent in managing overall portfolio concentrations,
and we will focus on real estate sectors and sponsors that we expect to perform better
during difficult times. We will understand the needs and goals of our business clients and
their owners so that we can help them fulfill those needs and achieve those goals. We will
target deposit only relationships as actively as we will target full loan and deposit
relationships. Wherever possible and prudent, we will purchase products and services
from the companies that do business with us to support our clients and thank them for their
business.
• Build long-term, mutually beneficial banking relationships with individuals and families in
our market area. We will offer the basic financial products and services individuals and
families in our communities need backed by exceptionally professional and caring
service. We offer convenience and flexibility through in person, online, mobile and
telephonic options for enrolling in new services, handling transactions and seeking
service. We want to help our clients thrive on their journey through life. Through our own
team members and business partners, we will help clients develop plans for handling the
big moments they will encounter along the way. We will be experts at using technology to
understand our clients and our markets, serving their needs and growing our business.
• Grow Village Bank Mortgage Corporation’s profitability and positive contribution to our
brand. We intend to add loan officers and production teams, more fully identify and serve
the mortgage needs of bank clients, fully leverage available grant programs, introduce
portfolio mortgage products, enhance our marketing efforts and streamline our
processes. We plan to continue to treat mortgage banking as a specialty line of
business. We will continue to differentiate ourselves by treating the homeowners who
work with us to exceptionally professional and caring service.
•
Improve the economics of our balance sheet, income statement and business model:
o Expand our Net Interest Margin by improving the mix of both assets and funding.
We will improve the mix of our assets by growing core loans, allowing guaranteed
student loans to run off and operating with a loan to earning assets mix at the
higher end of industry peers. We intend to improve our funding mix by developing
deposit relationships that produce low cost transaction deposits.
Improve asset productivity by increasing the proportion of earning assets to total
assets.
o
o Build and grow other non-interest income services to leverage our return on assets
(“ROA”) and return on equity (“ROE”).
4
o Streamline and rationalize our processes and organization to improve productivity
and efficiency.
Include a prudent amount of debt in our holding company capital structure to
leverage a strong ROA into an even stronger ROE.
o
• Achieve excellence in risk management. We strive to achieve best quartile performance
on credit quality metrics in the worst part of the business cycle and sustainable earnings
growth over the long term. Risk taking is a fundamental part of banking. Top performing
banks are very good at identifying, understanding, measuring, monitoring, managing,
mitigating and getting paid for the risks the organization takes. We are committed to
building and sustaining the culture, talent, tools, policies, processes and discipline needed
to be a top performer in our risk management functions.
• Be the place where exceptional people want to work. We are committed to achieving great
things and need teammates who share that commitment. We will sustain our fun, fulfilling
and rewarding work environment built on trust and teamwork. We know that we will
achieve our goals by fielding a team of champions, not by building our business around
individual stars. We are a meritocracy where every individual knows he or she can make
a difference every day, where their individual contributions are valued, where we invest in
our teammates, and where we hold people accountable. We will invest in technology to
leverage the talents of our associates and provide the flexibility to allow them to manage
their work and life priorities effectively. We will offer benefits and resources intended to
help our team members be fit to thrive on their journey through life. When we make difficult
business decisions, we will do so with sensitivity to and understanding of the
consequences of those decisions.
• Make a lasting difference in our communities. We will invest our work, wisdom and wealth
to help our communities prepare young people for success in life, help families navigate
the complex maze of modern life and support and honor the individuals who serve and
protect us. We believe that we can be particularly effective in serving our many
stakeholders by being a leader in education and workforce development initiatives in our
community because success in these areas will help individuals and families provide for
themselves and will provide businesses with the talented employees they need to grow
and prosper.
We strongly believe that there is a continuing need for banks like Village with deep community roots
and that a well-run community based bank can generate attractive returns for shareholders over the
long term.
Market Area
The Company, the Bank, and the mortgage company are headquartered in Chesterfield County and
primarily serve the Central Virginia region and the Richmond Metropolitan Statistical Area (the
“Richmond MSA”). At the end of 2015, the Richmond MSA was the nation’s 45th largest metro area.
At the end of 2016, its population was 1,269,129 representing approximately 15% of the total
population in the Commonwealth of Virginia with a median age of 38.2 years.
The unemployment rate for Richmond MSA was 4.1% in December 2016 compared to 4.1% for the
Commonwealth of Virginia and 4.7% for the nation. At December 31, 2015 the unemployment rate for
Richmond MSA was 4.1%, 4.2% for the Commonwealth of Virginia and 5.0% for the nation.
Banking Services
We currently conduct business from ten full-service branch banking offices, two offsite ATMs and two
mortgage loan production offices in Central Virginia in the counties of Chesterfield, Hanover, Henrico
and Powhatan. We also have a mortgage loan production office in Manassas, Virginia.
5
Deposit Services. Deposits are a major source of our funding. The Bank offers a full range of deposit
services that are typically available in most banks and other financial institutions including checking
accounts, savings accounts and other time deposits of various types, ranging from daily money market
accounts to longer term certificates of deposit and Individual Retirement Accounts. These deposit
accounts are offered at rates competitive with other institutions in our market area. We service our
deposit clients in our full-service branches, at drive-up windows, at our ATMs, through our customer
care team and through technology such as online banking, mobile banking applications and remote
deposit capture for business clients. We have not applied for permission to establish a trust
department and offer trust services. The Bank is not a member of the Federal Reserve System.
Deposits are insured under the Federal Deposit Insurance Act to the limits provided thereunder.
Lending Services. We offer a full range of short-to-medium term commercial and personal loans. We
also provide a wide range of real estate finance services. Our primary focus is on making loans in the
Central Virginia market where we have branch banking offices. We also originate mortgage loans for
sale in our Northern Virginia mortgage loan production office. We will periodically offer residential
construction-to-permanent financing to clients of the mortgage company.
• Commercial Business Lending. We make secured and unsecured loans to small- and medium-
sized businesses for purposes such as funding working capital needs (including inventory and
receivables), business expansion (including acquisition of real estate and improvements) and
purchase of equipment and machinery. We also make loans under Small Business Administration
and state sponsored business loan programs. In our underwriting, we evaluate the earnings and
cash flows of the business, guarantor support and both the need for and the protection offered by
the collateral for the loan.
• Commercial Real Estate Acquisition, Development, Construction and Mortgage Lending. We
make loans to our clients for the purposes of acquiring, developing, constructing and owning
commercial real estate. These properties may be owner-occupied or may be held for investment
purposes and repaid from rental income or from the sale of the property.
• Consumer Lending. Consumer loans include secured and unsecured loans for financing
automobiles, home improvements, education and personal investments. We also originate fixed
and variable rate mortgage loans and real estate construction and acquisition loans. Residential
loans originated by our mortgage company are usually sold in the secondary mortgage market.
• Loan Participations. We sell loan participations in the ordinary course of business when a loan
originated by us exceeds our legal lending limit or we otherwise deem it prudent to share the risk
with another lending institution. Additionally, we purchase loan participations from other banks,
usually without recourse against that bank. We underwrite purchased loan participations in
accordance with normal underwriting practices.
• Loan Purchases. We purchase Federal Rehabilitated Student Loan portfolios when approved by
the Board of Directors. These loans are guaranteed by the U.S. Department of Education (“DOE”)
which covers approximately 98% of the principal and interest. These loans are serviced by a third
party servicer that specializes in handling these types of loans.
We also purchase the guaranteed portion of United State Department of Agriculture Loans
(“USDA”) which are guaranteed by the USDA for 100% of the principal and interest. The
originating institution holds the unguaranteed portion of the loan and services the loan. These
loans are typically purchased at a premium. In the event of a loan default or early prepayment the
Bank may need to write off any unamortized premium.
Lending Limit. As of December 31, 2016, our legal lending limit for loans to one borrower was
approximately $7,384,000. However, we generally limit credit to any one individual or entity to a
maximum of $4,000,000.
6
Competition
We encounter strong competition from other local commercial banks, credit unions, mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance companies, money market
mutual funds and other financial institutions. A number of these competitors are well-established.
Competition for loans is keen, and pricing is important. Most of our competitors have substantially
greater resources and higher lending limits than ours and offer certain services, such as extensive and
established branch networks and trust services, which we do not provide at the present time. Deposit
competition also is strong, and we may have to pay higher interest rates to attract deposits. Nationwide
banking institutions and their branches have increased competition in our markets, and federal
legislation adopted in 1999 allows non-banking companies, such as insurance and investment firms,
to establish or acquire banks. We believe that the Company can capitalize on recent merger activity
to attract customers from the acquired institutions.
At June 30, 2016, the latest date such information is available from the FDIC, the Bank’s deposit
market share in Chesterfield County was 4.89%, 4.06% in Hanover County, 7.42% in Powhatan
County, 0.38% in the Richmond MSA and 0.08% in Henrico County.
Regulation
We are subject to extensive regulation by certain federal and state agencies and receive periodic
examinations by those regulatory authorities. As a consequence, our business is affected by state
and federal legislation and regulations.
General. The discussion below is only a summary of the principal laws and regulations that comprise
the regulatory framework applicable to us. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport to be complete and
are qualified in their entirety by reference to applicable laws and regulations. In recent years,
regulatory compliance by financial institutions such as ours has placed a significant burden on us both
in costs and employee time commitment.
Bank Holding Company. The Company is a bank holding company under the federal Bank Holding
Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the “Federal Reserve”) and Virginia Bureau of Financial
Institutions (the “BFI”). As a bank holding company, the Company is required to furnish to the Federal
Reserve annual and quarterly reports of its operations and such additional information as the Federal
Reserve may require. The Federal Reserve, FDIC and BFI also may conduct examinations of the
Company and/or the Bank.
Bank Regulation. As a Virginia-chartered bank that is not a member of the Federal Reserve, the
Bank is subject to regulation, supervision and examination by the BFI and the FDIC. Federal and state
law also specify the activities in which the Bank may engage, the investments it may make and the
aggregate amount of loans that may be granted to one borrower. Various consumer and compliance
laws and regulations also affect the Bank’s operations. Earnings are affected by general economic
conditions, management policies and the legislative and governmental actions of various regulatory
authorities, including those referred to above. The BFI and the FDIC conduct regular examinations,
reviewing such matters as the overall safety and soundness of the institution, the adequacy of loan
loss reserves, quality of loans and investments, management practices, compliance with laws, and
other aspects of the Bank’s operations. In addition to these regular examinations, the Bank must
furnish the FDIC and BFI with periodic reports containing a full and accurate statement of its affairs.
Supervision, regulation and examination of banks by these agencies are intended primarily for the
protection of depositors rather than shareholders.
Prior Agreements with Regulators. In February 2012, the Bank entered into a Stipulation and
Consent to the Issuance of a Consent Order with the FDIC and BFI (the “Supervisory Authorities”),
and the Supervisory Authorities issued the related Consent Order effective February 3, 2012 (the
“Consent Order”). In June 2012, the Company entered into a similar written agreement (the “Written
7
Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve Bank”). As a result of the
steps the Company and the Bank took to, among other things, improve asset quality, increase capital,
augment management and board oversight, and increase earnings, the Consent Order was terminated
effective December 14, 2015. In place of the Consent Order, the Bank’s Board of Directors made
certain written assurances to the Supervisory Authorities in the form of a Memorandum of
Understanding (“MOU”) that became effective November 17, 2015. Due to further improvements by
the Company and the Bank in asset quality and earnings, and the correction of a prior Regulation W
violation, the MOU was terminated effective May 12, 2016, and the Written Agreement was terminated
effective July 28, 2016. With the terminations of the MOU and the Written Agreement, neither the
Company nor the Bank is under any formal or informal agreements with its regulators.
The following description summarizes some of the laws and regulations to which we are subject.
The Dodd-Frank Wall Street Reform and Consumer Protection Act. In July 2010, the Dodd-Frank
Act Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law,
incorporating numerous financial institution regulatory reforms. Certain of these reforms are yet to be
implemented through regulations to be adopted by various federal banking and securities regulatory
agencies. The following discussion describes the material elements of the regulatory framework that
currently apply. The Dodd-Frank Act implements far-reaching reforms of major elements of the
financial landscape, particularly for larger financial institutions. Many of its provisions do not directly
impact community-based institutions like the Bank. For instance, provisions that regulate derivative
transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision
of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit
proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital
are among the provisions that do not directly impact the Bank either because of exemptions for
institutions below a certain asset size or because of the nature of the Bank’s operations. Provisions
that do impact the Bank include the following:
• FDIC Assessments. The Dodd-Frank Act changes the assessment base for federal deposit
insurance from the amount of insured deposits to average consolidated total assets less its
average tangible equity. In addition, it increases the minimum size of the Deposit Insurance
Fund (“DIF”) and eliminates its ceiling, with the burden of the increase in the minimum size on
institutions with more than $10 billion in assets.
• Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 limit for federal
•
deposit insurance at all insured depository institutions.
Interest on Demand Deposits. The Dodd-Frank Act provides that depository institutions may
pay interest on demand deposits, including business transaction and other accounts.
• Consumer Financial Protection Bureau. The Dodd-Frank Act centralizes responsibility for
consumer financial protection by creating the Consumer Financial Protection Bureau,
responsible for implementing federal consumer protection laws, although banks below $10
billion in assets will continue to be examined and supervised for compliance with these laws
by their federal bank regulator.
• Mortgage Lending. Additional requirements are imposed on mortgage lending, including
minimum underwriting standards, prohibitions on certain yield-spread compensation to
mortgage originators, special consumer protections for mortgage loans that do not meet
certain provision qualifications, prohibitions and limitations on certain mortgage terms and
various mandated disclosures to mortgage borrowers.
• Holding Company Capital Levels. Bank regulators are required to establish minimum capital
levels for holding companies that are at least as stringent as those currently applicable to
banks. In addition, all trust preferred securities issued after May 19, 2010 will be counted as
Tier 2 capital, but the Company’s currently outstanding trust preferred securities will continue
to qualify as Tier 1 capital.
• De Novo Interstate Branching. National and state banks are permitted to establish de novo
interstate branches outside of their home state, and bank holding companies and banks must
be well-capitalized and well managed in order to acquire banks located outside their home
state.
8
• Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain
transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including
an expansion of the definition of “covered transactions” and an increase in the amount of time
for which collateral requirements regarding covered transactions must be maintained.
• Transactions with Insiders. Insider transaction limitations are expanded through the
strengthening of loan restrictions to insiders and the expansion of the types of transactions
subject to the various limits, including derivative transactions, repurchase agreements, reverse
repurchase agreements and securities lending or borrowing transactions. Restrictions are also
placed on certain asset sales to and from an insider to an institution, including requirements
that such sales be on market terms and, in certain circumstances, approved by the institution’s
board of directors.
• Corporate Governance. The Dodd-Frank Act includes corporate governance revisions that
apply to all public companies, not just financial institutions, including with regard to executive
compensation and proxy access to shareholders.
The Company is continually evaluating the effects of the Dodd-Frank Act, together with implementing
the regulations that have been proposed and adopted. The ultimate effects of the Dodd-Frank Act
and the resulting rulemaking cannot be predicted at this time, but it has increased the Company’s
operating and compliance costs in the short-term, and it could have a material adverse effect on the
Company’s results of operation and financial condition.
Insurance of Accounts, Assessments and Regulation by the FDIC. Our deposits are insured by
the FDIC up to the limits set forth under applicable law, currently $250,000. We are subject to the
deposit insurance assessments of the DIF. The amount of the assessment is a function of the
institution’s risk category, of which there are four, and its assessment base. An institution’s risk
category is determined according to its supervisory ratings and capital levels and is used to determine
the institution’s assessment rate. The assessment base is an institution’s average consolidated total
assets less its average tangible equity.
The FDIC is authorized to prohibit any DIF-insured institution from engaging in any activity that the
FDIC determines by regulation or order to pose a serious threat to the respective insurance fund.
Also, the FDIC may initiate enforcement actions against banks, after first giving the institution’s primary
regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance
of any depository institution if it determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC.
It also may suspend deposit insurance temporarily during the hearing process for the permanent
termination of insurance if the institution has no tangible capital. If deposit insurance is terminated,
the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue
to be insured for a period from six months to two years, as determined by the FDIC. We are aware of
no existing circumstances that could result in termination of our deposit insurance.
Payment of Dividends. The Company is a legal entity separate and distinct from the Bank and its
other subsidiaries. Virtually all of the Company’s cash revenues will result from dividends paid to it by
the Bank, which is subject to laws and regulations that limit the amount of dividends that it can pay.
Under Virginia law, a bank may not declare a dividend in excess of its accumulated retained earnings
without BFI approval. As of December 31, 2016, the Bank did not have any accumulated retained
earnings. In addition, the Bank may not declare or pay any dividend if, after making the dividend, the
Bank would be "undercapitalized," as defined in FDIC regulations.
The FDIC and the state have the general authority to limit the dividends paid by insured banks if the
payment is deemed an unsafe and unsound practice. Both the FDIC and the state have indicated that
paying dividends that deplete a bank's capital base to an inadequate level would be an unsound and
unsafe banking practice.
In addition, the Company is subject to certain regulatory requirements to maintain capital at or above
regulatory minimums. These regulatory requirements regarding capital affect our dividend policies.
9
Regulators have indicated that holding companies should generally pay dividends only if the
organization's net income available to common shareholders over the past year has been sufficient to
fully fund the dividends, and the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition. In addition, the Federal
Reserve has issued guidelines that bank holding companies should inform and consult with the
Federal Reserve in advance of declaring or paying a dividend that exceeds earnings for the period
(e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to
the organization’s capital structure.
Capital Adequacy. Both the Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve, in the case of the Company, and the FDIC, in the case
of the Bank. In June 2012, the federal bank regulatory agencies jointly issued proposed rules to revise
the risk-based and leverage capital requirements and the method for calculating risk-weighted assets
to be consistent with the agreements reached by the Basel Committee on Banking Supervision in
“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel
III”) and certain provisions of the Dodd-Frank Act. The proposed rules applied to all depository
institutions, top-tier bank holding companies with total consolidated assets of $500 million or more,
and top-tier savings and loan holding companies (“banking organizations”). On July 2, 2013, the
federal bank regulatory agencies approved certain revisions to the proposed rules and finalized new
capital requirements for banking organizations.
Among other things, the final rules establish a revised definition of regulatory capital, a new common
equity Tier 1 minimum capital requirement (“CET1”), a higher minimum Tier 1 capital requirement, and
a supplementary leverage ratio that incorporates a broader set of exposures in the denominator. The
final rules also establish limits on a banking organization’s capital distributions and certain
discretionary bonus payments if the banking organization does not hold a specified amount of CET1
capital in addition to the necessary amount to meet its minimum risk-based capital requirements.
Effective January 1, 2015, the final rules require the Company and the Bank to comply with the
following new minimum capital ratios: (i) a new ratio of CET1 to risk-weighted assets of 4.5%; (ii) a
ratio of Tier 1 capital to risk-weighted assets of 6.0% (iii) a ratio of total (that is, Tier 1 plus Tier 2)
capital to risk-weighted assets of 8.0%; and (iv) a leverage ratio of 4.0%, 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). These are the initial capital
requirements, which will be phased in over a four-year period that began on January 1, 2015. When
fully phased in, Basel III will require the Company and the Bank to maintain (i) a minimum ratio of
CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is
added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of
CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1
capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to
the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital
ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of
at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that
buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full
implementation) and (iv) a minimum leverage ratio of 4%.
Basel III will also provide for a "countercyclical capital buffer," generally designed to absorb losses
during periods of economic stress and to be imposed when national regulators determine that excess
aggregate credit growth becomes associated with a buildup of systemic risk. The buffer would be a
CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented
(potentially resulting in total buffers of between 2.5% and 5%).
The Basel III capital framework is also expected to provide for a number of new deductions from and
adjustments to CET1. These include, for example, the requirement that mortgage servicing rights,
deferred tax assets dependent upon future taxable income and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent that any one such category
exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation
10
of the deductions and other adjustments to CET1 are to be phased-in over a three-year period which
began on January 1, 2016.
Additionally, the bank regulatory agencies’ final rules revised the “prompt corrective action” regulations
pursuant to Section 38 of the Federal Deposit Insurance Act of 1950 (the “FDI Act”) by (i) introducing
a CET1 capital ratio requirement at each level (other than critically undercapitalized), with the required
ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement
for each category, with the minimum ratio for well-capitalized status being 8.0%; and (iii) eliminating
the provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% Tier
1 leverage ratio and still be well-capitalized. These new thresholds were effective for the Bank as of
January 1, 2015. The minimum total capital to risk-weighted assets ratio (10.0%) and minimum
leverage ratio (5.0%) for well-capitalized status were unchanged by the final rules. As of December 31,
2016, the Bank met the new minimum ratios to be classified as a well capitalized financial institution.
Federal banking regulators are required to take various mandatory supervisory actions and are
authorized to take other discretionary actions with respect to banks in the three “undercapitalized”
categories. The severity of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal banking agencies have
specified by regulation the relevant capital level for each category. An institution that is categorized
as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit
an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding
company must guarantee that a subsidiary depository institution meets its capital restoration plan,
subject to various limitations. The controlling holding company’s obligation to fund a capital restoration
plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to
meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any branches or engaging in any
new line of business, except under an accepted capital restoration plan or with FDIC approval. The
regulations also establish procedures for downgrading an institution and a lower capital category
based on supervisory factors other than capital.
At December 31, 2016, the Bank’s Tier 1 risk-based capital ratio was 14.28%, its total risk-based
capital ratio was 15.33% and its leverage ratio was 10.47%. More information concerning our
regulatory ratios at December 31, 2016 is included in Note 13 to the Notes to Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Restrictions on Transactions with Affiliates. Both the Company and the Bank are subject to the
provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
• A bank’s loans or extensions of credit, including purchases of assets subject to an agreement
to repurchase, to affiliates;
• A bank’s investment in affiliates;
• Assets a bank may purchase from affiliates, except for real and personal property exempted
by the Federal Reserve;
• The amount of loans or extensions of credit to third parties collateralized by the securities or
debt obligations of affiliates;
• Transactions involving the borrowing or lending of securities and any derivative transaction
that results in credit exposure to an affiliate; and
• A bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a
bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In
addition to the limitation on the amount of these transactions, each of the above transactions must
also meet specified collateral requirements. The Bank must also comply with other provisions
designed to avoid acquiring low-quality assets from its affiliates.
The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve
11
Act which, among other things, prohibits an institution from engaging in the above transactions with
affiliates unless the transactions are on terms substantially the same, or at least as favorable to the
institution or its subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies.
On September 30, 2010, the Company sold its headquarters building at the Watkins Centre to the
Bank. This transaction allowed us to repay the outstanding mortgage loan on the building resulting in
a reduction of our interest expense and improvement in earnings on a consolidated basis. The Federal
Reserve Bank has determined that the sale of the headquarters building from the Company to the
Bank was not permitted under Section 23A of the Federal Reserve Act as the amount of the transaction
exceeded 10% of the Bank’s capital stock and surplus. As a result, the Federal Reserve Bank directed
the Company to take corrective action. The sale of the headquarters building at the Watkins Centre
was finalized in the second quarter of 2016 resulting in a gain on sale of $504,000.
The Bank is also subject to restrictions on extensions of credit to its executive officers, directors,
principal shareholders and their related interests. These extensions of credit (1) must be made on
substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties, and (2) must not involve more than the normal risk of
repayment or present other unfavorable features.
The Dodd-Frank Act also provides that an insured depository institution may not purchase an asset
from, or sell an asset to a bank insider (or their related interests) unless (1) the transaction is conducted
on market terms between the parties, and (2) if the proposed transaction represents more than 10%
of the capital stock and surplus of the insured institution, it has been approved in advance by a majority
of the institution’s non-interested directors.
Support of Subsidiary Institutions. Under the Dodd-Frank Act, and previously under Federal
Reserve policy, we are required to act as a source of financial strength for our bank subsidiary, Village
Bank, and to commit resources to support the Bank. This support can be required at times when it
would not be in the best interest of our shareholders or creditors to provide it. In the unlikely event of
our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of
the Bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. On
December 31, 2012, the Company made a capital contribution of $1,500,000 to the Bank to improve
its capital ratios. In addition, on December 4, 2013, the Company raised $1,684,075 through the sale
of 67,907 shares of its common stock to its board of directors and executive management team at a
price of $24.80 per share in a private placement. The total amount raised was contributed to the Bank
as additional capital.
On March 27, 2015, the Company completed a rights offering to shareholders (the “Rights Offering”)
and concurrent standby offering to Kenneth R. Lehman (the “Standby Offering”), in which the Company
issued an aggregate of 1,051,866 shares of common stock (the total number of shares offered) at
$13.87 per share for aggregate gross proceeds of $14,589,381 (including the value of the Company’s
preferred stock exchanged by Mr. Lehman for shares of common stock of $4,618,813). In connection
with the Rights Offering, 283,293 shares were issued to shareholders upon exercise of their basic
subscription rights and 191,773 shares were issued to shareholders upon exercise of their
oversubscription privileges (approximately 36.9% of the total number of shares requested pursuant to
oversubscription privileges). In connection with the Standby Offering, Mr. Lehman purchased an
aggregate of 576,800 shares of the Company’s common stock, 333,007 of which were issued in
exchange for 9,023 shares of the Company’s preferred stock and 243,793 of which were purchased
for cash. Also, as part of the Standby Offering, Mr. Lehman forgave $2,215,009 in accrued and unpaid
dividends on the preferred stock. The Company made a capital contribution of $5,000,000 to the Bank
from the cash proceeds of this offering.
Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies
issued guidance that applies to all banking organizations supervised by the agencies (thereby
including both the Company and the Bank). Pursuant to the guidance, to be consistent with safety
and soundness principles, a banking organization’s incentive compensation arrangements should:
12
(1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible
with effective controls and risk management; and (3) be supported by strong corporate governance
including active and effective oversight by the banking organization’s board of directors. Monitoring
methods and processes used by a banking organization should be commensurate with the size and
complexity of the organization and its use of incentive compensation. At December 31, 2016, we had
not been made aware of any instances of non-compliance with this guidance.
Emergency Economic Stabilization Act of 2008. In response to unprecedented market turmoil
during the third quarter of 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted on October 3, 2008. EESA authorized the U.S. Treasury to provide up to $700 billion to
support the financial services industry. Pursuant to the EESA, the U.S. Treasury was initially
authorized to use $350 billion for the Troubled Asset Relief Program (“TARP”), of which the U.S.
Treasury allocated $250 billion to the TARP Capital Purchase Program (the “TARP Program”).
On May 1, 2009, the Company issued preferred stock and a warrant to purchase its common stock to
the U.S. Treasury pursuant to the TARP Program. The amount of capital raised in that transaction
was $14.7 million. Pursuant to the terms of the preferred stock, dividends may not be paid on common
stock unless dividends have been paid on the preferred stock. The preferred stock does not have
voting rights other than the right to vote as a class on the issuance of any preferred stock ranking
senior, any change in its terms or any merger, exchange or similar transaction that would adversely
affect its rights. Holders of the preferred stock also have the right to elect two directors if dividends
have not been paid for six periods.
In November 2013, the Company’s preferred stock was sold by the U.S. Treasury as part of its efforts
to manage and recover its investments under the TARP Program. While the sale of the preferred
stock to new owners did not result in any proceeds to the Company (nor did it change the Company’s
capital position or accounting for these securities including accrual of dividends), it did eliminate certain
restrictions put in place by the U.S. Treasury on TARP recipients.
In accordance with the Company’s prior Written Agreement with the Reserve Bank, the Company had
been deferring quarterly cash dividends on the preferred stock since May 2011. The Written
Agreement was terminated by the Reserve Bank as of July 28, 2016. With the termination of the
Written Agreement, the Company is not required to defer the quarterly cash dividends on the preferred
stock. At December 31, 2016, the aggregate amount of the Company’s total accrued but deferred
dividend payments on the preferred stock was $2,815,000 and reflected as a reduction of retained
earnings. This amount was accrued for and included in other liabilities on the Balance Sheet in the
Consolidated Financial Statements.
Subsequent to December 31, 2016, 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.
Privacy Legislation. Several laws, including the Right To Financial Privacy Act, and related
regulations issued by the federal bank regulatory agencies, provide protections against the transfer
and use of customer information by financial institutions. A financial institution must provide to its
customers information regarding its policies and procedures with respect to the handling of customers’
personal information. Each institution must conduct an internal risk assessment of its ability to protect
customer information. These privacy provisions generally prohibit a financial institution from providing
a customer’s personal financial information to unaffiliated parties without prior notice and approval
from the customer.
Bank Secrecy Act. The Bank Secrecy Act (“BSA”), which is intended to require financial institutions
to develop policies, procedures and practices to prevent and deter money laundering, mandates that
every bank have a written, board-approved program that is reasonably designed to assure and monitor
13
compliance with the BSA. The program must, at a minimum: (i) provide for a system of internal controls
to assure ongoing compliance; (ii) provide for independent testing for compliance; (iii) designate an
individual responsible for coordinating and monitoring day-to-day compliance; and (iv) provide training
for appropriate personnel. In addition, a bank is required to adopt a customer identification program
as part of its BSA compliance program. Financial institutions are generally required to report cash
transactions involving more than $10,000 to the U.S. Department of the Treasury. In addition, financial
institutions are required to file suspicious activity reports for transactions that involve more than $5,000
and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is
designed to evade the requirements of the BSA or has no lawful purpose. The USA PATRIOT Act of
2001, enacted in response to the September 11, 2001 terrorist attacks, requires bank regulators to
consider a financial institution’s compliance with the BSA when reviewing applications from a financial
institution. In May 2016, the regulations implementing the BSA were amended to explicitly include
risk-based procedures for conducting ongoing customer due diligence, to include understanding the
nature and purpose of customer relationships for the purpose of developing a customer risk profile. In
addition, banks must identify and verify the identity of the beneficial owners of all legal entity customers
(other than those that are excluded) at the time a new account is opened (other than accounts that
are exempted). We must comply with these amendments and new requirements by May 11, 2018.
Reporting Terrorist Activities. The Office of Foreign Assets Control (“OFAC”), which is a division of
the Department of the Treasury, is responsible for helping to insure that United States entities do not
engage in transactions with “enemies” of the United States, as defined by various Executive Orders
and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names
of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank
finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such
account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC
compliance officer to oversee the inspection of its accounts and the filing of any notifications. The
Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files.
The Bank performs these checks utilizing software, which is updated each time a modification is made
to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked
Persons.
Other Safety and Soundness Regulations. There are a number of obligations and restrictions
imposed on depository institutions by federal law and regulatory policy that are designed to reduce
potential loss exposure to the depositors of such depository institutions and to the FDIC insurance
funds in the event the depository institution becomes in danger of default or is in default. The Federal
banking agencies also have broad powers under current Federal law to take prompt corrective action
to resolve problems of insured depository institutions. The extent of these powers depends upon
whether the institution in question is well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized, as defined by the law. Federal regulatory
authorities also have broad enforcement powers over us, including the power to impose fines and
other civil and criminal penalties, and to appoint a receiver in order to conserve the assets of any such
institution for the benefit of depositors and other creditors. At December 31, 2016, Village Bank met
the ratio requirements to be classified as a well capitalized financial institution.
Loans-to-One Borrower. Under applicable laws and regulations the amount of loans and extensions
of credit which may be extended by a bank to any one borrower, including related entities, generally
may not exceed 15% of the sum of the capital, surplus, and loan loss reserve of the institution.
Community Reinvestment. The requirements of the Community Reinvestment Act (“CRA”) are
applicable to the Company. The CRA imposes on financial institutions an affirmative and ongoing
obligation to meet the credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those institutions. A financial
institution’s efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to 12 assessment factors. These factors also are considered in
evaluating mergers, acquisitions and applications to open a branch or facility.
14
Volcker Rule. On December 10, 2013, five U.S. financial regulators, including the FDIC, adopted final
rules implementing the Volcker Rule. The final rules prohibit banking entities from (1) engaging in
short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and
relationships with hedge funds or private equity funds. The Volcker Rule is intended to provide greater
clarity with respect to both the extent of those primary prohibitions and of the related exemptions and
exclusions. The final rules were effective April 1, 2014, but the conformance period has been extended
from its statutory end date of July 21, 2014 until July 21, 2016. The adoption of this guidance did not
have a material effect on the Company’s financial condition or results of operations.
Cybersecurity. In March 2015, federal regulators issued two related statements regarding
cybersecurity. One statement indicates that financial institutions should design multiple layers of
security controls to establish lines of defense and to ensure that their risk management processes also
address the risk posed by compromised customer credentials, including security measures to reliably
authenticate customers accessing internet-based services of the financial institution. The other
statement indicates that a financial institution’s management is expected to maintain sufficient
business continuity planning processes to ensure the rapid recovery, resumption and maintenance of
the institution’s operations after a cyber-attack involving destructive malware. A financial institution is
also expected to develop appropriate processes to enable recovery of data and business operations
and address rebuilding network capabilities and restoring data if the institution or its critical service
providers fall victim to this type of cyber-attack. If the Company fails to observe the regulatory
guidance, it could be subject to various regulatory sanctions, including financial penalties. To date,
we have not experienced a significant compromise, significant data loss or any material financial
losses related to cybersecurity attacks, but our systems and those of our customers and third-party
service providers are under constant threat and it is possible that we could experience a significant
event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high
for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well
as due to the expanding use of Internet banking, mobile banking and other technology-based products
and services by us and our customers.
Future Legislation and Regulation. Congress may enact legislation from time to time that affects
the regulation of the financial services industry, and state legislatures may enact legislation from time
to time affecting the regulation of financial institutions chartered by or operating in those states. Federal
and state regulatory agencies also periodically propose and adopt changes to their regulations or
change the manner in which existing regulations are applied. The substance or impact of pending or
future legislation or regulation, or the application thereof, cannot be predicted, although enactment of
the proposed legislation could impact the regulatory structure under which we operate and may
significantly increase costs, impede the efficiency of internal business processes, require an increase
in regulatory capital, require modifications to business strategy, and limit the ability to pursue business
opportunities in an efficient manner.
At this time, it is difficult to predict the legislative and regulatory changes that will result from the
combination of a new President of the United States and the first year since 2010 in which both Houses
of Congress and the White House have majority memberships from the same political party. In recent
years, however, both the new President and senior members of the House of Representatives have
advocated for significant reduction of financial services regulation, to include amendments to the
Dodd-Frank Act and structural changes to the CFPB. The new administration and Congress also may
cause broader economic changes due to changes in governing ideology and governing style. Future
legislation, regulation, and government policy could affect the banking industry as a whole, including
our business and results of operations, in ways that are difficult to predict.
Employees
As of December 31, 2016, the Company and its subsidiaries had a total of 171 full-time employees
and 7 part-time employees. None of the Company’s employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
15
The Company has a Code of Ethics for directors, officers and all employees of the Company and its
subsidiaries, and a Code of Ethics applicable to the Company’s Chief Executive Officer, Chief
Financial Officer and other principal financial officers. The Code addresses such topics as protection
and proper use of Company assets, compliance with applicable laws and regulations, accuracy and
preservation of records, accounting and financial reporting and conflicts of interest. A copy of the Code
will be provided, without charge, to any shareholder upon written request to the Secretary of the
Company, whose address is P.O. Box 330, 13319 Midlothian Turnpike, Midlothian, Virginia 23113.
Additional Information
The Company files annual, quarterly and current reports, proxy statements and other information with
the Securities and Exchange Commission. You may read and copy any reports, statements and other
information we file at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the operations of the Public
Reference Room. Our SEC filings are also available on the SEC’s Internet site (http://www.sec.gov).
The Company’s common stock trades under the symbol “VBFC” on the Nasdaq Capital Market.
The Company’s Internet address is www.villagebank.com. At that address, we make available, free
of charge, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act (see “Investor Relations” section of website), as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC.
In addition, we will provide, at no cost, paper or electronic copies of our reports and other filings made
with the SEC (except for exhibits). Requests should be directed to C. Harril Whitehurst, Jr., Chief
Financial Officer, Village Bank and Trust Financial Corp., PO Box 330, Midlothian, VA 23113.
The information on the websites listed above is not and should not be considered to be part of this
annual report on Form 10-K and is not incorporated by reference in this document.
16
ITEM 1A. RISK FACTORS
Not applicable
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2. PROPERTIES
Our executive and administrative offices are owned by the Bank and are located at 13319 Midlothian
Turnpike, Midlothian, Virginia 23113 in Chesterfield County. The current location also houses the
principal office of the mortgage company.
In addition to its executive offices, the Bank owns seven full service branch buildings including the
land on those buildings and leases an additional four full service branch buildings. Five of our branch
offices are located in Chesterfield County, with three branch offices in Hanover County, two in Henrico
County and one in Powhatan County. We are in the process of closing one branch in Chesterfield
County and consolidating its operations in a nearby branch. This closure should be completed in the
first quarter of 2017.
Our properties are maintained in good operating condition and are suitable and adequate for our
operational needs.
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed by the Company, in March 2013, the Special Inspector General for the
Troubled Asset Relief Program notified the Company that it was conducting an investigation of the
Company. SIGTARP issued seven subpoenas from March 2013 to November 2016 requesting that
the Company produce certain documents and other information. The Company has been cooperating
fully with SIGTARP in providing the requested materials. The Company cannot predict the duration or
the outcome of this investigation, including the effect the investigation and the costs associated with
the investigation could have on the Company’s business, financial condition, or results of operations.
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 a party or of which the property of the
Company is subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
17
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On August 8, 2014, we completed a reverse split of our common stock. All financial information and
per share amounts are presented as if the reverse split was effective at the beginning of the earliest
period presented.
Market Information
Shares of the Company’s common stock trade on the Nasdaq Capital Market under the symbol
“VBFC”. The high and low prices of shares (adjusted for reverse stock split) of the Company’s common
stock for the periods indicated were as follows:
2015
1st quarter
2nd quarter
3rd quarter
4th quarter
2016
1st quarter
2nd quarter
3rd quarter
4th quarter
High
Low
$
25.99
22.40
23.75
21.80
$
14.15
17.30
18.00
18.25
$
20.36
23.50
24.88
27.45
$
18.01
18.91
22.30
23.10
Dividends
The Company has not paid any dividends on its common stock. We intend to retain all of our earnings
to finance the Company’s operations and we do not anticipate paying cash dividends for the
foreseeable future. Any decision made by the board of directors to declare dividends in the future will
depend on the Company’s future earnings, capital requirements, financial condition and other factors
deemed relevant by the board. Banking regulations limit the amount of cash dividends that may be
paid without prior approval of the Bank’s regulatory agencies. Such dividends are limited to the Bank’s
accumulated retained earnings. The Federal Reserve has issued guidelines that bank holding
companies should inform and consult with the Federal Reserve in advance of declaring or paying a
dividend that exceeds earnings for the period (e.g. quarter) for which the dividend is being paid or that
could result in a material adverse charge to the organization’s capital structure.
The Company was previously prohibited by its Written Agreement with the Reserve Bank from paying
dividends on capital stock, including the Series A preferred stock, or interest payments on the trust
preferred capital notes without prior regulatory approval. The Written Agreement was terminated by
the Reserve Bank as of July 28, 2016. With the termination of the Written Agreement, the Company
is not required to defer the quarterly cash dividends on the Series A preferred stock. At December 31,
2016, the aggregate amount of the Company’s total accrued but deferred dividend payments on the
preferred stock was $2,815,000 and reflected as a reduction of retained earnings.
Subsequent to December 31, 2016, 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.
18
Holders
At February 28, 2017, there were approximately 1,047 active holders of common stock; including
registered holders and beneficial holders of shares through banks, brokers and other nominees.
For information concerning the Company’s Equity Compensation Plans, see “Item 12: Security
Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”.
Purchases of Equity Securities
The Company did not repurchase any of its Common Stock during 2016.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
19
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and evaluating the financial
condition, changes in financial condition and the results of operations of the Company, consisting of
the parent company and its wholly-owned subsidiary, the Bank. This discussion should be read in
conjunction with the consolidated financial statements and other financial information contained
elsewhere in this report.
Caution About Forward-Looking Statements
In addition to historical information, this report may contain forward-looking statements. For this
purpose, any statement, that is not a statement of historical fact may be deemed to be a forward-
looking statement. These forward-looking statements may include statements regarding profitability,
liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy and financial
and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,”
“may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or other words of
similar meaning. You can also identify them by the fact that they do not relate strictly to historical or
current facts. Forward-looking statements are subject to numerous assumptions, risks and
uncertainties, and actual results could differ materially from historical results or those anticipated by
such statements.
There are many factors that could have a material adverse effect on the operations and future
prospects of the Company including, but not limited to:
•
•
•
•
changes in assumptions underlying the establishment of allowances for loan losses, and other
estimates;
the risks of changes in interest rates on levels, composition and costs of deposits, loan
demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets
and liabilities;
the effects of future economic, business and market conditions;
legislative and regulatory changes, including the Dodd-Frank Wall Street Reform and
Consumer Protection Act and other changes in banking, securities, and tax laws and
regulations and their application by our regulators, and changes in scope and cost of FDIC
insurance and other coverages;
• our inability to maintain our regulatory capital position;
•
the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers
or breached due to employee error, malfeasance, or other disruptions despite security
measures implemented by the Company;
changes in market conditions, specifically declines in the residential and commercial real
estate market, volatility and disruption of the capital and credit markets, soundness of other
financial institutions we do business with;
risks inherent in making loans such as repayment risks and fluctuating collateral values;
changes in operations of Village Bank Mortgage Corporation as a result of the activity in the
residential real estate market;
•
•
•
• exposure to repurchase loans sold to investors for which borrowers failed to provide full and
accurate information on or related to their loan application or for which appraisals have not
been acceptable or when the loan was not underwritten in accordance with the loan program
specified by the loan investor;
• governmental monetary and fiscal policies;
•
•
•
changes in accounting policies, rules and practices;
reliance on our management team, including our ability to attract and retain key personnel;
competition with other banks and financial institutions, and companies outside of the banking
industry, including those companies that have substantially greater access to capital and other
resources;
• demand, development and acceptance of new products and services;
• problems with technology utilized by us;
20
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. Because the Company
intentionally decreased assets for the three years prior to 2016 as it was resolving problem assets and
attempting to improve capital ratios, as well as declines in yields on earning assets, net interest income
declined from $13,018,000 in 2014 to $12,637,000 in 2015. With improved capital ratios and asset
quality in 2016, the Company’s asset strategy changed to one of growth, with interest earning assets
increasing by $7,765,000. This increase in interest earning assets as well as an increase of 0.05% (5
basis points) on their yield, combined with a decline in interest bearing liabilities of $11,365,000 and a
0.05% (5 basis points) decline in their cost, increased net interest income to $13,380,000 in 2016.
Although we endeavor to minimize the credit risk inherent in the Company’s loan portfolio, we must
necessarily make various assumptions and judgments about the collectability of the loan portfolio
based on our experience and evaluation of economic conditions. If such assumptions or judgments
prove to be incorrect, the current allowance for loan losses may not be sufficient to cover loan losses
and additions to the allowance may be necessary, which would have a negative impact on net income.
Results of Operations
The following presents management’s discussion and analysis of the financial condition of the
Company at December 31, 2016 and 2015, and results of operations for the Company for the years
ended December 31, 2016, 2015 and 2014. This discussion should be read in conjunction with the
Company’s audited Financial Statements and the notes thereto appearing elsewhere in this Annual
Report.
21
The following table sets forth selected financial ratios:
2016
2015
2014
Performance Ratios
Return on average assets(1)
Return on average equity(1)
Net interest margin(2)
Efficiency(3)
Loans to deposits
Equity to assets
Asset Quality Ratios
ALLL to loans at year-end
ALLL to loans at year-end
excluding guaranteed student loans(4)
ALLL to nonaccrual loans
Nonperforming assets to total assets
Nonperforming loans to total loans
Net charge-offs to average loans
3.15%
38.81%
3.53%
90.34%
88.12%
9.81%
0.15%
2.30%
3.40%
105.96%
84.27%
7.23%
(0.24)%
(5.43)%
3.46%
104.48%
75.72%
4.39%
1.00%
1.16%
2.00%
1.16%
140.41%
1.20%
1.58%
0.06%
1.41%
95.78%
2.37%
3.24%
0.06%
2.26%
76.62%
4.63%
7.01%
0.59%
(1) Return on Average Assets and Return on Average Equity for 2016 were positively
impacted by the reversal in the third quarter of 2016 of an $11,997,000 valuation
allowance previously recorded against the net deferred tax asset.
(2) Net interest margin is computed by dividing net interest income for the
period by average interest earning assets.
(3) Efficiency ratio is computed by dividing noninterest expense by the sum of
net interest income and noninterest income.
(4) Student loans are guaranteed by the Department of Education for
approximately 98% of principal and interest and are evaluated separately for ALLL.
Such ratios are not measurements under accounting principles generally accepted in the United States
(“GAAP”) and are not intended to be a substitute for our balance sheet or income statement prepared
in accordance with GAAP.
Income Statement Analysis
Summary
We recorded net income of $13,513,000 and net income available to common shareholders of
$12,776,000 or $8.99 in 2016 compared to income of $646,000 and net income available to common
shareholders of $6,591,000 or $5.49 per fully diluted share in 2015 and a net loss of $1,037,000 and
a net loss available to common shareholders of $2,473,000, or $(7.39) per fully diluted share, in 2014.
Net income and net income available to common shareholders for the year ended December 31, 2016
were positively impacted by the reversal in the third quarter of 2016 of an $11,997,000 valuation
allowance previously recorded against the net deferred tax asset. Netting this reversal against income
tax expense for 2016 of $825,000 resulted in an income tax benefit of $11,172,000 for the year ended
December 31, 2016. Net income available to common shareholders for the year ended December 31,
2015 was positively impacted by the forgiveness of principal and dividends on preferred stock
amounting to $6,619,000 associated with the rights offering to shareholders and concurrent standby
offering completed in March 2015.
There were significant changes in income and expense items when comparing the 2016 and 2015
results and 2015 to 2014. These changes are listed in the following table (in thousands):
22
Increase (decrease) in
Net interest income
(Recovery of) provision for loan losses
Gains on loan sales
Gain on sale of assets
Gain on sale of investments
Service charges and fees
Rental income
Other noninterest income
(Increase) decrease in
Salaries and benefits
Commissions
Occupancy expense
Professional and outside services
Writedown of assets held for sale
Loss on branch consolidation
Expenses related to foreclosed real estate
FDIC premium
Other operating expenses
Other
2016 Compared 2015 Compared
to 2015
to 2014
$
743
(2,000)
354
504
156
(61)
(523)
362
$
(381)
2,100
1,627
-
216
275
140
(89)
(449)
(51)
260
(69)
2,429
(252)
(240)
624
(78)
(14)
(161)
(390)
(40)
(380)
(2,649)
-
1,091
52
267
5
$
1,695
$
1,683
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.
2016
Year Ended December 31,
2015
(dollars in thousands)
Change
Average interest-earning assets
Interest income
Yield on interest-earning assets
Average interest-bearing liabilities
Interest expense
Cost of interest-bearing liabilities
Net interest income
Net interest margin
$
$
$
$
379,163
15,989
4.22%
304,458
2,609
0.86%
13,380
3.53%
$
$
$
$
371,398
15,504
4.17%
315,823
2,867
0.91%
12,637
3.40%
$
$
$
$
7,765
485
0.05%
(11,365)
(258)
(0.05)%
743
0.13%
$
$
$
23
The increase in net interest income of $743,000 in 2016 was a result of positive movements in both
interest income and interest expense. Interest income increased by $485,000 with interest income on
loans increasing by $706,000 offset by a decrease in interest income on investments of $261,000.
The increase in interest income on loans was attributable to an increase in average loans outstanding
of $27,388,000. The decline in interest income on securities was due to a decline in average
investment securities of $10,619,000 as we sold securities to reduce our exposure to interest rate
changes. Interest expense declined by $258,000 primarily as a result of a decline in average interest
bearing liabilities of $11,365,000.
2015
Year Ended December 31,
2014
(dollars in thousands)
Change
Average interest-earning assets
Interest income
Yield on interest-earning assets
Average interest-bearing liabilities
Interest expense
Cost of interest-bearing liabilities
Net interest income
Net interest margin
$
$
$
$
371,398
15,504
4.17%
315,823
2,867
0.91%
12,637
3.40%
$
$
$
$
376,003
16,578
4.41%
350,133
3,560
1.02%
13,018
3.46%
$
$
$
$
(4,605)
(1,074)
(0.24)%
(34,310)
(693)
(0.11)%
(381)
(0.06)%
$
$
$
The decline in net interest income of $381,000 in 2015 was a result of declines in both interest income
and interest expense. Interest income declined by $1,074,000 in 2015 primarily due to a decline of
0.24% (24 basis points) in the yield on average earning assets. While yields on all interest earning
assets declined with the exception of federal funds sold, the primary driver was a decline in the yield
on loans which declined by 0.61% (61 basis points) due to a competitive lending environment. Interest
expense declined by $693,000 primarily as a result of a decline in average interest bearing liabilities
of $34,310,000, with average interest bearing deposits declining by $27,436,000 and average Federal
Home Loan Bank of Atlanta (“FHLB”) advances declining by $6,441,000.
The following table illustrates average balances of total interest-earning assets and total interest-
bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities,
shareholders' equity and related income, expense and corresponding weighted-average yields and
rates (dollars in thousands). The average balances used in these tables and other statistical data
were calculated using daily average balances. We have no tax exempt assets for the periods
presented.
24
Total interest earning assets
379,163
15,989
Loans
Commercial
Real estate - residential
Real estate - commercial
Real estate - construction
Student loans
Consumer
Gross loans
Investment securities
Loans held for sale
Federal funds and other
Allowance for loan losses
Cash and due from banks
Premises and equipment, net
Other assets
Total assets
Interest bearing deposits
Interest checking
Money market
Savings
Certificates
Total deposits
Borrowings
Long-tern debt - trust
preferred securities
FHLB advances
Other borrowings
Year Ended December 31, 2016
Year Ended December 31, 2015
Year Ended December 31, 2014
Interest
Interest
Interest
Average
Income/
Balance
Expense
Yield
Rate
Average
Income/
Balance
Expense
Yield
Rate
Average
Income/
Balance
Expense
Yield
Rate
$
29,989
$
1,427
4.76%
$
21,291
$
1,096
5.15%
$
23,991
$
1,321
$
429,400
$
426,601
$
438,472
82,592
128,346
31,440
50,742
1,702
4,397
6,108
1,533
1,529
99
324,811
15,093
27,627
12,520
14,205
355
470
71
(3,513)
13,860
13,187
26,703
42,783
68,817
20,119
158,203
289,922
9,027
5,161
348
77
256
36
1,998
2,367
185
56
1
5.32%
4.76%
4.88%
3.01%
5.82%
4.65%
1.28%
3.75%
0.50%
4.22%
87,767
113,132
30,828
42,610
1,795
4,756
5,650
1,609
1,204
72
297,423
14,387
38,246
11,487
24,242
616
446
55
371,398
15,504
(5,678)
9,765
14,210
36,906
5.42%
4.99%
5.22%
2.83%
4.01%
4.84%
1.61%
3.88%
0.22%
4.17%
94,482
115,541
30,577
8,145
1,692
5,275
6,350
1,728
204
84
274,428
14,962
54,566
8,204
38,805
1,182
347
87
376,003
16,578
(6,218)
12,376
13,204
43,107
0.18%
0.37%
0.18%
1.26%
0.82%
2.05%
1.09%
0.29%
0.86%
43,450
67,796
20,282
163,956
295,484
9,922
9,027
1,390
79
251
37
2,114
2,481
213
170
3
315,823
2,867
75,127
7,480
398,430
28,171
0.18%
0.37%
0.18%
1.29%
0.84%
2.15%
1.88%
0.22%
0.91%
42,311
66,866
20,555
193,188
322,920
9,714
15,468
2,031
78
251
37
2,640
3,006
215
334
5
350,133
3,560
62,612
6,639
419,384
19,088
5.51%
5.58%
5.50%
5.65%
2.50%
4.96%
5.45%
2.17%
4.23%
0.22%
4.41%
0.18%
0.38%
0.18%
1.37%
0.93%
2.21%
2.16%
0.25%
1.02%
Total interest bearing liabilities
304,458
2,609
Noninterest bearing deposits
Other liabilities
Total liabilities
Equity capital
82,678
7,445
394,581
34,819
Total liabilities and capital
$
429,400
$
426,601
$
438,472
Net interest income before
provision for loan losses
Interest spread - average yield
on interest earning assets,
less average rate on
interest bearing liabilities
Net interest margin
(net interest income
expressed as a percentage
of average earning assets)
$
13,380
$
12,637
$
13,018
3.36%
3.27%
3.39%
3.53%
3.40%
3.46%
25
Interest income and interest expense are affected by changes in both average interest rates and
average volumes of interest-earning assets and interest-bearing liabilities. The following table
analyzes changes in net interest income attributable to changes in the volume of interest-sensitive
assets and liabilities compared to changes in interest rates. Nonaccrual loans are included in average
loans outstanding. The changes in interest due to both rate and volume have been allocated to
changes due to volume and changes due to rate in proportion to the relationship of the absolute dollar
amounts of the changes in each (dollars in thousands).
2016 vs. 2015
Increase (Decrease)
Due to Changes in
Rate
Volume
Total
Volume
2015 vs. 2014
Increase (Decrease)
Due to Changes in
Rate
Total
Interest income
Loans
Investment securities
Fed funds sold and other
Total interest income
Interest expense
Deposits
Interest checking
Money market accounts
Savings accounts
Certificates of deposit
Total deposits
Borrowings
Long-term debt
FHLB Advances
Other borrowings
Total interest expense
$
1,128
(151)
(8)
969
$
(398)
(110)
24
(484)
$
730
(261)
16
485
$
450
(305)
(32)
113
$
(926)
(261)
(1)
(1,188)
$
(476)
(566)
(33)
(1,075)
(1)
4
-
(73)
(70)
3
(57)
(2)
(126)
(1)
1
(1)
(43)
(44)
(31)
(57)
-
(132)
(2)
5
(1)
(116)
(114)
(28)
(114)
(2)
(258)
2
-
-
(383)
(381)
(0)
(125)
(2)
(508)
(1)
-
-
(143)
(144)
(2)
(39)
-
(185)
1
-
-
(526)
(525)
(2)
(164)
(2)
(693)
Net interest income
$
1,095
$
(352)
$
743
$
621
$
(1,003)
$
(382)
Provision for (recovery of) loan losses
The amount of the loan loss provision (recovery) is determined by an evaluation of the level of loans
outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends,
underlying collateral values, the amount of actual losses charged to the reserve in a given period and
assessment of present and anticipated economic conditions.
The level of the allowance reflects changes in the size of the portfolio or in any of its components as
well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, present economic, political and regulatory conditions.
Portions of the allowance may be allocated for specific credits; however, the entire allowance is
available for any credit that, in management’s judgment, should be charged off. While management
utilizes its best judgment and information available, the ultimate adequacy of the allowance is
dependent upon a variety of factors beyond the Company’s control, including the performance of the
Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory
authorities toward loan classifications.
The provision for (recovery of) loan losses by loan category is presented in the following schedule (in
thousands):
26
2016
2015
2014
Provision
(Recovery) Outstanding
Loans
Provision
(Recovery) Outstanding
Loans
Provision
(Recovery) Outstanding
Loans
Construction and land development
Commercial real estate
Consumer real estate
Commercial and industrial
Guaranteed student loans
Consumer
Unallocated
$
19
(730)
(146)
44
149
10
654
$
33,862
133,099
81,250
39,390
47,398
2,101
-
$
286
(866)
(1,143)
(350)
13
1
59
$
31,150
116,218
83,594
20,086
53,989
1,734
-
$
(1,119)
1,645
(159)
(447)
217
(37)
-
$
29,467
109,568
89,773
22,165
33,562
1,611
-
$
-
$
337,100
$
(2,000)
$
306,771
$
100
$
286,146
For the year ended December 31, 2016, no provision for loan losses was necessary due to continued
improvement in credit quality as well as declining historical loss experience used in its calculation.
The recovery of loan losses recorded for the year ended December 31, 2015 was due primarily to
credit quality improvements and an enhanced model for evaluating inherent losses in the Bank’s loan
portfolio. Improvements in credit quality are provided in the following schedule:
2016
December 31,
2015
2014
Classified assets
Nonaccrual loans
Foreclosed real estate
$
10,454
2,402
2,926
$
15,375
3,718
6,249
$
30,684
7,478
12,638
During the fourth quarter of 2015, we adopted a software solution for the analysis of the allowance for
loan losses. While our methodology of evaluating the adequacy of the allowance for loan losses
generally did not change, the software is more robust in that it:
• allows us to take a more measureable approach to our evaluation of qualitative factors such
•
as economic conditions that may affect loss experience; and
is widely used by community banks which provides peer data that can be used as a benchmark
for comparison to our analysis.
In addition to the adoption of the software solution for our analysis, we reviewed the last twenty years
of historical loss data for peer banks in Virginia to assist us in our evaluation of environmental factors
and other conditions that could affect the loan portfolio and the overall adequacy of the allowance for
loan losses.
The allowance for loan losses at each of the periods presented includes an amount that could not be
identified to individual types of loans referred to as the unallocated portion of the allowance. We
recognize the inherent imprecision in estimates of losses due to various uncertainties and variability
related to the factors used, and therefore a reasonable range around the estimate of losses is derived
and used to ascertain whether the allowance is too high. We concluded that the unallocated portion
of the allowance was acceptable given the level of classified assets and was within a reasonable range
around the estimate of losses. The allowance for loan losses included an unallocated portion of
approximately $713,000 and $59,000 at December 31, 2016 and 2015, respectively.
Discussion of the recovery of loan losses related to specific loan types are provided following:
• The recovery of loan losses totaling $1,119,000 for the construction and land development
loan portfolio during 2014 was attributable to changes in our assessment of the general
component of the allowance for loan losses as it related to this portfolio. The general
component allocated to this portfolio declined primarily as a result of the historical net recovery
27
of 0.27% at December 31, 2014. Also contributing to the declines in the general component
were declines of approximately $1,643,000 and $12,945,000 in the outstanding loan balance
of this portfolio at December 31, 2014 and 2013, respectively.
• The recovery of loan losses totaling $730,000 and $866,000 for the commercial real estate
portfolio at December 31, 2016 and 2015, respectively, was also attributable to changes in our
assessment of the general component of the allowance for loan losses as it related to this
portfolio. The general component allocated to this portfolio declined primarily as a result of
declines in the historical loss experience from 0.96% in 2014 to 0.57% in 2015 and to 0.20%
in 2016. In addition, net charge-offs on this portfolio decreased from $1,220,000 in 2014 to
$90,000 in 2015 and to a net recovery of $111,000 in 2016.
• The recovery of loan losses totaling $1,143,000 for the consumer real estate portfolio in 2015
was also attributable to changes in our assessment of the general component of the allowance
for loan losses as it related to this portfolio. The general component allocated to this portfolio
declined primarily as a result of declines in the historical loss experience from 1.36% in 2014
to 0.24% in 2015 and to .0022% in 2016. In addition, net charge-offs on this portfolio
decreased from $562,000 in 2014 to a recovery of $215,000 in 2015.
Noninterest income
Noninterest income includes service charges and fees on deposit accounts, fee income related to loan
origination, gains and losses on sale of mortgage loans and securities held for sale, and rental income
primarily on our previous headquarters building. Over the last three years the most significant
noninterest income item has been gain on loan sales generated by the mortgage company,
representing 59% in 2016, 60% in 2015, and 56% in 2014 of total noninterest income. Noninterest
income amounted to $10,850,000 in 2016, $10,058,000 in 2015, and $7,889,000 in 2014.
For the Year Ended
December 31,
Change
2016
2015
$
%
(dollars in thousands)
$
$
$
Service charges and fees
Gain on sale of loans
Gain on sale of assets
Gain on sale of investment securities
Rental income
Other
Total noninterest income
2,459
6,430
504
162
582
713
10,850
2,520
6,076
-
6
1,105
351
10,058
$
$
$
(61)
354
504
156
(523)
362
792
(2.4)%
5.8%
100.0%
2600.0%
(47.3)%
103.1%
7.9%
• The increase in gain on sale of loans is due to increased activity by our mortgage banking
segment as the mortgage market was more favorable in the latter half of 2016. The gain on
sale is recognized at the date of sale to the investor and mortgage loan sales increased from
$208,479,000 in 2015 to $218,627,000 in 2016.
• The gain on sale of assets in 2016 relates to the sale of our previous headquarters building
and was a onetime event.
• The gain on investment securities resulted from management’s efforts to reduce interest rate
risk in our investment portfolio by selling longer duration securities.
• The decline in rental income is a result of the sale of our previous headquarters building in
June 2016 that generated rental income from nonrelated entities.
• The increase in other income is primarily due to a gain of $266,000 from a bank owned life
insurance claim.
28
For the Year Ended
December 31,
Change
2015
2014
$
%
(dollars in thousands)
$
$
$
Service charges and fees
Gain on sale of loans
Gain on sale of investment securities
Rental income
Other
Total noninterest income
2,520
6,076
6
1,105
351
10,058
2,245
4,449
(210)
965
440
7,889
275
1,627
216
140
(89)
2,169
12.2%
36.6%
(102.9)%
14.5%
(20.2)%
27.5%
$
$
$
• The increase in service charges and fees is due to increases from:
o Commercial banking segment ($177,000) – more product offerings to our customers.
o Mortgage banking segment ($98,000) – increased lending activity resulting from an
improvement in the mortgage lending market.
• The gain on sale of loans is also due to improvement in the mortgage lending market. The
gain on sale is recognized at the date of sale to the investor and mortgage loan sales increased
from $162,983,000 in 2014 to $208,479,000 in 2015.
• The gain on sale of investment securities resulted from management’s efforts to reduce
interest rate risk in 2014 by selling longer duration securities.
• The increase in rental income was a result of moving the company’s headquarters and leasing
the vacated space to unrelated entities.
Noninterest expense
Noninterest expense includes all expenses of the Company with the exception of interest expense on
deposits and borrowings, provision for loan losses and income taxes. Some of the primary
components of noninterest expense are salaries and benefits, occupancy and equipment costs and
expenses related to foreclosed real estate. Over the last three years, the most significant noninterest
expense item has been salaries and benefits including commissions, representing 59%, 52%, and
54% of noninterest expense in 2016, 2015 and 2014, respectively. Noninterest expense increased
from $21,844,000 in 2014 to $24,049,000 in 2015, and decreased to $21,889,000 in 2016.
For the Year Ended
December 31,
2016
2015
Change
$
%
(dollars in thousands)
Salaries and benefits
Commissions
Occupancy
Equipment
Write down of assets held for sale
Cease use lease obligation
Supplies
Professional and outside services
Advertising and marketing
Foreclosed assets, net
FDIC insurance premium
Other operating expense
Total noninterest income
$
$
$
11,295
1,606
1,470
762
220
252
265
2,999
355
393
292
1,980
21,889
10,846
1,555
1,730
765
2,649
-
278
2,930
325
153
916
1,902
24,049
29
$
$
$
449
51
(260)
(3)
(2,429)
252
(13)
69
30
240
(624)
78
(2,160)
4.1%
3.3%
(15.0)%
(0.4)%
(91.7)%
(4.7)%
2.4%
9.2%
156.9%
(68.1)%
4.1%
(9.0)%
• The increase in salaries and benefits was due to staffing changes in key management
positions.
• Occupancy declined due to the sale of our previous headquarters building in June
2016.
• Write down of assets held for sale decreased due to write downs in 2015 associated
with the headquarters building. The building was sold in June 2016 for a gain of
$504,000.
• Cease use lease obligation is due to recording a loss related to consolidating two
branches.
• Costs associated with foreclosed assets increased due to gains on sale in 2015 as we
disposed of these assets. We did not have similar gains in 2016.
• The decrease in the FDIC insurance premium was due to the improvement in the
Bank’s risk rating with the FDIC based on the removal of the Consent Order in
December 2015.
For the Year Ended
December 31,
2015
2014
Change
$
%
(dollars in thousands)
$
$
$
Salaries and benefits
Commissions
Occupancy
Equipment
Write down of assets held for sale
Supplies
Professional and outside services
Advertising and marketing
Foreclosed assets, net
FDIC insurance premium
Other operating expense
Total noninterest income
10,846
1,555
1,730
765
2,649
278
2,930
325
153
916
1,902
24,049
10,685
1,165
1,690
708
-
344
2,550
321
1,244
968
2,169
21,844
$
$
$
161
390
40
57
2,649
(66)
380
4
(1,091)
(52)
(267)
2,205
1.5%
33.5%
2.4%
8.1%
(19.2)%
14.9%
1.2%
(87.7)%
(5.4)%
(12.3)%
10.1%
• The increase in salaries and benefits was due primarily to an increase in stock based
compensation.
• Commissions increased due to an increase in the activity of our mortgage banking segment.
• The write down of assets held for sale in 2015 related to our evaluation of the net realizable
value of our previous headquarters building. This asset was sold in 2016 resulting in a gain of
$504,000.
• The increase in professional and outside services is related to an increase in legal fees and
servicing income from our student loan processors from additional student loan purchases in
2015.
• The decline in expenses related to foreclosed real estate was aided by gains of $862,000
offset by write downs of $690,000 on the sale of these properties. Additionally, write downs
and expense declined by $434,000 as many of these properties were sold in 2015.
Income taxes
Certain items of income and expense are reported in different periods for financial reporting and tax
return purposes. The tax effects of these temporary differences are recognized currently in the
deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and liabilities using the
applicable enacted marginal tax rate.
30
The net deferred tax asset is included in other assets on the balance sheet. Accounting Standards
Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance
should be established against their deferred tax assets based on the consideration of all available
evidence using a “more likely than not” standard. Management considers both positive and negative
evidence and analyzes changes in near-term market conditions as well as other factors which may
impact future operating results. In making such judgments, significant weight is given to evidence that
can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting
realization.
In assessing the Company’s ability to realize its net deferred tax asset, management considers
whether it is more likely than not that some portion or all of the net deferred tax asset will or will
not be realized. The Company’s ultimate realization of the net deferred tax asset is dependent
upon the generation of future taxable income during the periods in which temporary differences
become deductible. Management considers the nature and amount of historical and projected
future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available
tax planning strategies in making this assessment. The amount of net deferred taxes recognized
could be impacted by changes to any of these variables.
Each quarter, the Company weighs both the positive and negative information with respect to
realization of the net deferred tax asset and analyzes its position as to whether or not a valuation
allowance is required. At December 31, 2015, management concluded that the objective negative
evidence represented by the Company’s prior losses outweighed the more subjective positive
evidence and, as a result, provided for a valuation allowance at December 31, 2015 of $11,997,000.
Over the several quarters previous to September 30, 2016, the positive information was
increasing while the negative information was decreasing. For the seven quarters prior to
September 30, 2016, the Company demonstrated consistent earnings while its level of non-
performing assets, which was the primary cause of the Company’s losses, steadily decreased.
Additionally, the Reserve Bank, the FDIC and the BFI terminated their formal agreements with
the Company and the Bank, reducing regulatory risk.
Given the consistent earnings and improving asset quality, the Company’s analysis concluded that,
as of September 30, 2016, it was more likely than not that it would generate sufficient taxable income
within the applicable carry-forward periods to realize its net deferred tax asset. As such, the full
valuation allowance of $11,997,000 was reversed to income tax expense at September 30, 2016. The
Company’s net deferred tax asset was $11,435,000 as of September 30, 2016. During the fourth
quarter of 2016, the consistent earnings continued with earnings before income taxes of $700,000,
and our asset quality continued to improve. As a result, we continue to believe that it is more likely
than not that the Company will generate sufficient taxable income within the applicable carry-forward
periods to realize its net deferred tax asset as of December 31, 2016.
We recognized an income tax benefit of $11,172,000 for the year ended December 31, 2016 compared
to not recognizing any income tax in 2015 and 2014 due to the valuation allowance on the net deferred
tax asset. The income tax benefit in 2016 was due to the reversal of the valuation allowance previously
recorded against the net deferred tax asset as of September 30, 2016, offset by tax on pretax earnings
for 2016 of $825,000. Net operating losses available to offset future taxable income amounted to
$21,974,000 at December 31, 2016 and begin expiring in 2028; $1,257,000 of such amount is subject
to a limitation by Section 382 of the Internal Revenue Code of 1986, as amended, to $908,000 per
year.
Commercial banking organizations conducting business in Virginia are not subject to Virginia income
taxes. Instead, they are subject to a franchise tax based on bank capital. The Company recorded
franchise tax expense of approximately $75,000 for the year ended December 31, 2016. Due to the
Company’s adjusted capital level we were not subject to franchise tax expense for the years ended
December 31, 2015 and 2014.
During 2016, the Internal Revenue Service completed an examination of the Company’s federal
31
income tax return for the year ended December 31, 2013. No changes to the return were proposed.
Balance Sheet Analysis
Investment securities
At December 31, 2016 and 2015, all of our investment securities were classified as available for sale.
Investment securities classified as available for sale may be sold in the future, prior to maturity. These
securities are carried at fair value. Net aggregate unrealized gains or losses on these securities are
included, net of taxes, as a component of shareholders’ equity. Given the generally high credit quality
of the portfolio, management expects to realize all of its investment upon market recovery or the
maturity of such instruments, and thus believes that any impairment in value is interest rate related
and therefore temporary. Available for sale securities included net unrealized losses of $275,000 and
$665,000 at December 31, 2016 and 2015, respectively. As of December 31, 2016, management
does not have the intent to sell any of the securities classified as available for sale and which have
unrealized losses, and believes that it is more likely than not that the Company will not have to sell
any such securities before a recovery of cost.
The Company sold approximately $22 million and $8 million of investment securities available for sale
at a gain of $162,000 and $6,000 in 2016 and 2015, respectively. The sale of these securities, which
had fixed interest rates, allowed the Company to decrease its exposure to the anticipated upward
movement in interest rates that would result in unrealized losses being recognized in shareholders’
equity. In November and December 2016, the Company purchased approximately $18 million in
investment securities available for sale to invest liquidity in higher yielding assets. The securities
purchased have durations of less than five years to minimize exposure to upward movement in interest
rates and, in some cases, have returning cash flows that can be reinvested should interest rates rise.
The following table presents the composition of our investment portfolio at the dates indicated (in
thousands).
32
Par
Value
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Estimated
Fair
Value
Average
Yield
December 31, 2016
US Government Agencies
One to five years
More than ten years
Mortgage-backed securities
One to five years
More than ten years
$
29,400
2,862
32,262
$
29,607
2,868
32,475
-
$
-
-
$
(213)
(16)
(229)
$
29,394
2,852
32,246
3,457
8,253
11,710
3,524
8,170
11,694
-
1
1
(33)
(14)
(47)
3,491
8,157
11,648
1.25%
1.08%
1.24%
1.78%
2.16%
2.05%
Total investment securities
$
43,972
$
44,169
$
1
$
(276)
$
43,894
1.45%
December 31, 2015
US Government Agencies
One to five years
Five to ten years
More than ten years
Mortgage-backed securities
One to five years
More than ten years
Municipals
More than ten years
$
11,000
18,500
3,312
32,812
$
11,270
19,697
3,319
34,286
$
-
-
-
-
$
(157)
(403)
(13)
(573)
$
11,113
19,294
3,306
33,713
1,794
1,149
2,943
1,130
1,130
1,841
1,202
3,043
1,255
1,255
-
1
1
-
-
(28)
(15)
(43)
(50)
(50)
1,813
1,188
3,001
1,205
1,205
Total investment securities
$
36,885
$
38,584
$
1
$
(666)
$
37,919
Loans
0.91%
2.32%
0.85%
1.51%
1.30%
1.34%
1.35%
3.72%
3.72%
1.57%
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 manage the quality and concentration in these loan types.
Approximately 74% of all loans are secured by mortgages on real property located principally in the
Commonwealth of Virginia. We are much less reliant on real estate secured lending than was the
case in 2012 when 90% of our loan portfolio consisted of this type of lending. Approximately 14% of
the loan portfolio consists of rehabilitated student loans purchased by the Bank in 2016, 2015 and
2014 (see discussion following). Commercial and industrial loans represented $39 million, or 11%, of
the portfolio at December 31, 2016. Loans in this category are typically made to individuals, small and
medium-sized businesses and range between $250,000 and $2.5 million. Based on underwriting
standards, these loans may be secured in whole or in part by collateral such as liquid assets, accounts
receivable, equipment, inventory, and real property. The collateral securing any loan may depend on
the type of loan and may vary in value based on market conditions. The remainder of our loan portfolio
is in consumer loans which represent less than 1% of the total.
The Bank purchased one portfolio of rehabilitated student loans guaranteed by the DOE totaling
approximately $7 million on July 16, 2016. The Bank had previously purchased two portfolios totaling
approximately $23 million in 2015 and two portfolios totaling approximately $33 million in 2014. The
guarantee covers approximately 98% of principal and accrued interest. The loans are serviced by a
third-party servicer that specializes in handling the special needs of the DOE student loan programs.
The Bank used excess liquidity to purchase the loans.
33
The following tables present the composition of our loan portfolio at the dates indicated and maturities
of selected loans at December 31, 2016 (in thousands).
2016
2015
December 31,
2014
2013
2012
Construction and land development
Residential
Commercial
Total construction and land development
$
6,770
27,092
33,862
$
5,202
25,948
31,150
$
4,315
25,152
29,467
$
2,931
28,179
31,110
$
2,845
41,210
44,055
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Total commercial real estate
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deeds of trust
Second deeds of trust
Total consumer real estate
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
66,021
57,944
8,824
310
133,099
69,256
38,037
8,537
388
116,218
58,804
38,892
11,438
434
109,568
73,585
43,868
11,560
1,463
130,476
92,773
54,551
7,979
2,581
157,884
20,691
20,333
20,082
21,246
25,521
54,791
5,768
81,250
39,390
47,398
2,101
56,776
6,485
83,594
20,086
53,989
1,734
61,837
7,854
89,773
22,165
33,562
1,611
66,872
8,675
96,793
26,254
-
1,930
80,788
9,517
115,826
34,384
-
2,761
Total Loans
Deferred loan cost, net
Less: Allowance for loan losses
337,100
660
(3,373)
306,771
670
(3,562)
286,146
722
(5,729)
286,563
683
(7,239)
354,910
788
(10,808)
Total loans, net
$
334,387
$
303,879
$
281,139
$
280,007
$
344,890
Within
1 Year
1 to 5
Years
Fixed Rate
After
5 Years
Total
Variable Rate
After
5 Years
1 to 5
Years
Total
Total
Maturities
Construction and land development
Residential
Commercial
Total construction and land development
$
6,770
20,805
27,575
$
-
6,071
6,071
-
$
-
-
-
$
6,071
6,071
-
$
162
162
$
-
54
54
-
$
216
216
$
6,770
27,092
33,862
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Total commercial real estate
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deeds of trust
Second deeds of trust
Total consumer real estate
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
10,579
13,202
190
29
24,000
19,519
23,932
2,715
181
46,347
25,091
9,970
1,683
-
36,744
44,610
33,902
4,398
181
83,091
10,053
10,840
4,236
100
25,229
16,692
-
3,994
3,994
5
21,722
1,277
39,691
16,532
1,330
17,862
4,551
589
9,134
21,083
1,919
26,996
11,986
2,572
14,563
779
-
779
-
-
-
-
10,832
10,840
4,236
100
26,008
66,021
57,944
8,824
310
133,099
5
20,691
11,986
2,572
14,563
54,791
5,768
81,250
19,659
-
573
111,498
$
11,736
-
1,435
83,451
$
7,460
-
93
53,431
$
19,196
-
1,528
136,882
$
535
47,398
-
87,887
$
-
-
-
833
$
535
47,398
-
88,720
$
39,390
47,398
2,101
337,100
$
The Company assigns risk rating classifications to its loans. These risk ratings are divided into the
following groups:
34
• Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These
assets generally are well protected by the current net worth and paying capacity of the obligor
or by the value of the asset or underlying collateral;
• Risk rated 5 loans are defined as having potential weaknesses that deserve management’s
close attention;
• Risk rated 6 loans are inadequately protected by the current sound worth and paying capacity
of the obligor or of the collateral pledged, if any; and
• Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added
characteristics that the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and improbable.
Loans are considered impaired when, based on current information and events it is probable the
Company will be unable to collect all amounts due in accordance with the original contractual terms
of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated
in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If
a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported
net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans
are typically applied to principal unless collectability of the principal amount is reasonably assured, in
which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged
off when deemed uncollectible.
Allowance for loan losses
We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses
inherent in the loan portfolio. We maintain policies and procedures that address the systems of
controls over the following areas of maintenance of the allowance: the systematic methodology used
to determine the appropriate level of the allowance to provide assurance they are maintained in
accordance with GAAP; the accounting policies for loan charge-offs and recoveries; the assessment
and measurement of impairment in the loan portfolio; and the loan grading system.
The allowance reflects management’s best estimate of probable losses within the existing loan
portfolio and of the risk inherent in various components of the loan portfolio, including loans identified
as impaired as required by FASB Codification Topic 310: Receivables. Loans evaluated individually
for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days
or more, restructured loans and other loans selected by management. The evaluations are based
upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is
individually impaired, then a specific reserve is established for the amount of impairment.
Loans are grouped by similar characteristics, including the type of loan, the assigned loan classification
and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is
derived based upon historical net charge-off rates, the predominant collateral type for the group and
the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant
environmental factors and other conditions of the portfolio of loans and leases, including: borrower
and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes
in underwriting standards and risk selection; level of experience, ability and depth of lending
management; and national and local economic conditions.
The amounts of estimated impairment for individually evaluated loans and groups of loans are added
together for a total estimate of loan losses. This estimate of losses is compared to our allowance for
loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an
additional provision to the allowance would be made. If the estimate of losses is less than the
allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether
the allowance falls outside a range of estimates. We recognize the inherent imprecision in estimates
of losses due to various uncertainties and variability related to the factors used, and therefore a
reasonable range around the estimate of losses is derived and used to ascertain whether the
35
allowance is too high. If different assumptions or conditions were to prevail and it is determined that
the allowance is not adequate to absorb the new estimate of probable losses, an additional provision
for loan losses would be made, which amount may be material to the financial statements.
The allowance for loan losses was $3,373,000, $3,562,000 and $5,729,000 at December 31, 2016,
2015 and 2014, respectively. The ratio of the allowance for loan losses to gross loans was 1.00% at
December 31, 2016, 1.16% at December 31, 2015, and 2.00% December 31, 2014. However,
excluding the student loan portfolio which is guaranteed by the DOE for 98% of principal and interest,
the ratio was 1.16%, 1.36% and 2.26% at December 31, 2016, 2015 and 2014, respectively. The
allowance for loan losses as a percentage of net loans decreased in 2016 to 1.00% primarily as a
result of the improvement in historical charge-off rates for the periods evaluated that are used to
estimate the expected loss inherent in different groups of loans. The allowance for loan losses as a
percentage of net loans decreased in 2015 to 1.16% primarily as a result of the recovery of loan losses
of $2,000,000 while portfolio loans of $252,782,000, excluding student loans, remained consistent with
the prior year amount of $252,584,000. We believe the amount of the allowance for loan losses at
December 31, 2016 is adequate to absorb the losses that can reasonably be anticipated from the loan
portfolio at that date.
The following table presents an analysis of the changes in the allowance for loan losses for the periods
indicated (dollars in thousands).
36
2016
Year Ended December 31,
2014
2015
2013
2012
Beginning balance
(Recovery of), provision for loan losses
Charge-offs
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial
(except those secured by real estate)
Guaranteed student loans
Consumer and other
Recoveries
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial
(except those secured by real estate)
Guranteed student loans
Consumer and other
Net charge-offs
Ending balance
Loans outstanding at end of period(1)
Ratio of allowance for loan losses as
a percent of loans outstanding at
end of period
Average loans outstanding for the period(1)
Ratio of net charge-offs to average loans
$
3,562
-
$
5,729
(2,000)
$
7,239
100
$
10,808
1,173
$
16,071
9,095
(10)
(66)
(1)
-
(252)
(100)
(127)
-
(631)
(518)
-
(96)
-
(279)
(454)
(619)
-
(896)
(797)
(5,645)
(961)
(431)
(10)
-
(53)
(62)
(476)
(266)
(884)
(140)
(25)
(15)
(221)
(13)
(544)
1
10
-
53
125
3
25
29
100
9
355
(189)
(103)
(55)
(162)
(55)
(816)
2
49
33
4
-
5
380
50
100
26
649
(167)
(277)
(86)
(172)
-
(25)
(2,381)
(1,953)
(367)
(760)
-
(64)
(5,658)
(3,220)
(663)
(1,880)
-
(408)
(14,899)
2
44
-
25
-
15
72
190
401
102
424
43
20
-
9
94
38
45
14
200
-
-
13
86
21
177
155
22
771
(1,610)
9
916
(4,742)
7
541
(14,358)
$
3,373
$
3,562
$
5,729
$
7,239
$
10,808
$
337,760
$
307,441
$
286,868
$
287,246
$
355,698
1.00%
1.16%
2.00%
2.52%
3.04%
$
297,423
$
297,423
$
274,429
$
315,642
$
394,680
outstanding for the period
0.06%
0.06%
0.59%
1.50%
3.64%
(1) Loans are net of unearned income.
Charge-offs decreased from $816,000 in 2015 to $544,000 in 2016, which represents the lowest level
of charge-offs for the last five years. This reflects an improvement in credit quality that mirrors the
overall improvement in the local economy.
37
We have allocated the allowance for loan losses according to the amount deemed to be reasonably
necessary to provide for the possibility of losses being incurred within each of the categories of loans.
The allocation of the allowance as shown in the table below should not be interpreted as an indication
that losses in future years will occur in the same proportions or that the allocation indicates future loss
trends. Furthermore, the portion allocated to each loan category is not the total amount available for
future losses that might occur within such categories since the total allowance is a general allowance
applicable to the entire portfolio (dollars in thousands).
December 31, 2016
December 31, 2015
December 31, 2014
December 31, 2013
December 31, 2012
Total
%
Total
%
Total
%
Total
%
Total
%
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial
(except those secured by real estate)
Guranteed student loans
Consumer and other
Unallocated
$
41
300
1.22%
8.89%
$
30
291
0.8%
8.2%
$
34
202
0.6%
3.5%
$
135
1,274
1.9%
17.5%
$
495
4,612
4.6%
42.6%
611
406
56
3
18.11%
12.04%
1.66%
0.09%
1,167
460
51
17
32.8%
12.9%
1.4%
0.5%
1,837
607
77
130
32.1%
10.6%
1.3%
2.3%
1,200
670
19
337
16.6%
9.3%
0.3%
4.7%
1,359
817
23
-
12.6%
7.6%
0.2%
0.0%
271
8.03%
448
12.6%
469
8.2%
424
5.9%
658
6.1%
447
136
13.25%
4.03%
223
158
8
713
6.61%
4.68%
0.24%
21.15%
602
111
94
230
2
59
16.9%
3.1%
2.6%
6.5%
0.1%
1.6%
1,345
275
23.5%
4.8%
1,992
394
27.5%
5.4%
1,358
223
12.6%
2.1%
506
217
30
-
8.8%
3.8%
0.5%
0.0%
724
-
70
-
9.9%
0.0%
1.0%
0.0%
1,162
-
101
-
10.7%
0.0%
0.9%
0.0%
Total
$
3,373
100.0%
$
3,562
100.0%
$
5,729
100.0%
$
7,239
100.0%
$
10,808
100.0%
Asset quality
The following table summarizes asset quality information at the dates indicated (dollars in thousands).
2016
2015
December 31,
2014
2013
2012
Nonaccrual loans
Foreclosed properties
Total nonperforming assets
Restructured loans (not included in
nonaccrual loans above)
Loans past due 90 days and still
accruing (1)
$
$
2,402
2,926
5,328
$
$
3,718
6,249
9,967
$
7,478
12,638
20,116
$
$
$
18,647
16,742
35,389
$
$
25,605
20,204
45,809
$
10,154
$
14,260
$
24,812
$
28,236
$
30,167
$
8,174
$
8,590
$
719
$
60
$
115
Nonperforming assets to loans (2)
1.58%
3.25%
7.03%
12.35%
12.91%
Nonperforming assets to total assets
1.2%
2.4%
4.6%
8.0%
9.0%
Allowance for loan losses to
nonaccrual loans
140.4%
95.8%
76.6%
38.8%
42.2%
(1) All loans 90 days past due and still accruing at December 31, 2016 and 2015 are rehabilitated
student loans which have a 98% guarantee by the DOE.
(2) Loans are net of unearned income and deferred cost.
38
The following table presents an analysis of the changes in nonperforming assets for 2016 (in
thousands).
Nonaccrual
Loans
OREO
Total
Balance December 31, 2015
Additions
Loans placed back on accrual
Transfers to OREO
Repayments
Charge-offs
Sales
Balance December 31, 2016
$
$
$
3,718
1,812
(2,198)
(296)
(506)
(128)
-
-
2,402
6,249
277
-
296
-
(231)
(3,665)
-
2,926
9,967
2,089
(2,198)
-
(506)
(359)
(3,665)
-
5,328
$
$
$
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 in non-accrual status, previously accrued and unpaid interest is reversed against interest
income in the current period and interest is subsequently recognized only to the extent cash is
received. Interest accruals are resumed on such loans only when in the judgment of management,
the loans are estimated to be fully collectible as to both principal and interest.
Of the total nonaccrual loans of $2,402,000 at December 31, 2016 that were considered impaired, 8
loans totaling $660,000 had specific allowances for loan losses totaling $97,000. This compares to
$3,718,000 in nonaccrual loans at December 31, 2015 of which 12 loans totaling $2,112,000 had
specific allowances for loan losses of $370,000.
Cumulative interest income that would have been recorded had nonaccrual loans been performing
would have been $119,000, $146,000 and $224,000 for 2016, 2015 and 2014, respectively. Student
loans totaling $8,174,000 and $8,590,000 at December 31, 2016 and 2015, respectively, were past
due 90 days or more and interest was still being accrued as principal and interest on such loans have
a 98% guarantee by the DOE. The 2% not covered by the DOE guarantee is provided for in the
allowance for loan losses.
Other real estate owned consists of assets acquired through or in lieu of foreclosure. $1,983,000 of
the $2,926,000 other real estate owned at December 31, 2016, or 68%, relates to loans previously
classified as construction loans.
Deposits
The following table gives the composition of our deposits at the dates indicated (dollars in thousands).
39
December 31, 2016
December 31, 2015
December 31, 2014
Amount
%
Amount
%
Amount
%
Demand accounts
$
92,574
24.2%
$
78,282
21.5%
$
77,496
Interest checking accounts
Money market accounts
Savings accounts
Time deposits of $100,000 and over
Other time deposits
44,390
71,290
26,598
74,279
74,146
11.6%
18.6%
6.9%
19.4%
19.3%
44,256
64,841
19,403
72,745
85,321
12.1%
17.8%
5.3%
19.9%
23.4%
42,924
64,987
20,643
75,559
97,251
20.5%
11.3%
17.2%
5.4%
19.9%
25.7%
Total
$
383,277
100.0%
$
364,848
100.0%
$
378,860
100.0%
Total deposits increased by 5.1% in 2016 and decreased by, 3.6% and 3.0% in 2015 and 2014,
respectively. Checking and savings accounts increased by $21,621,000 or 15%, money market
accounts increased by $6,449,000 or 10% and time deposits decreased by $9,641,000 or 6% in 2016.
The decline in deposits in 2015 and 2014 was a result of repricing maturing time deposits at rates
below market for noncore depositors. In reducing deposits, we targeted higher cost deposits to reduce
our overall cost of funds. Higher cost time deposits declined as a percentage of total deposits from
45.6% at December 31, 2014 to 43.3% at December 31, 2015 and to 38.7% at December 31, 2016.
The variety of deposit accounts offered by the Company 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 will continue to be, significantly affected by money
market conditions.
The following table is a schedule of average balances and average rates paid for each deposit
category for the periods presented (dollars in thousands).
Noninterest-bearing demand accounts
Interest-bearing deposits
Interest checking accounts
Money market accounts
Savings accounts
Time deposits of $100,000 and over
Other time deposits
Total interest-bearing deposits
2016
Year Ended December 31,
2015
2014
Amount
Rate
Amount
Rate
Amount
Rate
$
82,678
$
75,127
$
62,612
42,783
68,817
20,119
77,248
80,955
289,922
0.18%
0.37%
0.18%
1.37%
1.16%
0.82%
43,450
67,796
20,282
72,989
90,967
295,484
0.18%
0.37%
0.18%
1.41%
1.19%
0.84%
42,311
66,866
20,555
105,829
87,359
322,920
0.18%
0.38%
0.18%
1.20%
1.56%
0.93%
Total average deposits
$
372,600
$
370,611
$
385,532
With short-term interest rates remaining at historic lows throughout the last few years, we were able
to significantly reduce the interest rates paid on deposits, particularly on longer term certificates of
deposit, as higher rate certificates of deposit matured in 2016, 2015 and 2014.
The following table is a schedule of maturities for time deposits of $100,000 or more at December 31,
2016 (in thousands).
40
Due within three months
Due after three months through six months
Due after six months through twelve months
Over twelve months
$
7,507
8,684
16,236
41,852
$
74,279
The Dodd-Frank Act permanently raises the current standard maximum deposit insurance amount to
$250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution
for each account ownership category.
Borrowings
We utilize borrowings to supplement deposits to address funding or liability duration needs.
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 borrowings from the FHLB. Each FHLB credit program has
its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe
the acceptable uses to which the advances may be put, as well as on the size of the advances and
repayment provisions. Borrowings from the FHLB were $2,400,000 and $6,000,000 at December 31,
2016 and 2015, respectively. The FHLB advances are secured by the pledge of loans. Available
borrowings at December 31, 2016 were approximately $27,000,000 based on currently pledged
collateral; however, with additional pledges, the Company could be granted up to 25% of assets in
advances.
Federal funds purchased represent unsecured and secured borrowings from other banks and
generally mature daily. We did not have any purchased federal funds at December 31, 2016 or 2015.
Other borrowings decreased by $427,000, from $508,000 at December 31, 2015 to $81,000 at
December 31, 2016. These borrowings represent business checking sweep accounts that bear
interest and are secured by pledged securities.
Off-balance sheet arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve elements of credit risk and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contractual amounts of these instruments
reflect the extent of the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and letters of credit written is represented by
the contractual amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted
otherwise, the Company does not require collateral or other security to support financial instruments
with credit risk.
At December 31, 2016, the Company had outstanding the following approximate off-balance-sheet
financial instruments whose contract amounts represent credit risk (in thousands):
41
Contract
Amount
2016
Contract
Amount
2015
Undisbursed credit lines
Commitments to extend or originate credit
Standby letters of credit
$
55,315
16,467
4,397
$
46,656
9,132
1,484
Total commitments to extend credit
$
76,179
$
57,272
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 payment of a fee. Since many of the commitments may
expire without being completely drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Capital resources
Shareholders’ equity at December 31, 2016 was $43,614,000, compared to $30,359,000 at December
31, 2015 and $19,058,000 at December 31, 2014. The $13,254,000 increase in shareholders’ equity
in 2016 is primarily due to net income for the year of $13,513,000, which includes the reversal of the
$11,977,000 valuation allowance previously recorded against the net deferred tax asset, offset by
dividends on preferred stock of $737,000.
The $11,301,000 increase in shareholders’ equity in 2015 is primarily due to the Rights Offering to
shareholders and concurrent Standby Offering completed in March 2015. Net cash proceeds from the
offering amounted to $8,717,000. In addition, as part of the Standby Offering, $2,215,000 in accrued
and unpaid dividends on our preferred stock was forgiven. Shareholders’ equity was also increased
by $646,000 from net income for the year and decreased by dividends on preferred stock of $674,000.
On May 1, 2009, the Company received a $14,738,000 investment by the United States Department
of the Treasury under the TARP Program. The TARP Program is a voluntary program designed to
provide capital for healthy banks to improve the flow of funds from banks to their customers. Under
the TARP Program, the Company issued to the Treasury $14,738,000 of preferred stock and warrants
to purchase 31,190 shares of the Company’s common stock at a purchase price of $70.88 per share.
The preferred stock issued by the Company under the TARP Program carried a 5% dividend until May
1, 2014, and now carries a 9% dividend. In November 2013, the Company participated in a successful
auction of the Company’s preferred stock securities by the U.S. Treasury that resulted in the purchase
of the securities by private and institutional investors. The U.S. Treasury continues to own the
warrants. This freed the Company from some constraints and costs that were in place while the U.S.
Treasury held the securities.
During the first quarter of 2005, the Company issued $5.2 million in Trust Preferred Capital Notes to
increase its regulatory capital and to help fund its expected growth in 2005. During the third quarter
of 2007, the Company issued $3.6 million in Trust Preferred Capital Notes to partially fund the
construction of an 80,000 square foot headquarters building at the Watkins Centre completed in July
2008. The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital
adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. See Note 15 of the
Notes to Consolidated Financial Statements for a more detailed discussion of the Trust Preferred
Capital Notes.
The Company was previously prohibited by its Written Agreement with the Reserve Bank from paying
dividends on capital stock, including the Series A preferred stock, or interest payments on the trust
preferred capital notes without prior regulatory approval. The Written Agreement was terminated by
the Reserve Bank as of July 28, 2016. With the termination of the Written Agreement, the Company
is not required to defer the quarterly cash dividends on the Series A preferred stock. At December 31,
42
2016, the aggregate amount of the Company’s total accrued but deferred dividend payments on the
preferred stock was $2,815,000 and reflected as a reduction of retained earnings. This amount was
accrued for and included in other liabilities on the Balance Sheet in the Consolidated Financial
Statements.
Subsequent to December 31, 2016, 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.
The Company received notification on February 26, 2016 from the Reserve Bank approving the
payment of all accrued and deferred interest payments on trust preferred securities bringing the
Company current as of March 2016.
On December 4, 2013 the Company issued 67,907 new shares of common stock through a private
placement to directors and executive officers. The sale raised $1,684,075 in new capital for the
Company. The $24.80 sale price for the common shares was the stock’s book value at September
30, 2013, which represented a 30% premium over the closing price of the stock on December 3, 2013.
On August 6, 2014, the Company filed Articles of Amendment to its Articles of Incorporation with the
Virginia State Corporation Commission to effect a 1-for-16 reverse stock split of its outstanding
common stock. The Articles of Amendment became effective on August 8, 2014. As a result of the
reverse split, every sixteen shares of the Company’s issued and outstanding common stock were
consolidated into one issued and outstanding share of common stock.
On March 27, 2015, the Company completed a Rights Offering to shareholders and concurrent
Standby Offering to Kenneth R. Lehman, in which the Company issued an aggregate of 1,051,866
shares of common stock (the total number of shares offered) at $13.87 per share for aggregate gross
proceeds of $14,589,381 (including the value of the Company’s common stock of $4,618,813
exchanged for shares of preferred stock by Mr. Lehman). In connection with the Rights Offering,
283,293 shares were issued to shareholders upon exercise of their basic subscription rights and
191,773 shares were issued to shareholders upon exercise of their oversubscription privileges
(approximately 36.9% of the total number of shares requested pursuant to oversubscription privileges).
In connection with the Standby Offering, Mr. Lehman purchased an aggregate of 576,800 shares of
the Company’s common stock, 333,007 of which were issued in exchange for 9,023 shares of the
Company’s preferred stock and 243,793 of which were purchased for cash. Also, as part of the
Standby Offering, Mr. Lehman forgave $2,215,009 in accrued and unpaid dividends on the preferred
stock.
On December 22, 2015, the Bank received notification from the FDIC and the BFI that the Consent
Order under which the Bank had been operating since February 3, 2012 was terminated effective
December 14, 2015. The Consent Order was terminated as a result of the steps the Company and
the Bank took to, among other things, improve asset quality, increase capital, augment management
and board oversight, and increase earnings. In place of the Consent Order, the Bank’s board of
directors made certain written assurances to the FDIC and BFI in the MOU concerning asset quality,
earnings, regulatory violations, minimum capital levels, asset growth, restrictions on paying dividends
and a requirement to furnish progress reports to the FDIC and BFI. Due to further improvements by
the Company and the Bank in asset quality and earnings, and the correction of a prior Regulation W
violation, the MOU was terminated effective May 12, 2016, and the Written Agreement was terminated
effective July 28, 2016. With the terminations of the MOU and the Written Agreement, neither the
Company nor the Bank is under any formal or informal agreements with its regulators.
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal
Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no
longer obligated to report consolidated regulatory capital. The Bank continues to be subject to various
43
capital requirements administered by banking agencies.
The following table presents the composition of regulatory capital and the capital ratios for the Bank
at the dates indicated (dollars in thousands).
2016
December 31,
2015
2014
Tier 1 capital
Total bank equity capital
Net unrealized loss on available-for-sale securities
Defined benefit postretirement plan
Dissallowed deferred tax asset
Disallowed intangible assets
Total Tier 1 capital
$
50,231
181
60
(4,619)
(1)
45,852
$
38,665
439
69
-
(40)
39,133
$
30,158
644
77
-
(198)
30,681
Tier 2 capital
Allowance for loan losses
Total Tier 2 capital
Total risk-based capital
Risk-weighted assets
Average assets
Capital ratios
3,373
3,373
3,562
3,562
3,572
3,572
49,225
42,695
34,253
$
321,166
$
304,611
$
283,581
$
438,069
$
419,398
$
427,113
Leverage ratio (Tier 1 capital to
average assets)
Common equity tier 1 capital ratio (CET 1)
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Equity to total assets
10.47%
14.28%
14.28%
15.33%
11.29%
9.33%
12.85%
12.85%
14.02%
9.25%
7.18%
N/A
10.82%
12.08%
7.02%
Under new capital guidelines discussed more fully following, the Bank must identify high volatility
commercial real estate (“HVCRE”) loans, which are defined as a credit facility that, prior to conversion
to permanent financing, finances or has financed the acquisition, development, or construction of real
property, unless the facility finances (1) one to four family residential properties; (2) certain community
development projects; (3) the purchase or development of agricultural land; (4) commercial real estate
projects that meet the criteria in the rule, including criteria regarding the loan-to-value ratio and capital
contributions to the project. Under the new guidelines, HVCRE loans are risk weighted at 150% for
capital ratios purposes, rather than 100% as with other loans.
Federal regulatory agencies are required by law to adopt regulations defining five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. The Bank met the ratio requirements to be categorized as a “well capitalized”
institution as of December 31, 2016, 2015 and 2014. However, due to the minimum capital ratios
required by the prior Consent Order, the Bank was considered adequately capitalized in 2014. The
MOU required the Bank to maintain a leverage ratio of at least 8% and a total capital to risk-weighted
assets ratio of at least 12%. Primarily as a result of the Company’s Rights Offering and Standby
Offering completed on March 27, 2015, the Bank’s leverage ratio increased to 9.33% and the total
capital to risk weighted assets ratio increased to 14.02% at December 31, 2015, exceeding the ratios
required by the MOU. With the termination of the Consent Order and MOU, the Bank is considered
well-capitalized at December 31, 2016.
When capital falls below the “well capitalized” requirement, consequences can include: new branch
approval could be withheld; more frequent examinations by the FDIC; brokered deposits cannot be
44
renewed without a waiver from the FDIC; and other potential limitations as described in FDIC Rules
and Regulations Sections 337.6 and 303, and FDI Act Section 29. In addition, the FDIC insurance
assessment increases when an institution falls below the “well capitalized” classification.
Liquidity
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without
significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management
involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow
requirements while maximizing profits. Liquidity management is made more complicated because
different balance sheet components are subject to varying degrees of management control. For
example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high
degree of control at the time investment decisions are made. However, net deposit inflows and
outflows are far less predictable and are not subject to the same degree of control.
At December 31, 2016 and 2015, our liquid assets, consisting of cash, cash equivalents and
investment securities available for sale, totaled $55,690,000 and $55,181,000, or 12.5% and 13.1%
of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity
since they can be converted into cash in a timely manner. However, one security of approximately
$1,050,000 is pledged against internal sweeps. Therefore, the related borrowings would need to be
repaid prior to the securities being sold in order for these securities to be converted to cash.
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 December 31, 2016.
We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB
requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be
pledged to secure any advances from the FHLB. The unused borrowing capacity currently available
from the FHLB at December 31, 2016 was $24.7 million, based on the Bank's qualifying collateral
available to secure any future borrowings. However, we are able to pledge additional collateral to the
FHLB in order to increase our available borrowing capacity up to 25% of assets. Liquidity provides us
with the ability to meet normal deposit withdrawals, while also providing for the credit needs of
customers. We are committed to maintaining liquidity at a level sufficient to protect depositors, provide
for reasonable growth, and fully comply with all regulatory requirements.
At December 31, 2016, we had commitments to originate $76,179,000 of loans. Fixed commitments
to incur capital expenditures were approximately $275,000 at December 31, 2016. Certificates of
deposit scheduled to mature or reprice in the 12-month period ending December 31, 2016 total
$66,472,000. We believe that a significant portion of such deposits will remain with us. We further
believe that deposit growth, loan repayments and other sources of funds will be adequate to meet our
foreseeable short-term and long-term liquidity needs.
Interest Rate Sensitivity
An important element of asset/liability management is the monitoring of our sensitivity to interest rate
movements. In order to measure the effects of interest rates on our net interest income, management
takes into consideration the expected cash flows from the securities and loan portfolios and the
expected magnitude of the repricing of specific asset and liability categories. We evaluate interest
sensitivity risk and then formulate guidelines to manage this risk based on management’s outlook
regarding the economy, forecasted interest rate movements and other business factors. Our goal is
to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.
45
Contractual principal repayments of loans do not necessarily reflect the actual term of our loan
portfolio. The average lives of mortgage loans are substantially less than their contractual terms
because of loan prepayments and because of enforcement of due-on-sale clauses, which gives us the
right to declare a loan immediately due and payable in the event, among other things, the borrower
sells the real property subject to the mortgage and the loan is not repaid. In addition, certain borrowers
increase their equity in the security property by making payments in excess of those required under
the terms of the mortgage.
The sale of fixed rate loans is intended to protect us from precipitous changes in the general level of
interest rates. The valuation of adjustable rate mortgage loans is not as directly dependent on the level
of interest rates as is the value of fixed rate loans. As with other investments, we regularly monitor
the appropriateness of the level of adjustable rate mortgage loans in our portfolio and may decide from
time to time to sell such loans and reinvest the proceeds in other adjustable rate investments.
Critical Accounting Policies and Estimates
General
The accounting and reporting policies of the Company and the Bank are in accordance with GAAP
and conform to general practices within the banking industry. The Company’s financial position and
results of operations are affected by management’s application of accounting policies, including
estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities,
and amounts reported for revenues, expenses and related disclosures. Different assumptions in the
application of these policies could result in material changes in the Company’s consolidated financial
position and/or results of operations.
The more critical accounting and reporting policies include the Company’s accounting for the
allowance for loan losses, real estate acquired in settlement of loans, and income taxes. The
Company’s accounting policies are fundamental to understanding the Company’s consolidated
financial position and consolidated results of operations. Accordingly, the Company’s significant
accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial
Statements.
The following is a summary of the Company’s critical accounting policies that are highly dependent on
estimates, assumptions, and judgments.
Allowance for loan losses
We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses
inherent in the loan portfolio. We maintain policies and procedures that address the systems of
controls over the following areas of maintenance of the allowance: the systematic methodology used
to determine the appropriate level of the allowance to provide assurance they are maintained in
accordance with GAAP; the accounting policies for loan charge-offs and recoveries; the assessment
and measurement of impairment in the loan portfolio; and the loan grading system.
The allowance reflects management’s best estimate of probable losses within the existing loan
portfolio and of the risk inherent in various components of the loan portfolio, including loans identified
as impaired as required by FASB Codification Topic 310: Receivables. Loans evaluated individually
for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days
or more, restructured loans and other loans selected by management. The evaluations are based
upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is
individually impaired, then a specific reserve is established for the amount of impairment.
Loans are grouped by similar characteristics, including the type of loan, the assigned loan classification
and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is
derived based upon historical net charge-off rates, the predominant collateral type for the group and
the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant
46
environmental factors and other conditions of the portfolio of loans and leases, including: borrower
and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes
in underwriting standards and risk selection; level of experience, ability and depth of lending
management; and national and local economic conditions.
The amounts of estimated impairment for individually evaluated loans and groups of loans are added
together for a total estimate of loan losses. This estimate of losses is compared to our allowance for
loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an
additional provision to the allowance would be made. If the estimate of losses is less than the
allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether
the allowance falls outside a range of estimates. We recognize the inherent imprecision in estimates
of losses due to various uncertainties and variability related to the factors used, and therefore a
reasonable range around the estimate of losses is derived and used to ascertain whether the
allowance is too high. If different assumptions or conditions were to prevail and it is determined that
the allowance is not adequate to absorb the new estimate of probable losses, an additional provision
for loan losses would be made, which amount may be material to the financial statements.
During the fourth quarter of 2015, we adopted a software solution for the analysis of the allowance for
loan losses. While our methodology of evaluating the adequacy of the allowance for loan losses
generally did not change, the software is more robust in that it:
• allows us to take a more measureable approach to our evaluation of qualitative factors such
•
as economic conditions that may affect loss experience; and
is widely used by community banks which provides peer data that can be used as a benchmark
for comparison to our analysis.
In addition to the adoption of the software solution for our analysis, we reviewed the last twenty years
of historical loss data for peer banks in Virginia to assist us in our evaluation of environmental factors
and other conditions that could affect the loan portfolio and the overall adequacy of the allowance for
loan losses.
Troubled debt restructurings
A loan is accounted for as a troubled debt restructuring if we, for economic or legal reasons, grant a
concession to a borrower considered to be experiencing financial difficulties that we would not
otherwise consider. A troubled debt restructuring may involve the receipt of assets from the debtor in
partial or full satisfaction of the loan, or a modification of terms such as a reduction of the stated interest
rate or balance of the loan, a reduction of accrued interest, an extension of the maturity date or renewal
of the loan at a stated interest rate lower than the current market rate for a new loan with similar risk,
or some combination of these concessions. Troubled debt restructurings can be in either accrual or
nonaccrual status. Nonaccrual troubled debt restructurings are included in nonperforming loans.
Accruing troubled debt restructurings are generally excluded from nonperforming loans as it is
considered probable that all contractual principal and interest due under the restructured terms will be
collected. Troubled debt restructurings generally remain categorized as nonperforming loans and
leases until a six-month payment history has been maintained.
In accordance with current accounting guidance, loans modified as troubled debt restructurings are,
by definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-
loan basis similar to other impaired loans as described above under Allowance for loan
losses. Certain loans modified as troubled debt restructurings may have been previously measured
for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is
modified as a troubled debt restructuring the allowance will be impacted by the difference between the
results of these two measurement methodologies. Loans modified as troubled debt restructurings that
subsequently default are factored into the determination of the allowance in the same manner as other
defaulted loans.
47
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans represents properties acquired through foreclosure or
physical possession. Write-downs to fair value of foreclosed assets less estimate costs to sell at the
time of transfer are charged to allowance for loan losses. Subsequent to foreclosure, the Company
periodically evaluates the value of foreclosed assets held for sale and records an impairment charge
for any subsequent declines in fair value less selling costs. If fair value declines subsequent to
foreclosure a valuation allowance is recorded through expense. Operating costs after acquisition are
expensed as incurred. The valuation allowance was $612,000 and $1,748,000 at December 31, 2016
and 2015, respectively. Fair value is based on an assessment of information available at the end of
a reporting period and depends upon a number of factors, including historical experience, economic
conditions, and issues specific to individual properties. The evaluation of these factors involves
subjective estimates and judgments that may change.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. If current available information raises doubt as to the realization of the
deferred tax assets, a valuation allowance may be established. Management considers the
determination of this valuation allowance to be a critical accounting policy due to the need to exercise
significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and
assets, including projections of future taxable income. These judgments and estimates are reviewed
on a continual basis as regulatory and business factors change. A valuation allowance for deferred
tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, or if
management projects lower levels of future taxable income. Management determined that as of
December 31, 2015, the objective negative evidence represented by the Company’s recent losses
outweighed the more subjective positive evidence and, as a result, recognized a valuation allowance
for all of the net deferred tax asset that is dependent on future earnings of the Company of
approximately $11,807,000.
Given consistent earnings and improving asset quality, the Company’s analysis concluded that, as of
September 30, 2016, it was more likely than not that it would generate sufficient taxable income within
the applicable carry-forward periods to realize its net deferred tax asset. As such, the full valuation
allowance of $11,997,000 was released at September 30, 2016. The Company’s net deferred tax
asset was $11,435,000 as of September 30, 2016. During the fourth quarter of 2016, the consistent
earnings continued with earnings before income taxes of $700,000, and our asset quality continued
to improve. As a result, we continue to believe that it is more likely than not that the Company will
generate sufficient taxable income within the applicable carry-forward periods to realize its net deferred
tax asset as of December 31, 2016.
During 2016, the Internal Revenue Service completed an examination of the Company’s federal
income tax return for the year ended December 31, 2013. No changes to the return were proposed.
New accounting standards
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606).
The amendments in this ASU modify the guidance companies use to recognize revenue from contracts
with customers for transfers of goods or services and transfers of nonfinancial assets, unless those
contracts are within the scope of other standards. The ASU requires that entities apply a specific
method to recognize revenue reflecting the consideration expected from customers in exchange for
the transfer of goods and services. The guidance also requires new qualitative and quantitative
disclosures, including information about contract balances and performance obligations. Entities are
48
also required to disclose significant judgments and changes in judgments for determining the
satisfaction of performance obligations.
In August 2015, the FASB issued ASU 2014-09 changing the effective date for ASU 2014-09 to annual
reporting periods beginning after December 15, 2017 from December 15, 2016. The Company’s
primary source of revenue is interest income from loans and their fees. As these items are outside the
scope of the guidance, this income is not expected to be impacted by implementation of ASU 2014-
09. The Company is still reviewing other sources of income such as secondary market lending fees
and other deposit account fees to evaluate the impact of ASU 2014-09. The Company continues to
evaluate the impact that ASU 2014-09 will have on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”.
ASU 2015-17 eliminates the guidance in Topic 740, “Income Taxes”, that required an entity to separate
deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related
valuation allowance, be offset and presented as a single noncurrent amount in a classified balance
sheet. The new guidance requires that all deferred tax assets and liabilities, along with any related
valuation allowance, be classified as noncurrent on the balance sheet. As a result each jurisdiction
will now only have one net noncurrent deferred tax asset or liability. The guidance in this ASU is
effective for public business entities for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2016. Early adoption is permitted as of the beginning of any interim or
annual reporting period. The Company does not expect this ASU to have a significant impact on its
financial condition or results of operations.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial
Assets and Financial Liabilities.” This ASU requires an entity to: (i) measure equity investments at fair
value through net income, with certain exceptions; (ii) present in Other Comprehensive Income the
changes in instrument-specific credit risk for financial liabilities measured using the fair value option;
(iii) present financial assets and financial liabilities by measurement category and form of financial
asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit
price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS
debt securities in combination with other deferred tax assets. The Update provides an election to
subsequently measure certain nonmarketable equity investments at cost less any impairment and
adjusted for certain observable price changes. The Update also requires a qualitative impairment
assessment of such equity investments and amends certain fair value disclosure requirements. This
ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017. Early adoption is only permitted for the provision related to instrument-specific
credit risk. The Company is currently assessing the impact of ASU 2016-01 will have on its
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU requires lessees
to recognize assets and liabilities arising from most operating leases on the statement of financial
position. ASU 2016-02 will be effective for the Company for the fiscal years beginning after December
15, 2018 with early adoption permitted. The Company has determined that the provisions of ASU-
2016-02 may result in an increase in assets to recognize the present value of the lease obligations
with a corresponding increase liabilities, however, the Company does not expect this to have a material
impact on the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-09 “Compensation – Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several
aspects of the accounting for employee share-based payment transactions, including the accounting
for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2016. Early adoption is permitted; however if the Company
elects to early adopt, then all amendments must be adopted in the same period. The Company has
concluded the adoption of ASU No. 2016-09 will hot have a material impact on its consolidated
financial statements.
49
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” This ASU amends guidance on reporting
credit losses for assets held at amortized cost basis and available-for-sale debt securities by
eliminating the probable initial recognition threshold (incurred loss methodology) and requiring entities
to reflect its current estimate of all expected credit losses. The amendments in the ASU are effective
beginning after December 15, 2019 and for interim periods within that year. Early adoption is permitted
beginning after December 15, 2018. Entities will apply the amendments in this ASU through a
cumulative-effect adjustment to retained earnings in the first period effective. While the Company is
currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new
standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare
for the implementation when it becomes effective, such as forming an internal task force, gathering
pertinent data, consulting with outside professionals, and evaluating its current IT systems.
In August 2016, The FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Payments (a consensus of Merging Issues Task Force).”
This ASU attempts to clarify how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The purpose of this update is to reduce existing diversity in
practice in eight areas addressed by the update. The amendment will be effective for the Company
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Early adoption is permitted. The Company has concluded the adoption of ASU No. 2016-15 will not
have a material impact on its consolidated financial statements.
Amendment to Village Bank Supplemental Executive Retirement Plan
On July 9, 2016, the Bank amended its supplemental executive retirement plan to provide that the
participants’ benefits will vest upon a change of control of the Bank. The plan previously provided that
a participant’s benefits would vest upon a change of control only if the participant experienced a
qualifying termination of employment within 12 months after the change of control.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related footnotes of the Company are presented following.
50
Report of Independent Registered Public Accounting Firm
Board of Directors
Village Bank and Trust Financial Corp.
Midlothian, Virginia
We have audited the accompanying consolidated balance sheets of Village Bank and Trust Financial
Corp. and Subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of
operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in
the period ended December 31, 2016. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Village Bank and Trust Financial Corp. and Subsidiary as of
December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2016, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO USA, LLP
Richmond, Virginia
March 31, 2017
51
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
December 31, 2016 and 2015
(in thousands, except share data)
Assets
Cash and due from banks
Federal funds sold
Total cash and cash equivalents
Investment securities available for sale
Loans held for sale
Loans
Outstandings
Allowance for loan losses
Deferred fees and costs, net
Total loans, net
Other real estate owned, net of valuation allowance
Assets held for sale
Premises and equipment, net
Bank owned life insurance
Accrued interest receivable
Other assets
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest bearing demand
Interest bearing
Total deposits
Federal Home Loan Bank advances
Long-term debt - trust preferred securities
Other borrowings
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' equity
Preferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 shares
authorized; 5,715 shares issued and outstanding at December 31, 2016
and December 31, 2015
Common stock, $4 par value - 10,000,000 shares authorized;
1,428,261 shares issued and outstanding at December 31, 2016
1,417,775 shares issued and outstanding at December 31, 2015
Additional paid-in capital
Accumulated deficit
Common stock warrant
Stock in directors rabbi trust
Directors deferred fees obligation
Accumulated other comprehensive loss
Total shareholders' equity
See accompanying notes to consolidated financial statements.
52
2016
2015
$
10,848
948
11,796
43,894
14,784
$
17,076
186
17,262
37,919
14,373
337,100
(3,373)
660
334,387
2,926
841
12,758
7,093
2,274
14,049
306,771
(3,562)
670
303,879
6,249
12,631
13,671
7,130
2,060
4,767
$
444,802
$
419,941
$
92,574
290,703
383,277
2,400
8,764
81
70
6,596
401,188
$
78,282
286,566
364,848
6,000
8,764
508
1,346
8,116
389,582
23
23
5,629
58,643
(21,172)
732
(1,034)
1,034
(241)
43,614
5,562
58,497
(33,948)
732
(1,034)
1,034
(507)
30,359
$
444,802
$
419,941
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Operations
Years Ended December 31, 2016, 2015 and 2014
(in thousands, except per share data)
Interest income
Loans
Investment securities
Federal funds sold
Total interest income
Interest expense
Deposits
Borrowed funds
Total interest expense
Net interest income
Provision for (recovery of) loan losses
Net interest income after provision
for (recovery of) loan losses
Noninterest income
Service charges and fees
Gain on sale of loans
Gain on sale of asset held for sale
Gain (loss) on sale of investment securities
Rental income
Other
Total noninterest income
Noninterest expense
Salaries and benefits
Commissions
Occupancy
Equipment
Write down of assets held for sale
Cease use lease obligation
Supplies
Professional and outside services
Advertising and marketing
Foreclosed assets, net
FDIC insurance premium
Other operating expense
Total noninterest expense
Income (loss) before income tax benefit
Income tax benefit
Net income (loss)
Preferred stock dividends and amortization of discount
Preferred stock principal forgiveness
Preferred stock dividend forgiveness
Net income (loss) available to
2016
2015
2014
$
15,563
355
71
15,989
$
14,833
616
55
15,504
$
15,309
1,182
87
16,578
2,367
242
2,609
13,380
-
2,481
386
2,867
12,637
(2,000)
3,006
554
3,560
13,018
100
13,380
14,637
12,918
2,459
6,430
504
162
582
713
10,850
11,295
1,606
1,470
762
220
252
265
2,999
355
393
292
1,980
21,889
2,341
(11,172)
13,513
(737)
-
-
2,520
6,076
-
6
1,105
351
10,058
10,846
1,555
1,730
765
2,649
-
278
2,930
325
153
916
1,902
24,049
646
-
646
(674)
4,404
2,215
2,245
4,449
-
(210)
965
440
7,889
10,685
1,165
1,690
708
-
-
344
2,550
321
1,244
968
2,169
21,844
-
(1,037)
-
(1,037)
(1,436)
-
-
common shareholders
$
12,776
$
6,591
$
(2,473)
Earnings (loss) per share, basic
Earnings (loss) per share, diluted
$
$
8.99
8.99
$
$
5.65
5.49
$
$
(7.39)
(7.39)
See accompanying notes to consolidated financial statements.
53
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2016, 2015 and 2014
(in thousands)
Net income (loss)
Other comprehensive income
Unrealized holding gains arising during the period
Tax effect
Net change in unrealized holding gains on
securities available for sale, net of tax
Reclassification adjustment
Reclassification adjustment for (gains) losses
realized in net income (loss)
Tax effect
Reclassification for (gains) losses included
in net income (loss), net of tax
Minimum pension adjustment
Tax effect
Minimum pension adjustment, net of tax
2016
2015
2014
$
13,513
$
646
$
(1,037)
552
188
364
(162)
(55)
(107)
14
5
9
317
108
209
(6)
(2)
(4)
14
5
9
4,499
1,529
2,970
210
72
138
14
5
9
Total other comprehensive income
266
214
3,117
Total comprehensive income
$
13,779
$
860
$
2,080
See accompanying notes to consolidated financial statements.
54
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2016, 2015 and 2014
(in thousands)
Additional Retained
Discount on Stock in Deferred
Other
Preferred Common
Stock
Stock
Paid-in
Capital
Earnings
Preferred Directors
Fees
omprehensive
(Deficit)
Warrant
Stock Rabbi Trust Obligation ncome (loss) Total
Directors Accumulated
$
59
$
21,353
$
38,054
$
(38,066)
$
732
$
(50)
$
(878)
$
878
$
(3,838)
$
18,244
-
-
-
-
-
-
-
-
-
-
-
-
(50)
(1,386)
(20,019)
20,019
5
-
-
-
-
(16)
131
-
-
-
-
-
-
(1,037)
-
-
-
-
-
-
-
-
59
1,339
58,188
(40,539)
732
-
-
-
(18)
(18)
-
-
-
-
-
-
16
2,875
1,332
-
-
-
-
-
-
-
(95)
5,842
(1,314)
(4,386)
-
262
-
-
-
(674)
-
-
-
4,404
2,215
-
-
646
-
-
-
-
-
-
-
-
-
-
-
23
5,562
58,497
(33,948)
732
-
-
-
-
-
-
67
-
-
-
-
-
(67)
213
-
-
-
(737)
-
-
-
13,513
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
-
-
-
(1,386)
(11)
131
9
(1,037)
-
-
3,108
3,108
(878)
878
(721)
19,058
(156)
156
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
-
(674)
(79)
8,717
-
-
2,215
262
-
9
646
205
205
(1,034)
1,034
(507)
30,359
-
-
-
-
-
(737)
-
213
-
9
13,513
-
9
-
257
257
-
-
-
-
-
50
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance, December 31, 2013
Amortization of preferred stock
discount
Preferred stock dividend
Reverse stock split
Issuance of common stock
Stock based compensation
Minimum pension adjustment
(net of income taxes of $5)
Net loss
Change in unrealized gain on
investment securities available-for-sale,
net of reclassification and tax effect
Balance, December 31, 2014
Preferred stock dividend
Restricted stock issuance
Issuance of common stock, net of offering
expense of $1,200
Preferred stock exchanged for common stock
Preferred stock principal forgiveness
Preferred stock dividend forgiveness
Stock based compensation
Minimum pension adjustment
(net of income taxes of $5)
Net income
Change in unrealized gain on
investment securities available-for-sale,
net of reclassification and tax effect
Balance, December 31, 2015
Preferred stock dividend
Restricted stock issuance
Stock based compensation
Minimum pension adjustment
(net of income taxes of $5)
Net income
Change in unrealized gain on
investment securities available-for-sale,
net of reclassification and tax effect
Balance, December 31, 2016
$
23
$
5,629
$
58,643
$
(21,172)
$
732
$
-
$
(1,034)
$
1,034
$
(241)
$
43,614
See accompanying notes to consolidated financial statements.
55
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2016, 2015 and 2014
(in thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization
Deferred income taxes
Valuation allowance (recovery) on net deferred tax asset
Provision for (recovery of) loan losses
Write-down of other real estate owned
Valuation allowance other real estate owned
Write-down of assets held for sale
(Gain) loss on securities sold
Gain on loans sold
Gain on sale of assets held for sale
(Gian) loss on sale and disposal of premises and equipment
Gain on sale of other real estate owned
Stock compensation expense
Proceeds from sale of mortgage loans
Origination of mortgage loans for sale
Amortization of premiums and accretion of discounts on securities, net
Decrease (increase) in interest receivable
Increase in bank owned life insurance
Income recognized from death benefit on bank owned life insurance
Decrease (increase) in other assets
Increase (decrease) in interest payable
Increase (decrease) in other liabilities
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities
Purchases of available for sale securities
Proceeds from the sale or calls of available for sale securities
Proceeds from the sale of assets held for sale
Net increase in loans
Proceeds from bank owned life insurance death benefit
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Proceeds from sale of premises and equipment
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities
Issuance of common stock
Net proceeds from sale of common stock, net of expenses of $990
Net increase (decrease) in deposits
Net decrease in Federal Home Loan Bank Advances
Net increase (decrease) in other borrowings
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
2016
2015
2014
$
13,513
$
646
$
(1,037)
765
813
(11,997)
-
624
(393)
220
(162)
(6,430)
(504)
2
(15)
213
218,627
(212,608)
142
(214)
(185)
(226)
2,660
(1,276)
(2,257)
1,312
(27,822)
22,257
7,338
(26,169)
448
3,680
(912)
-
(21,180)
-
-
18,429
(3,600)
(427)
14,402
(5,466)
17,262
843
277
(277)
(2,000)
690
(35)
2,649
(6)
(6,076)
-
12
(862)
262
208,479
(206,862)
287
(688)
(183)
-
(190)
179
505
(2,350)
(6,748)
8,401
-
(21,181)
-
7,037
(1,080)
-
(13,571)
(79)
8,965
(14,012)
(8,000)
(2,794)
(15,920)
(31,841)
49,103
681
(401)
334
100
1,642
(720)
-
210
(4,449)
-
(3)
(142)
131
162,983
(160,077)
396
114
(182)
-
(138)
74
2,736
2,252
-
22,310
-
(8,860)
-
10,952
(2,587)
17
21,832
(11)
-
(11,768)
(4,000)
589
(15,190)
8,894
40,209
Cash and cash equivalents, end of period
$
11,796
$
17,262
$
49,103
Supplemental Disclosure of Cash Flow Information
Cash payments for interest
Supplemental Schedule of Non Cash Activities
Real estate owned assets acquired in settlement of loans
Assets moved to held for sale
Accrual of additions on held for sale
Bank financed sale of asset held for sale
Dividends on preferred stock accrued
Non-Cash conversion of preferred shares
Forgiveness of principal and accrued dividends
See accompanying notes to consolidated financial statements.
56
$
3,233
$
2,688
$
3,486
268
$
$
-
$
-
4,912
$
$
737
-
$
-
$
$
461
831
$
547
$
$
-
$
674
$
4,619
$
6,619
7,628
$
$
-
-
$
$
-
$
1,386
$
-
$
-
Village Bank and Trust Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Note 1.
Summary of Significant Accounting Policies
The accounting and reporting policies of Village Bank and Trust Financial Corp. and subsidiary (the
“Company”) conform to accounting principles generally accepted in the United States of America
(“GAAP”) and to general practice within the banking industry. The following is a description of the
more significant of those policies:
Business
The Company is the holding company of Village Bank (the “Bank”). The Bank opened to the public
on December 13, 1999 as a traditional community bank offering deposit and loan services to
individuals and businesses in the Richmond, Virginia metropolitan area. Village Bank Mortgage
Corporation (“Village Mortgage”) is a full service mortgage banking company wholly-owned by the
Bank.
The Bank is subject to regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities. As a consequence of the extensive regulation of
commercial banking activities, the Bank’s business is susceptible to being affected by state and federal
legislation and regulations.
The majority of the Company’s real estate loans are collateralized by properties in markets in the
Richmond, Virginia metropolitan area. Accordingly, the ultimate collectability of those loans
collateralized by real estate is particularly susceptible to changes in market conditions in the Richmond
area.
Basis of presentation and consolidation
The consolidated financial statements include the accounts of the Company, the Bank and Village
Mortgage. All material intercompany balances and transactions have been eliminated in
consolidation.
Use of estimates
The preparation of the consolidated financial statements in conformity with 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 balance sheets dates and
revenues and expenses during the reporting 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, and the estimate of the fair
value of assets held for sale.
Investment securities
At the time of purchase, debt securities are classified into the following categories: held to maturity,
available for sale or trading. Debt securities that the Company has both the positive intent and ability
to hold to maturity are classified as held to maturity. Held to maturity securities are stated at amortized
cost adjusted for amortization of premiums and accretion of discounts on purchase using a method
that approximates the effective interest method. Investments classified as trading or available for sale
are stated at fair value. Changes in fair value of trading investments are included in current earnings
while changes in fair value of available for sale investments are excluded from current earnings and
reported, net of taxes, as a separate component of other comprehensive income. Presently, the
Company does not maintain a portfolio of trading securities or held to maturity.
The fair value of investment securities held to maturity and available for sale is estimated based on
quoted prices for similar assets determined by bid quotations received from independent pricing
57
services. Declines in the fair value of securities below their amortized cost that are other than
temporary are reflected in earnings or other comprehensive income, as appropriate. For those debt
securities whose fair value is less than their amortized cost basis, we consider our intent to sell the
security, whether it is more likely than not that we will be required to sell the security before recovery
and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an
issuer’s financial condition, we may consider whether the securities are issued by the federal
government or its agencies, whether downgrades by bond rating agencies have occurred and the
results of reviews of the issuer’s financial condition.
Interest income is recognized when earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Loans held for sale
The Company, through the Bank’s mortgage banking subsidiary, Village Bank Mortgage, originates
residential mortgage loans for sale in the secondary market. Mortgage loans originated and intended
for sale in the secondary market are carried at the lower of cost or estimated fair value on an aggregate
basis as determined by outstanding commitments from investors. Upon entering into a commitment
to originate a loan, 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 that 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. Net unrealized losses, if any, are recognized through a valuation allowance by charges to
income.
Residential mortgage loans held for sale are sold to the permanent investor with the mortgage
servicing rights released. Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related mortgage loans sold. Gains
on the sale of loans totaling approximately $6,430,000, $6,076,000 and $4,449,000 were realized
during the years ended December 31, 2016, 2015 and 2014, respectively.
Once a residential mortgage loan is sold to a permanent investor, the Company has no further
involvement or retained interest in the loan. There are limited circumstances in which the permanent
investor can contractually require the Company to repurchase the loan. The Company makes no
provision for any such recourse related to loans sold as history has shown repurchase of loans under
these circumstances has been remote.
The Company, through Village Mortgage, enters into commitments to originate residential mortgage
loans in which the interest rate on the loan is determined prior to funding, termed rate lock
commitments. Such rate lock commitments on mortgage loans to be sold in the secondary market
are considered to be derivatives. The period of time between issuance of a loan commitment and
closing and sale of the loan generally ranges from 30 to 45 days. The Company protects itself from
changes in interest rates during this period by requiring a firm purchase agreement from a permanent
investor before a loan can be closed. As a result, the Company is not exposed to losses nor will it
realize gains or losses related to its rate lock commitments due to changes in interest rates.
The fair value of rate lock commitments and best efforts contracts is not readily ascertainable with
precision because rate lock commitments and best efforts contracts are not actively traded in stand-
alone markets. The Company determines the fair value of rate lock commitments and best efforts
contracts by measuring the change in the value of the underlying asset while taking into consideration
the probability that the rate lock commitments will close. Due to high correlation between rate lock
commitments and best efforts contracts, no significant gains or losses have occurred on the rate lock
commitments.
At December 31, 2016, Village Mortgage had rate lock commitments to originate mortgage loans
aggregating approximately $16,467,000 and loans held for sale of approximately $14,784,000. Village
Mortgage has entered into corresponding commitments with third party investors to sell loans of
58
approximately $31,251,000. Under the best efforts contractual relationship with these investors,
Village Mortgage is obligated to sell the loans, and the investor is obligated to purchase the loans,
only if the loans close. No other obligation exists. As a result of these best efforts contractual
relationships with these investors Village Mortgage is not exposed to losses, nor will it realize gains,
related to its rate lock commitments due to changes in interest rates.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have
been isolated from the Bank and put presumptively beyond the reach of the transferor and its creditors,
even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity or the ability to unilaterally cause the holder to return specific
assets. Our transfers of financial assets are limited to commercial loan participations sold, which were
insignificant for 2016, 2015 and 2014, and the sale of residential mortgage loans in the secondary
market; the extent of which are disclosed in the Consolidated Statements of Cash Flows.
Loans
Loans are stated at the principal amount outstanding, net of unearned income. Loan origination fees
and certain direct loan origination costs are deferred and amortized to interest income over the life of
the loan as an adjustment to the loan’s yield over the term of the loan.
Interest is accrued on outstanding principal balances, unless the Company considers collection to be
doubtful. Commercial and unsecured consumer loans are designated as non-accrual when payment
is delinquent 90 days or at the point which the Company considers collection doubtful, if earlier.
Mortgage loans and most other types of consumer loans past due 90 days or more may remain on
accrual status if management determines that such amounts are collectible. When loans are placed
in 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 as long
as the remaining recorded investment in the loan is deemed fully collectible. Loans may be placed
back on accrual status when, in the opinion of management, the circumstances warrant such action
such as a history of timely payments subsequent to being placed on nonaccrual status, additional
collateral is obtained or the borrowers cash flows improve.
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. The total contractual amount
of standby letters of credit, whose contract amount represent credit risk was approximately $4,397,000
at December 31, 2016 and approximately $1,484,000 at December 31, 2015.
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is probable. Subsequent recoveries, if any,
are credited to the allowance.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb any
losses on existing loans that may become uncollectible. Management’s judgment in determining the
adequacy of the allowance is based on evaluations of the collectability of loans while taking into
consideration such factors as changes in the nature and volume of the loan portfolio, current economic
conditions which may affect a borrower’s ability to repay, overall portfolio quality, and review of specific
potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible
to significant revision as more information becomes available.
59
The allowance consists of general and specific components. The general component covers non-
classified loans and is based on historical loss experience and risk characteristics (i.e. trends in
delinquencies and other non-performing loans, changes in economic conditions on both a local and
national level, and changes in the categories of loans comprising the loan portfolio) adjusted for
qualitative factors. The specific component relates to loans that we have concluded, based on the
value of collateral, guarantees and any other pertinent factors, have known losses. For such loans
that are also classified as impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than the carrying value of
that loan. An unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable losses. The unallocated component of the allowance reflects the
margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons
for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of the expected future cash flows discounted at the
loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Troubled debt restructurings
A loan or lease is accounted for as a troubled debt restructuring if we, for economic or legal reasons
related to the borrower’s financial condition, grant a significant concession to the borrower that we
would not otherwise consider. A troubled debt restructuring may involve the receipt of assets from
the debtor in partial or full satisfaction of the loan or lease, or a modification of terms such as a
reduction of the stated interest rate or balance of the loan or lease, a reduction of accrued interest, an
extension of the maturity date at a stated interest rate lower than the current market rate for a new
loan with similar risk, or some combination of these concessions. Troubled debt restructurings
generally remain categorized as nonperforming loans and leases until a six-month payment history
has been maintained.
In accordance with current accounting guidance, loans modified as troubled debt restructurings are,
by definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-
loan basis similar to other impaired loans as described above under Allowance for loan
losses. Certain loans modified as troubled debt restructurings may have been previously measured
for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is
modified as a troubled debt restructuring the allowance will be impacted by the difference between the
results of these two measurement methodologies. Loans modified as troubled debt restructurings that
subsequently default are factored into the determination of the allowance in the same manner as other
defaulted loans.
Real estate acquired in settlement of loans
Real estate acquired through or in lieu of foreclosure is initially recorded at estimated fair value less
estimated selling costs. Subsequent to the date of acquisition, it is carried at the lower of cost or fair
value, adjusted for net selling costs. If fair value declines subsequent to foreclosure a valuation
allowance is recorded through expense. Operating costs after acquisition are expensed as incurred.
The valuation allowance was $612,000 and $1,748,000 at December 31, 2016 and 2015, respectively.
Costs relating to the development and improvement of such property are capitalized when appropriate,
whereas those costs relating to holding the property are expensed.
60
Assets held for sale
Assets held for sale at December 31, 2016 included a branch building we previously closed. Assets
held for sale at December 31, 2015 are the Company’s previous headquarters building at the Watkins
Centre and a branch building we previously closed. They were transferred from premises and
equipment to assets held for sale at cost less accumulated depreciation at the date of transfer,
December 31, 2013 and June 29, 2015 respectively, which were lower than their respective fair values,
adjusted for net selling costs, at that date. 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.
Premises and equipment
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation of buildings and improvements is computed using the straight-line
method over the estimated useful lives of the assets of 39 years. Depreciation of equipment is
computed using the straight-line method over the estimated useful lives of the assets ranging from 3
to 7 years. Amortization of premises (leasehold improvements) is computed using the straight-line
method over the term of the lease or estimated lives of the improvements, whichever is shorter.
Income taxes
Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying
enacted tax rates applicable to future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. The primary temporary differences are
the allowance for loan losses and depreciation and amortization. The effect on recorded deferred
income taxes of a change in tax laws or rates is recognized in income in the period that includes the
enactment date. To the extent that available evidence about the future raises doubt about the
realization of a deferred income tax asset, a valuation allowance is established. A tax position is
recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a
tax examination, with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is recorded. Interest and penalties
associated with unrecognized tax benefits are classified as taxes other than income in the statement
of income. The Company has no uncertain tax positions.
Consolidated statements of cash flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, due from
banks (including cash items in process of collection), interest-bearing deposits with banks and federal
funds sold. Generally, federal funds are purchased and sold for one-day periods. Cash flows from
loans originated by the Bank for investment and deposits are reported net. The Company did not pay
income taxes in 2016, 2015 and 2014.
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Total comprehensive income consists of net
income (loss) and other comprehensive income. The Company’s other comprehensive income and
accumulated other comprehensive income are comprised of unrealized gains and losses on
investment securities available for sale and amortization of the unfunded pension liability. At
December 31, 2016 and 2015 the accumulated other comprehensive income was comprised of
unrealized losses on securities available for sale of $181,000 and $439,000 and unfunded pension
liability of $60,000 and $68,000 net of tax, respectively.
Earnings per common share
Basic earnings (loss) per common share represent net income available to common shareholders,
which represents net income (loss) less dividends paid or payable to preferred stock shareholders,
divided by the weighted-average number of common shares outstanding during the period. For diluted
earnings per common share, net income available to common shareholders is divided by the weighted
average number of common shares issued and outstanding for each period plus amounts representing
61
the dilutive effect of stock options, restricted stock, and warrants, as well as any adjustment to income
that would result from the assumed issuance. The effects of stock options, restricted stock, and
warrants are excluded from the computation of diluted earnings per common share in periods in which
the effect would be antidilutive. Stock options, restricted stock, and warrants are antidilutive if the
underlying average market price of the stock that can be purchased for the period is less than the
exercise price of the option or warrant. Potential common shares that may be issued by the Company
relate solely to outstanding stock options, restricted stock, and warrants and are determined using the
treasury stock method.
Stock incentive plan
On May 26, 2015, the Company’s shareholders approved the adoption of the Village Bank and Trust
Financial Corp. 2015 Stock Incentive Plan (the “2015 Plan”) authorizing the issuance of up to 60,000
shares of common stock. The 2015 Plan was adopted to replace the Company’s 2006 stock incentive
plan and any new awards will be made pursuant to the 2015 Plan. The prior awards made under the
2006 plan were unchanged by the adoption of the 2015 Plan and continue to be governed by the terms
of the 2006 plan. See Note 14 for more information on the stock incentive plan.
Fair values of financial instruments
The fair value of an asset or liability is the price that would be received to sell that asset or paid to
transfer that liability in an orderly transaction between market participants. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for
the asset or liability or, in the absence of a principal market, the most advantageous market for the
asset or liability. The price in the principal (or most advantageous) market used to measure the fair
value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the measurement date to allow
for marketing activities that are usual and customary for transactions involving such assets and
liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal
market that are independent, knowledgeable, able to transact and willing to transact. See Note 17 for
the methods and assumptions the Bank uses in estimating fair values of financial instruments.
Insurance of Accounts, Assessments and Regulation by the FDIC. Our deposits are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the limits set forth under
applicable law, currently $250,000. We are subject to the deposit insurance assessments of the DIF.
The amount of the assessment is a function of the institution’s risk category, of which there are four,
and its assessment base. An institution’s risk category is determined according to its supervisory
ratings and capital levels and is used to determine the institution’s assessment rate. The assessment
base is an institution’s average consolidated total assets less its average tangible equity.
The FDIC is authorized to prohibit any DIF-insured institution from engaging in any activity that the
FDIC determines by regulation or order to pose a serious threat to the respective insurance fund.
Also, the FDIC may initiate enforcement actions against banks, after first giving the institution’s primary
regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance
of any depository institution if it determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC.
It also may suspend deposit insurance temporarily during the hearing process for the permanent
termination of insurance if the institution has no tangible capital. If deposit insurance is terminated,
the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue
to be insured for a period from six months to two years, as determined by the FDIC. We are aware of
no existing circumstances that could result in termination of our deposit insurance.
Segments
In previous reports, the Company concluded that it had one operating and reportable segment,
“Community Banking”. This conclusion was based on the fact that the Company’s activities are
interrelated, and each activity is dependent and assessed based on how each of the activities supports
the others. The Company has re-assessed its segment reporting and decided to report two segments:
62
traditional commercial banking and mortgage banking, as management has changed the information
it reviews to make decisions. 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
Year Ended December 31, 2016
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Commercial Mortgage
Banking
Banking
Eliminations
Consolidated
Totals
$
15,636
-
3,868
19,504
$
470
6,430
742
7,642
$
(117)
-
(190)
(307)
$
15,989
6,430
4,420
26,839
2,609
7,702
-
8,088
18,399
117
3,593
1,606
1,090
6,406
(117)
-
-
(190)
(307)
2,609
11,295
1,606
8,988
24,498
Income before income taxes
$
1,105
$
1,236
$
-
$
2,341
Total assets
$
448,373
$
10,026
$
(13,597)
$
444,802
Year Ended December 31, 2015
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Commercial Mortgage
Banking
Banking
Eliminations
Consolidated
Totals
$
15,165
-
3,473
18,638
$
446
6,076
749
7,271
$
(107)
-
(240)
(347)
$
15,504
6,076
3,982
25,562
2,877
7,346
-
8,787
19,010
107
3,500
1,555
1,091
6,253
(117)
-
-
(230)
(347)
2,867
10,846
1,555
9,648
24,916
Income (loss) before income taxes
$
(372)
$
1,018
$
-
$
646
Total assets
$
426,038
$
8,806
$
(14,903)
$
419,941
63
Year Ended December 31, 2014
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Commercial Mortgage
Banking
Banking
Eliminations
Consolidated
Totals
$
16,287
-
3,078
19,365
$
347
4,449
706
5,502
$
(56)
-
(344)
(400)
$
16,578
4,449
3,440
24,467
3,561
7,454
-
9,237
20,252
55
3,231
1,165
1,201
5,652
(56)
-
-
(344)
(400)
3,560
10,685
1,165
10,094
25,504
Income (loss) before income taxes
$
(887)
$
(150)
$
-
$
(1,037)
Total assets
$
435,046
$
8,081
$
(9,123)
$
434,004
New accounting pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606).
The amendments in this ASU modify the guidance companies use to recognize revenue from contracts
with customers for transfers of goods or services and transfers of nonfinancial assets, unless those
contracts are within the scope of other standards. The ASU requires that entities apply a specific
method to recognize revenue reflecting the consideration expected from customers in exchange for
the transfer of goods and services. The guidance also requires new qualitative and quantitative
disclosures, including information about contract balances and performance obligations. Entities are
also required to disclose significant judgments and changes in judgments for determining the
satisfaction of performance obligations.
In August 2015, the FASB issued ASU 2014-09 changing the effective date for ASU 2014-09 to annual
reporting periods beginning after December 15, 2017 from December 15, 2016. The Company’s
primary source of revenue is interest income from loans and their fees. As these items are outside the
scope of the guidance, this income is not expected to be impacted by implementation of ASU 2014-
09. The Company is still reviewing other sources of income such as secondary market lending fees
and other deposit account fees to evaluate the impact of ASU 2014-09. The Company continues to
evaluate the impact that ASU 2014-09 will have on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”.
ASU 2015-17 eliminates the guidance in Topic 740, “Income Taxes”, that required an entity to separate
deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related
valuation allowance, be offset and presented as a single noncurrent amount in a classified balance
sheet. The new guidance requires that all deferred tax assets and liabilities, along with any related
valuation allowance, be classified as noncurrent on the balance sheet. As a result each jurisdiction
will now only have one net noncurrent deferred tax asset or liability. The guidance in this ASU is
effective for public business entities for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2016. Early adoption is permitted as of the beginning of any interim or
annual reporting period. The Company does not expect this ASU to have a significant impact on its
financial condition or results of operations.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial
Assets and Financial Liabilities.” This ASU requires an entity to: (i) measure equity investments at fair
value through net income, with certain exceptions; (ii) present in Other Comprehensive Income the
changes in instrument-specific credit risk for financial liabilities measured using the fair value option;
(iii) present financial assets and financial liabilities by measurement category and form of financial
64
asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit
price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS
debt securities in combination with other deferred tax assets. The Update provides an election to
subsequently measure certain nonmarketable equity investments at cost less any impairment and
adjusted for certain observable price changes. The Update also requires a qualitative impairment
assessment of such equity investments and amends certain fair value disclosure requirements. This
ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017. Early adoption is only permitted for the provision related to instrument-specific
credit risk. The Company is currently assessing the impact of ASU 2016-01 will have on its
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU requires lessees
to recognize assets and liabilities arising from most operating leases on the statement of financial
position. ASU 2016-02 will be effective for the Company for the fiscal years beginning after December
15, 2018 with early adoption permitted. The Company has determined that the provisions of ASU-
2016-02 may result in an increase in assets to recognize the present value of the lease obligations
with a corresponding increase liabilities, however, the Company does not expect this to have a material
impact on the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-09 “Compensation – Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several
aspects of the accounting for employee share-based payment transactions, including the accounting
for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2016. Early adoption is permitted; however if the Company
elects to early adopt, then all amendments must be adopted in the same period. The Company has
concluded the adoption of ASU No. 2016-09 will hot have a material impact on its consolidated
financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” This ASU amends guidance on reporting
credit losses for assets held at amortized cost basis and available-for-sale debt securities by
eliminating the probable initial recognition threshold (incurred loss methodology) and requiring entities
to reflect its current estimate of all expected credit losses. The amendments in the ASU are effective
beginning after December 15, 2019 and for interim periods within that year. Early adoption is permitted
beginning after December 15, 2018. Entities will apply the amendments in this ASU through a
cumulative-effect adjustment to retained earnings in the first period effective. While the Company is
currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new
standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare
for the implementation when it becomes effective, such as forming an internal task force, gathering
pertinent data, consulting with outside professionals, and evaluating its current IT systems.
In August 2016, The FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Payments (a consensus of Merging Issues Task Force).”
This ASU attempts to clarify how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The purpose of this update is to reduce existing diversity in
practice in eight areas addressed by the update. The amendment will be effective for the Company
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Early adoption is permitted. The Company has concluded the adoption of ASU No. 2016-15 will not
have a material impact on its consolidated financial statements.
65
Note 2.
Investment securities available for sale
The amortized cost and estimated fair value of investment securities available for sale as of December
31, 2016 and 2015 are as follows (in thousands):
Gross
Gross
Amortized Unrealized Unrealized Estimated
Fair Value
Losses
Gains
Cost
December 31, 2016
U.S. Government agencies
Mortgage-backed securities
$
32,475
11,694
-
$
1
$
(229)
(47)
$
32,246
11,648
$
44,169
$
1
$
(276)
$
43,894
December 31, 2015
U.S. Government agencies
Mortgage-backed securities
Municipals
$
34,286
3,043
1,255
-
$
1
-
$
(573)
(43)
(50)
$
33,713
3,001
1,205
$
38,584
$
1
$
(666)
$
37,919
Investment securities with book values of approximately $1,050,000 and $5,968,000 at December
31, 2016 and 2015, respectively, were pledged to secure deposit repurchase agreements.
Gross realized gains and losses pertaining to available for sale securities are detailed as follows for
the years ending December 31, 2016, 2015 and 2014 (in thousands):
2016
2015
2014
Gross realized gains
Gross realized losses
$
162
-
$
13
(7)
$
218
(428)
$
162
$
6
$
(210)
The Company sold approximately $22 million, $8 million and $22 million of investment securities
available for sale at a gain of $162,000 and $6,000 in 2016 and 2015, respectively and a loss of
$210,000 in 2014. The sale of these securities, which had fixed interest rates, allowed the Company
to decrease its exposure to the anticipated upward movement in interest rates that would result in
unrealized losses being recognized in shareholders’ equity. In 2014, approximately $15 million of the
proceeds from the sale of these securities were used to purchase rehabilitated student loans that have
variable interest rates that will increase as interest rates in general increase.
Investment securities available for sale that have an unrealized loss position at December 31, 2016
and December 31, 2015 are detailed below (in thousands):
66
Securities in a loss
position for less than
12 Months
Securities in a loss
position for more than
12 Months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2016
US Government Agencies
Mortgage-backed securities
$
27,291
9,450
$
(213)
(47)
$
2,852
-
$
(16)
-
$
30,143
9,450
$
(229)
(47)
$
36,741
$
(260)
$
2,852
$
(16)
$
39,593
$
(276)
December 31, 2015
US Government Agencies
Municipals
Mortgage-backed securities
$
18,598
707
2,899
$
(329)
(14)
(43)
$
15,115
497
-
$
(244)
(36)
-
$
33,713
1,204
2,899
$
(573)
(50)
(43)
$
22,204
$
(386)
$
15,612
$
(280)
$
37,816
$
(666)
All of the unrealized losses are attributable to increases in interest rates and not to credit deterioration.
Currently, the Company believes that it is probable that the Company will be able to collect all amounts
due according to the contractual terms of the investments. Because the decline in market value is
attributable to changes in interest rates and not to credit quality, and because it is not more likely than
not that the Company will be required to sell the investments before recovery of their amortized cost
bases, which may be maturity, the Company does not consider these investments to be other than
temporarily impaired at December 31, 2016.
The amortized cost and estimated fair value of investment securities available for sale as of December
31, 2016, by contractual maturity, are as follows (in thousands):
Amortized Estimated
Fair Value
Cost
One to five years
More than ten years
$
33,131
11,038
$
32,885
11,009
Total
$
44,169
$
43,894
67
Note 3.
Loans
Loans classified by type as of December 31, 2016 and 2015 are as follows (in thousands):
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
Total loans
Deferred loan cost, net
Less: allowance for loan losses
2016
2015
$
6,770
27,092
33,862
$
5,202
25,948
31,150
66,021
57,944
8,824
310
133,099
69,256
38,037
8,537
388
116,218
20,691
20,333
54,791
5,768
81,250
39,390
47,398
2,101
56,776
6,485
83,594
20,086
53,989
1,734
337,100
660
(3,373)
306,771
670
(3,562)
$
334,387
$
303,879
The Bank purchased portfolios of rehabilitated student loans guaranteed by the Department of
Education (“DOE”). The guarantee covers approximately 98% of principal and accrued interest. The
loans are serviced by a third-party servicer that specializes in handling the special needs of the DOE
student loan programs.
Loans pledged as collateral with the Federal Home Loan Bank of Atlanta (“FHLB”) as part of their
lending arrangements with the Company totaled $27,073,000 and $7,891,000 as of December 31,
2016 and 2015, respectively.
The following is a summary of loans directly or indirectly with executive officers or directors of the
Company for the years ended December 31, 2016 and 2015 (in thousands):
2016
2015
Beginning balance
Additions
Reductions
$
8,073
2,703
(3,065)
$
8,258
5,504
(5,689)
Ending balance
$
7,711
$
8,073
Executive officers and directors also had unused credit lines totaling $3,219,000 and $1,375,000 at
68
December 31, 2016 and 2015, respectively. All loans and credit lines to executive officers and
directors were made in the ordinary course of business at the Company’s normal credit terms,
including interest rate and collateralization prevailing at the time for comparable transactions with other
persons.
Loans are considered past due if the required principal and interest payments have not been received
as of the date such payments were due. Loans are placed on nonaccrual status when, in
management’s opinion, the borrower may be unable to meet payment obligations as they become
due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status
regardless of whether or not such loans are considered past due as long as the remaining recorded
investment in the loan is deemed fully collectible. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to the extent cash
payments are received in excess of principal due. Loans are returned to accrual status when all
principal and interest amounts contractually due are brought to current and future payments are
reasonably assured.
Year-end nonaccrual loans segregated by type as of December 31, 2016 and 2015 were as follows
(in thousands):
Construction and land development
Commercial
Commercial real estate
Owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Consumer and other
2016
2015
$
102
102
$
52
52
225
225
163
1,404
72
1,639
430
6
1,078
1,078
154
1,498
421
2,073
508
7
Total loans
$
2,402
$
3,718
The Company assigns risk rating classifications to its loans. These risk ratings are divided into the
following groups:
• Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These
assets generally are well protected by the current net worth and paying capacity of the obligor
or by the value of the asset or underlying collateral;
• Risk rated 5 loans are defined as having potential weaknesses that deserve management’s
close attention;
• Risk rated 6 loans are inadequately protected by the current sound worth and paying capacity
of the obligor or of the collateral pledged, if any; and
• Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added
characteristics that the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and improbable.
The following tables provide information on the risk rating of loans at the dates indicated (in
thousands):
69
December 31, 2016
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
Risk Rated
1-4
Risk Rated
5
Risk Rated
6
Risk Rated
7
Total
Loans
$
6,770
25,342
32,112
$
-
1,648
1,648
-
$
102
102
-
$
-
-
$
6,770
27,092
33,862
58,788
57,944
8,634
310
125,676
19,501
49,648
5,399
74,548
39,390
46,009
2,043
3,565
-
190
-
3,755
487
2,847
125
3,459
739
52
3,668
-
-
-
3,668
703
2,296
244
3,243
650
6
-
-
-
-
-
-
-
-
-
-
-
-
66,021
57,944
8,824
310
133,099
20,691
54,791
5,768
81,250
39,390
47,398
2,101
Total loans
$
319,778
$
9,653
$
7,669
$
-
$
337,100
Risk Rated
1-4
Risk Rated
5
Risk Rated
6
Risk Rated
7
Total
Loans
December 31, 2015
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
$
5,202
24,053
29,255
-
$
572
572
$
-
1,323
1,323
64,261
35,887
8,337
388
108,873
18,539
51,200
5,751
75,490
18,873
53,989
1,649
2,850
2,055
200
-
5,105
435
2,710
128
3,273
373
-
62
2,145
95
-
-
2,240
1,359
2,866
606
4,831
840
-
23
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
5,202
25,948
31,150
69,256
38,037
8,537
388
116,218
20,333
56,776
6,485
83,594
20,086
53,989
1,734
Total loans
$
288,129
$
9,385
$
9,257
$
-
$
306,771
The following tables present the aging of the recorded investment in past due loans as of the dates
indicated (in thousands):
70
December 31, 2016
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
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
-
$
-
-
-
$
-
-
-
$
-
-
-
$
-
-
$
6,770
27,092
33,862
$
6,770
27,092
33,862
-
$
-
-
-
-
190
-
190
-
414
128
542
15
2,743
11
-
-
-
-
-
-
63
-
63
-
-
-
-
-
-
-
-
-
-
-
190
-
190
-
477
128
605
62
1,923
-
-
8,174
-
77
12,840
11
66,021
57,944
8,634
310
132,909
66,021
57,944
8,824
310
133,099
20,691
20,691
54,314
5,640
80,645
39,313
34,558
2,090
54,791
5,768
81,250
39,390
47,398
2,101
-
-
-
-
-
-
-
-
-
-
8,174
-
Total loans
$
3,501
$
2,048
$
8,174
$
13,723
$
323,377
$
337,100
$
8,174
December 31, 2015
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
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
$
-
-
-
$
-
-
-
$
-
-
-
$
-
-
-
$
5,202
25,948
31,150
$
5,202
25,948
31,150
$
-
-
-
327
-
-
-
327
-
163
94
257
-
7,816
10
-
110
-
-
110
-
292
-
292
-
1,252
-
-
-
-
-
-
-
-
-
-
327
110
-
-
437
-
455
94
549
-
8,590
-
-
17,658
10
68,929
37,927
8,537
388
115,781
69,256
38,037
8,537
388
116,218
20,333
20,333
56,321
6,391
83,045
20,086
36,331
1,724
56,776
6,485
83,594
20,086
53,989
1,734
-
-
-
-
-
-
-
-
-
-
8,590
-
Total loans
$
8,410
$
1,654
$
8,590
$
18,654
$
288,117
$
306,771
$
8,590
Loans greater than 90 days past due are student loans that are guaranteed by the DOE which covers
approximately 98% of the principal and interest. Accordingly, these loans will not be placed on
nonaccrual status.
Loans are considered impaired when, based on current information and events it is probable the
Company will be unable to collect all amounts due in accordance with the original contractual terms
of the loan agreement, including scheduled principal and interest payments. Loans evaluated
individually for impairment include non-performing loans, such as loans on non-accrual, loans past
due by 90 days or more, restructured loans and other loans selected by management. The evaluations
are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that
a loan is individually impaired, then a specific reserve is established for the amount of impairment.
Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan
basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so
that the loan is reported net, at the present value of estimated future cash flows using the loan’s
existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest
payments on impaired loans are typically applied to principal unless collectability of the principal
71
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):
With no related allowance recorded
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
With an allowance recorded
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-Owner occupied
Consumer real estate
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Total
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
December 31, 2016
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
$
102
$
169
$
-
1,487
2,236
3,723
703
3,514
619
4,836
538
9,199
479
4,117
-
4,117
1,550
90
1,640
6
6,242
581
581
5,604
2,236
7,840
703
5,064
709
6,476
1,487
2,236
3,723
703
3,518
865
5,086
768
9,746
479
4,132
-
4,132
1,550
90
1,640
122
6,373
648
648
5,619
2,236
7,855
703
5,068
955
6,726
-
-
-
-
-
-
-
-
9
86
-
86
144
90
234
6
335
9
9
86
-
86
-
144
90
234
544
15,441
$
890
16,119
$
$
6
335
72
With no related allowance recorded
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
With an allowance recorded
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-Owner occupied
Consumer real estate
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Total
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
December 31, 2015
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
$
123
$
190
$
-
1,066
2,418
3,484
1,238
3,984
962
6,184
1,066
2,418
3,484
1,247
3,988
1,232
6,467
690
10,481
920
11,061
1,699
5,719
449
6,168
1,775
250
2,025
136
10,028
1,822
1,822
6,785
2,867
9,652
1,238
5,759
1,212
8,209
1,699
5,734
449
6,183
1,775
250
2,025
238
10,145
1,889
1,889
6,800
2,867
9,667
1,247
5,763
1,482
8,492
-
-
-
-
-
-
-
-
2
383
26
409
324
98
422
18
851
2
2
383
26
409
-
324
98
422
826
20,509
$
1,158
21,206
$
$
18
851
73
The following is a summary of average recorded investment in impaired loans with and without
valuation allowance and interest income recognized on those loans for periods indicated (in
thousands):
With no related allowance recorded
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Consumer and other
With an allowance recorded
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-Owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Total
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Consumer and other
December 31,
2016
2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
-
$
87
87
$
-
40
40
$
61
1,769
1,830
-
$
95
95
1,040
2,501
-
-
3,541
1,030
4,019
753
5,802
421
-
9,851
1,118
4,511
46
4,557
-
1,624
131
1,755
66
7,496
-
1,206
1,206
5,551
2,547
-
-
8,098
1,030
5,643
884
7,557
29
106
-
-
135
10
145
43
198
31
-
404
25
162
12
174
-
9
4
13
-
212
-
65
65
191
118
-
-
309
10
154
47
211
1,349
4,435
-
-
5,784
890
5,374
1,121
7,385
344
9
15,352
844
6,088
369
6,457
22
1,434
277
1,733
317
9,351
61
2,613
2,674
7,437
4,804
-
-
12,241
912
6,808
1,398
9,118
69
121
-
-
190
51
233
47
331
44
1
661
23
226
24
250
-
26
15
41
5
319
-
118
118
295
145
-
-
440
51
259
62
372
487
-
17,348
$
31
-
616
$
661
9
24,703
$
49
1
980
$
74
As of December 31, 2016, 2015 and 2014, the Company had impaired loans of $2,402,000,
$3,718,000 and $7,478,000, respectively, which were on nonaccrual status. These loans had
valuation allowances of $97,000, $370,000 and $1,087,000 as of December 31, 2016, 2015 and 2014,
respectively. Cumulative interest income that would have been recorded had nonaccrual loans been
performing would have been $119,000, $146,000 and $224,000 for 2016, 2015 and 2014,
respectively.
Included in impaired loans are loans classified as troubled debt restructurings (“TDRs”). A modification
of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or
legal reasons related to the borrowers 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 as of
December 31, 2016 (dollars in thousands).
December 31, 2016
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deeds of trust
Second deeds of trust
Commercial and industrial loans
(except those secured by real estate)
Consumer and other
Total
Performing
Nonaccrual
Specific
Valuation
Allowance
$
479
479
$
479
479
$
-
-
$
9
9
4,342
2,236
-
6,578
-
3,853
547
4,400
4,117
2,236
-
6,353
-
3,012
547
3,559
225
-
-
225
-
841
-
841
86
-
-
86
-
139
-
139
397
-
11,854
$
-
-
10,391
$
397
-
1,463
$
-
-
234
$
Number of loans
55
36
16
3
75
December 31, 2015
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deeds of trust
Second deeds of trust
Commercial and industrial loans
(except those secured by real estate)
Consumer and other
Total
Performing
Nonaccrual
Specific
Valuation
Allowance
-
$
1,699
1,699
-
$
1,699
1,699
-
$
-
-
-
$
2
2
5,730
2,866
-
8,596
87
4,283
693
5,063
5,458
2,866
-
8,324
-
3,544
693
4,237
272
-
-
272
87
739
-
826
184
26
-
210
-
236
1
237
127
-
15,485
$
-
-
14,260
$
127
-
1,225
$
18
-
467
$
Number of loans
66
51
15
13
The following table provides information about TDRs identified during the indicated periods (dollars in
thousands).
December 31, 2016
December 31, 2015
Pre-
Post-
Pre-
Post-
Modification Modification
Modification Modification
Number of Recorded Recorded Number of Recorded Recorded
Balance
Balance
Balance
Balance
Loans
Loans
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Commercial and industrial loans
(except those secured by real estate)
-
1
1
3
4
$
-
$
-
234
234
234
234
352
586
$
352
586
$
1
-
1
$
87
$
87
-
87
-
87
1
$
87
$
87
76
The following table provides information about defaults on TDRs for the indicated periods (dollars in
thousands).
Commercial real estate
Owner occupied
Consumer real estate
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial
(except those secured by real estate)
December 31, 2016
December 31, 2015
Number of
Loans
Recorded
Balance
Number of
Loans
Recorded
Balance
1
1
13
2
15
-
16
$
225
225
1,134
83
1,217
$
-
1,442
1
1
11
2
13
1
15
$
156
156
889
94
983
$
127
1,266
77
Note 4.
Allowance for loan losses
Activity in the allowance for loan losses was as follows for the periods indicated (in thousands):
Year Ended December 31, 2016
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Unallocated
Year Ended December 31, 2015
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Unallocated
Beginning
Balance
Provision for
(Recovery of)
Loan Losses Charge-offs
Recoveries
Ending
Balance
$
30
291
321
$
10
9
19
$
-
(10)
(10)
$
1
10
11
$
41
300
341
1,167
460
51
17
1,695
448
602
111
1,161
94
230
2
59
(490)
(106)
5
(139)
(730)
(127)
(40)
21
(146)
44
149
10
654
(66)
(1)
-
-
(67)
(53)
(140)
(25)
(218)
(15)
(221)
(13)
-
-
53
-
125
178
3
25
29
57
100
-
9
-
611
406
56
3
1,076
271
447
136
854
223
158
8
713
$
3,562
$
-
$
(544)
$
355
$
3,373
$
34
202
236
$
(6)
292
286
$
-
(252)
(252)
$
2
49
51
$
30
291
321
1,837
607
77
130
2,651
469
1,345
275
2,089
506
217
30
-
(576)
(151)
(26)
(113)
(866)
36
(1,020)
(159)
(1,143)
(350)
13
1
59
(127)
-
-
-
(127)
(62)
(103)
(55)
(220)
(162)
-
(55)
-
33
4
-
-
37
5
380
50
435
100
-
26
-
1,167
460
51
17
1,695
448
602
111
1,161
94
230
2
59
$
5,729
$
(2,000)
$
(816)
$
649
$
3,562
78
Year Ended December 31, 2014
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Beginning
Balance
Provision for
(Recovery of)
Loan Losses Charge-offs
Recoveries
Ending
Balance
$
135
1,274
1,409
$
(103)
(1,016)
(1,119)
$
-
(100)
(100)
$
2
44
46
$
34
202
236
1,200
670
19
337
2,226
424
1,992
394
2,810
724
-
70
1,268
430
58
(111)
1,645
506
(442)
(223)
(159)
(447)
217
(37)
(631)
(518)
-
(96)
(1,245)
(476)
(277)
(86)
(839)
(172)
-
(25)
-
25
-
-
25
15
72
190
277
401
-
22
1,837
607
77
130
2,651
469
1,345
275
2,089
506
217
30
$
7,239
$
100
$
(2,381)
$
771
$
5,729
Overall the recovery of loan losses recorded for the year ended December 31, 2015 was due primarily
to credit quality improvements and an enhanced model for evaluating inherent losses in the Bank’s
loan portfolio. Improvements in credit quality are provided in the following schedule:
2016
December 31,
2015
2014
Classified assets
Nonaccrual loans
Foreclosed real estate
$
10,454
2,402
2,926
$
15,375
3,718
6,249
$
30,684
7,478
12,638
During the fourth quarter of 2015, we adopted a software solution for the analysis of the allowance for
loan losses. While our methodology of evaluating the adequacy of the allowance for loan losses
generally did not change, the software is more robust in that it:
• allows us to take a more measureable approach to our evaluation of qualitative factors such
•
as economic conditions that may affect loss experience; and
is widely used by community banks which provides peer data that can be used as a benchmark
for comparison to our analysis.
In addition to the adoption of the software solution for our analysis, we reviewed the last twenty years
of historical loss data for peer banks in Virginia to assist us in our evaluation of environmental factors
and other conditions that could affect the loan portfolio and the overall adequacy of the allowance for
loan losses.
The allowance for loan losses at each of the periods presented includes an amount that could not be
identified to individual types of loans referred to as the unallocated portion of the allowance. We
recognize the inherent imprecision in estimates of losses due to various uncertainties and variability
related to the factors used, and therefore a reasonable range around the estimate of losses is derived
and used to ascertain whether the allowance is too high. We concluded that the unallocated portion
79
of the allowance was acceptable given the level of classified assets and was within a reasonable range
around the estimate of losses. The allowance for loan losses included an unallocated portion of
approximately $713,000 and $59,000 at December 31, 2016 and 2015, respectively.
Discussion of the recovery of loan losses related to specific loan types are provided following:
• The recovery of loan losses totaling $1,119,000 for the construction and land development
loan portfolio during 2014 was attributable to changes in our assessment of the general
component of the allowance for loan losses as it related to this portfolio. The general
component allocated to this portfolio declined primarily as a result of the historical net recovery
of 0.27% at December 31, 2014. Also contributing to the declines in the general component
were declines of approximately $1,643,000 and $12,945,000 in the outstanding loan balance
of this portfolio at December 31, 2014 and 2013, respectively.
• The recovery of loan losses totaling $730,000 and $866,000 for the commercial real estate
portfolio at December 31, 2016 and 2015, respectively, was also attributable to changes in our
assessment of the general component of the allowance for loan losses as it related to this
portfolio. The general component allocated to this portfolio declined primarily as a result of
declines in the historical loss experience from 0.96% in 2014 to 0.57% in 2015 and to 0.20%
in 2016. In addition, net charge-offs on this portfolio decreased from $1,220,000 in 2014 to
$90,000 in 2015 and to a net recovery of $111,000 in 2016.
• The recovery of loan losses totaling $1,143,000 for the consumer real estate portfolio in 2015
was also attributable to changes in our assessment of the general component of the allowance
for loan losses as it related to this portfolio. The general component allocated to this portfolio
declined primarily as a result of declines in the historical loss experience from 1.36% in 2014
to 0.24% in 2015 and to .0022% in 2016. In addition, net charge-offs on this portfolio
decreased from $562,000 in 2014 to a recovery of $215,000 in 2015.
80
Loans were evaluated for impairment as follows for the periods indicated (in thousands):
Year Ended December 31, 2016
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Year Ended December 31, 2015
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Year Ended December 31, 2014
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Recorded Investment in Loans
Allowance
Loans
Ending
Balance
Individually
Collectively
Ending
Balance
Individually
Collectively
$
41
300
341
$
-
9
9
$
41
291
332
$
6,770
27,092
33,862
$
-
581
581
$
6,770
26,511
33,281
611
406
56
3
1,076
271
447
136
854
223
158
721
86
-
-
-
86
-
144
90
234
6
-
-
525
406
56
3
990
271
303
46
620
217
158
721
66,021
57,944
8,824
310
133,099
20,691
54,791
5,768
81,250
39,390
47,398
2,101
5,604
2,236
-
-
7,840
703
5,064
709
6,476
544
-
-
60,417
55,708
8,824
310
125,259
19,988
49,727
5,059
74,774
38,846
47,398
2,101
$
3,373
$
335
$
3,038
$
337,100
$
15,441
$
321,659
$
30
291
321
$
-
2
2
$
30
289
319
$
5,202
25,948
31,150
$
-
1,822
1,822
$
5,202
24,126
29,328
1,167
460
51
17
1,695
448
602
111
1,161
94
230
61
383
26
-
-
409
-
324
98
422
18
-
-
784
434
51
17
1,286
448
278
13
739
76
230
61
69,256
38,037
8,537
388
116,218
20,333
56,776
6,485
83,594
20,086
53,989
1,734
6,785
2,867
-
-
9,652
1,238
5,759
1,212
8,209
826
-
-
62,471
35,170
8,537
388
106,566
19,095
51,017
5,273
75,385
19,260
53,989
1,734
$
3,562
$
851
$
2,711
$
306,771
$
20,509
$
286,262
$
34
202
236
-
$
26
26
$
34
176
210
$
4,315
25,152
29,467
$
164
3,968
4,132
$
4,151
21,184
25,335
1,837
607
77
130
2,651
469
1,345
275
2,089
506
217
30
905
-
-
-
905
-
200
142
342
239
-
-
932
607
77
130
1,746
58,804
38,892
11,438
434
109,568
8,311
6,593
2,322
21
17,247
50,493
32,299
9,116
413
92,321
469
20,082
800
19,282
1,145
133
1,747
267
217
30
61,837
7,854
89,773
22,165
33,562
1,611
7,900
1,360
10,060
818
-
23
53,937
6,494
79,713
21,347
33,562
1,588
$
5,729
$
1,512
$
4,217
$
286,146
$
32,280
$
253,866
81
Note 5.
Premises and equipment
The following is a summary of premises and equipment as of December 31, 2016 and 2015 (in
thousands):
2016
2015
Land
Buildings and improvements
Furniture, fixtures and equipment
Total premises and equipment
Less: Accumulated depreciation and amortization
$
4,352
9,087
7,613
21,052
(8,294)
$
4,858
9,216
7,437
21,511
(7,840)
Premises and equipment, net
$
12,758
$
13,671
Depreciation and amortization of premises and equipment for 2016, 2015 and 2014 amounted to
$765,000, $843,000 and $681,000, respectively.
Note 6.
Investment in bank owned life insurance
The Bank is owner and designated beneficiary on life insurance policies in the aggregate face amount
of $13,728,000 covering certain of its directors and executive officers. The earnings from these
policies are used to offset expenses related to retirement plans. The cash surrender value of these
policies at December 31, 2016 and 2015 was approximately $7,093,000 and $7,130,000, respectively.
Note 7.
Deposits
Deposits as of December 31, 2016 and 2015 were as follows (in thousands):
Demand accounts
Interest checking accounts
Money market accounts
Savings accounts
Time deposits of $250,000 and over
Other time deposits
2016
2015
$
92,574
44,390
71,290
26,598
13,372
135,053
$
78,282
44,256
64,841
19,403
9,717
148,349
Total
$
383,277
$
364,848
The following are the scheduled maturities of time deposits as of December 31, 2016 (in thousands):
Year Ending December 31,
2017
2018
2019
2020
2021
Less Than
$250,000
Greater than
or Equal to
$250,000
$
62,380
25,956
15,552
9,808
21,357
$
4,092
2,552
2,791
576
3,361
Total
$
66,472
28,508
18,343
10,384
24,718
$
135,053
$
13,372
$
148,425
Deposits held at the Company by related parties, which include officers, directors, greater than 5%
shareholders and companies in which directors of the board have a significant ownership interest,
82
approximated $5,709,000 and $6,240,000 at December 31, 2016 and 2015, respectively.
Note 8.
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 $512,000 in
FHLB stock at December 31, 2016 and $685,000 at December 31, 2015 which is held at cost and
included in other assets. Each FHLB credit program has its own interest rate, which may be fixed or
variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances
may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings
are secured by the pledge of commercial and 1-4 family residential loans. The Company had FHLB
advances of approximately $2,400,000 at December 31, 2016 maturing through 2018. At December
31, 2015, approximately $6,000,000 of advances was outstanding.
The Company had advances from the FHLB for the periods indicated that consisted of the following
(in thousands):
Year Ended December 31, 2016
Type
Maturity
Date
Interest
Rate
Advance
Amount
Fixed Rate
Fixed Rate
Fixed Rate
06/01/2017
12/01/2017
06/01/2018
1.06%
1.27%
1.48%
$
800
800
800
$
2,400
Year Ended December 31, 2015
Type
Maturity
Date
Interest
Rate
Advance
Amount
Fixed Rate
Fixed Rate
Fixed Rate
Fixed Rate
Fixed Rate
Fixed Rate
Fixed Rate
02/25/2016
04/11/2016
06/01/2016
12/01/2016
06/01/2017
12/01/2017
06/01/2018
2.65%
2.71%
0.56%
0.81%
1.06%
1.27%
1.48%
$
1,000
1,000
800
800
800
800
800
$
6,000
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 repurchase agreements was $81,000 and $508,000 at
December 31, 2016 and 2015, respectively.
Information related to borrowings as of December 31, 2016 and 2015 is as follows (dollars in
83
thousands):
Maximum outstanding during the year
FHLB advances
Balance outstanding at end of year
FHLB advances
Average amount outstanding during the year
FHLB advances
Average interest rate during the year
FHLB advances
Average interest rate at end of year
FHLB advances
Note 9.
Income taxes
Year Ended December 31,
2016
2015
2014
$
12,200
$
14,000
$
18,000
2,400
5,161
1.09%
1.46%
6,000
14,000
9,027
15,468
1.88%
2.16%
1.58%
2.07%
The following summarizes the tax effects of temporary differences which comprise net deferred tax
assets and liabilities at December 31, 2016 and 2015 (in thousands):
Deferred tax assets
Net operating loss carryforward
Capital loss carryforward
State net operating loss carryfoward
Allowance for loan losses
Unrealized loss on available-for-sale securities
Interest on nonaccrual loans
Expenses and writedowns related to foreclosed
property
Stock compensation
Employee benefits
Pension expense
Depreciation
Lease Obligation
Other, net
Goodwill
2016
2015
$
7,471
14
50
1,147
93
41
$
8,475
69
11
1,211
226
50
883
253
1,079
31
144
74
71
23
991
140
1,015
35
-
-
38
39
Total deferred tax assets
11,374
12,300
Deferred tax liabilities
Depreciation
Amortization of intangibles
Total deferred tax liabilities
-
1
1
43
34
77
Net deferred tax asset prior to valuation allowance
11,373
12,223
Less Unrealized gain on available-for-sale securities
Net deferred tax asset subject to valuation allowance
Less valuation allowance
Net deferred tax asset
-
-
-
(226)
11,997
11,997
$
11,373
$
226
84
The net deferred tax asset is included in other assets on the consolidated balance sheet. Accounting
Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation
allowance should be established against their deferred tax assets based on the consideration of all
available evidence using a “more likely than not” standard. Management considers both positive and
negative evidence and analyzes changes in near-term market conditions as well as other factors which
may impact future operating results. In making such judgments, significant weight is given to evidence
that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting
realization.
There was an $11,172,000 income tax benefit recorded for the year ended December 31, 2016
compared to no tax expense for the year ended December 31 2015. The income tax benefit in 2016
was primarily due to the reversal of an $11,997,000 valuation allowance previously recorded against
the net deferred tax asset. This valuation allowance was first recorded in the fourth quarter of 2011
due to the uncertainty of whether or not the Company would be able to realize the asset.
In assessing the Company’s ability to realize its net deferred tax asset, management considers
whether it is more likely than not that some portion or all of the net deferred tax asset will or will not be
realized. The Company’s ultimate realization of the net deferred tax asset is dependent upon the
generation of future taxable income during the periods in which temporary differences become
deductible. Management considers the nature and amount of historical and projected future taxable
income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning
strategies in making this assessment. The amount of net deferred taxes recognized could be impacted
by changes to any of these variables.
Each quarter, the Company weighs both the positive and negative information with respect to
realization of the net deferred tax asset and analyzes its position as to whether or not a valuation
allowance is required. Over the past several quarters, the positive information has been increasing
while the negative information has been decreasing. Over the last seven quarters, the Company has
demonstrated consistent earnings while its level of non-performing assets, which was the primary
cause of the Company’s losses, has steadily decreased. Additionally, the Federal Reserve Bank of
Richmond (the “Reserve Bank”), the FDIC and the Virginia Bureau of Financial Institutions have
terminated their formal agreements with the Company and the Bank, reducing regulatory risk.
Given the consistent earnings and improving asset quality, the Company’s analysis concluded that, it
is more likely than not that the Company will generate sufficient taxable income within the applicable
carry-forward periods to realize its net deferred tax asset. As such, the full valuation allowance of
$11,997,000 was released.
The net operating losses available to offset future taxable income amounted to $21,974,000 at
December 31, 2016 and begin expiring in 2028; $1,257,000 of such amount is subject to a limitation
by Section 382 of the Internal Revenue Code of 1986, as amended, to $908,000 per year.
The income tax expense (benefit) charged to operations for the years ended December 31, 2016,
2015 and 2014 consists of the following (in thousands):
Current tax expense (benefit)
Deferred tax expense (benefit)
Valuation allowance
2016
2015
2014
$
12
813
(11,997)
$
-
277
(277)
$
67
(401)
334
Provision (benefit) for income taxes
$
(11,172)
$
-
$
-
A reconciliation of income taxes computed at the federal statutory income tax rate to total income
taxes is as follows for the years ended December 31, 2016, 2015 and 2014 (in thousands):
85
Net income (loss) before income taxes
$
2,341
$
646
$
(1,037)
2016
2015
2014
Computed "expected" tax expense (benefit)
Valuation allowance change
State taxes, net of fed
Cash surrender value of life insurance
Other
$
796
(11,997)
(39)
(63)
131
$
220
(277)
-
(62)
119
$
(352)
334
44
(62)
36
Provision (benefit) for income taxes
$
(11,172)
$
-
$
-
Commercial banking organizations conducting business in Virginia are not subject to Virginia income
taxes. Instead, they are subject to a franchise tax based on bank capital. The Company recorded
franchise tax expense of approximately $75,000 for the year ended December 31, 2016. Due to the
Company’s adjusted capital level, we were not subject to franchise tax expense for the years ended
December 31, 2015 and 2014.
Note 10.
Earnings (loss) per share
The following table presents the basic and diluted earnings per share computations (in thousands
except per share data):
Numerator
Net income (loss) - basic and diluted
Preferred stock dividend and accretion
Preferred stock principal forgiveness
Preferred stock dividend forgiveness
Net income (loss) available to common
2016
2015
2014
$
13,513
(737)
-
-
$
646
(674)
4,404
2,215
$
(1,037)
(1,436)
-
-
shareholders
$
12,776
$
6,591
$
(2,473)
Denominator
Weighted average shares outstanding - basic
Dilutive effect of common stock options and
restricted stock awards
1,421
1,166
-
35
Weighted average shares outstanding - diluted
1,421
1,201
334
-
334
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
$
$
8.99
8.99
$
$
5.65
5.49
$
$
(7.39)
(7.39)
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 6,830 shares of common stock
were not included in computing diluted earnings per share in 2014, because their effects were anti-
dilutive. Restricted stock awards for 14,642 shares of common stock were not included in computing
diluted earnings per share in 2014 because their effects were also anti-dilutive (see Notes 13 and 14).
Note 11.
Lease commitments
Certain premises and equipment are leased under various operating leases. Total rent expense
charged to operations was $387,000, $422,000 and $439,000 in 2016, 2015 and 2014, respectively.
At December 31, 2016, the minimum total rental commitment under such non-cancelable operating
leases was as follows (in thousands):
86
2017
2018
2019
2020
2021
$
405
283
213
208
64
$
1,173
Note 12.
Commitments and contingencies
Off-balance-sheet risk – The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financial needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts
recognized in the financial statements. The contract amounts of these instruments reflect the extent
of involvement that the Company has in particular classes of instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to the
financial instrument for commitments to extend credit, and to potential credit loss associated with
letters of credit issued, is represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for loans
and other such on-balance sheet instruments.
At December 31, 2016 and 2015, the Company had outstanding the following approximate off-
balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):
Contract
Amount
2016
Contract
Amount
2015
Undisbursed credit lines
Commitments to extend or originate credit
Standby letters of credit
$
55,315
16,467
4,397
$
46,656
9,132
1,484
Total commitments to extend credit
$
76,179
$
57,272
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.
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 3. The
distribution of commitments to extend credit approximates the distribution of loans outstanding.
Prior Agreements with Regulators − In February 2012, the Bank entered into a Stipulation and Consent
to the Issuance of a Consent Order with the FDIC and the Virginia Bureau of Financial Institutions (the
87
“Supervisory Authorities”), and the Supervisory Authorities issued the related Consent Order effective
February 3, 2012 (the “Consent Order”). In June 2012, the Company entered into a similar written
agreement (the “Written Agreement”) with the Reserve Bank. As a result of the steps the Company
and the Bank took to, among other things, improve asset quality, increase capital, augment
management and board oversight, and increase earnings, the Consent Order was terminated effective
December 14, 2015. In place of the Consent Order, the Bank’s Board of Directors made certain written
assurances to the Supervisory Authorities in the form of a Memorandum of Understanding (“MOU”)
that became effective November 17, 2015. Due to further improvements by the Company and the
Bank in asset quality and earnings, and the correction of a prior Regulation W violation, the MOU was
terminated effective May 12, 2016, and the Written Agreement was terminated effective July 28, 2016.
With the terminations of the MOU and the Written Agreement, neither the Company nor the Bank is
under any formal or informal agreements with its regulators.
IRS Examination – During 2016, the Internal Revenue Service completed an examination of the
Company’s federal income tax return for the year ended December 31, 2013. No changes to the
return were proposed.
Note 13.
Shareholders’ equity and regulatory matters
On May 1, 2009, as part of the Capital Purchase Program (the “TARP Program”) established by the
U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of
2008, the Company entered into a Letter Agreement and Securities Purchase Agreement—Standard
Terms (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which the Company
sold (i) 14,738 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
par value $4.00 per share, having a liquidation preference of $1,000 per share (the “preferred stock”)
and (ii) a warrant (the “Warrant”) to purchase 499,029 shares of the Company’s common stock at an
initial exercise price of $4.43 per share, subject to certain anti-dilution and other adjustments, for an
aggregate purchase price of $14,738,000 in cash. The fair value of the preferred stock was estimated
using discounted cash flow methodology at an assumed market equivalent rate of 13%, with 20
quarterly payments over a five year period, and was determined to be $10,208,000. The fair value of
the Warrant was estimated using the Black-Scholes option pricing model, with assumptions of 25%
volatility, a risk-free rate of 2.03%, a yield of 6.162% and an estimated life of 5 years, and was
determined to be $534,000. The aggregate fair value for both the preferred stock and Warrant was
determined to be $10,742,000 with 95% of the aggregate attributable to the preferred stock and 5%
attributable to the Warrant. Therefore, the $14,738,000 issuance was allocated with $14,006,000
being assigned to the preferred stock and $732,000 being allocated to the Warrant. The difference
between the $14,738,000 face value of the preferred stock and the amount allocated of $14,006,000
to the preferred stock was accreted as a discount on the preferred stock using the effective interest
rate method over five years.
The preferred stock qualifies as Tier 1 capital and accrued cumulative dividends at a rate of 5% until
May 1, 2014 and now accrues at a 9% rate, unless the shares are redeemed by the Company. The
preferred stock is generally non-voting, other than on certain matters that could adversely affect the
preferred stock.
The Warrant was immediately exercisable. The Warrant provides for the adjustment of the exercise
price and the number of shares of common stock issuable upon exercise pursuant to customary anti-
dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of
common stock, and upon certain issuances of common stock at or below a specified price relative to
the then-current market price of common stock. The Warrant expires ten years from the issuance
date. Pursuant to the Purchase Agreement, the Treasury had agreed not to exercise voting power
with respect to any shares of common stock issued upon exercise of the Warrant.
In November 2013, the Company participated in a successful auction of the Company’s preferred
stock by the Treasury that resulted in the purchase of the preferred stock by private and institutional
investors.
88
In accordance with the Company’s prior Written Agreement with the Reserve Bank, the Company had
been deferring quarterly cash dividends on the preferred stock since May 2011. The Written
Agreement was terminated by the Reserve Bank as of July 28, 2016. With the termination of the
Written Agreement, the Company is not required to defer the quarterly cash dividends on the preferred
stock. At December 31, 2016, the aggregate amount of the Company’s total accrued but deferred
dividend payments on the preferred stock was $2,815,000 and reflected as a reduction of retained
earnings.
Subsequent to December 31, 2016, 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.
On December 4, 2013, the Company issued 67,907 new shares of common stock through a private
placement to directors and executive officers. The sale raised $1,684,075 in new capital for the
Company. The $24.80 sale price for the common shares was the stock’s book value at September
30, 2013, which represented a 30% premium over the closing price of the stock on December 3, 2013.
On August 6, 2014, the Company filed Articles of Amendment to its Articles of Incorporation with the
Virginia State Corporation Commission to effect a reverse stock split of its outstanding common stock
which became effective on August 8, 2014. As a result of the reverse split, every sixteen shares of the
Company’s issued and outstanding common stock were consolidated into one issued and outstanding
share of common stock.
On March 27, 2015, the Company completed a rights offering to shareholders (the “Rights Offering”)
and concurrent standby offering to Kenneth R. Lehman (the “Standby Offering”), in which the Company
issued an aggregate of 1,051,866 shares of common stock (the total number of shares offered) at
$13.87 per share for aggregate gross proceeds of $14,589,381 (including the value of the Company’s
common stock of $4,618,813 exchanged for shares of preferred stock by Mr. Lehman). In connection
with the Rights Offering, 283,293 shares were issued to shareholders upon exercise of their basic
subscription rights and 191,773 shares were issued to shareholders upon exercise of their
oversubscription privileges (approximately 36.9% of the total number of shares requested pursuant to
oversubscription privileges). In connection with the Standby Offering, Mr. Lehman purchased an
aggregate of 576,800 shares of the Company’s common stock, 333,007 of which were issued in
exchange for 9,023 shares of the Company’s preferred stock and 243,793 of which were purchased
for cash. Also, as part of the Standby Offering, Mr. Lehman forgave $2,215,009 in accrued and unpaid
dividends on the preferred stock.
The Bank is subject to various regulatory capital requirements administered by the federal and state
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary, actions by regulators that, if undertaken, could have a direct material
effect on the Bank’s financial statements. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank’s capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures are established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital (as
defined in the regulations) to risk-weighted assets, and of Tier 1 Capital to average assets (the
Leverage ratio).
Federal regulatory agencies are required by law to adopt regulations defining five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
89
undercapitalized. The Bank met the ratio criteria to be categorized as a “well capitalized” institution as
of December 31, 2016, 2015 and 2014. However, due to the minimum capital ratios required by the
prior Consent Order, the Bank was considered adequately capitalized in 2014. The MOU required the
Bank to maintain a leverage ratio of at least 8% and a total capital to risk-weighted assets ratio of at
least 12%. Primarily as a result of the Company’s Rights Offering and Standby Offering completed on
March 27, 2015, the Bank’s leverage ratio increased to 9.33% and the total capital to risk-weighted
assets ratio was 14.02%, exceeding the ratios required by the MOU. At December 31, 2016, the
Bank’s Tier 1 risk-based capital ratio was 14.28%, its total risk-based capital ratio was 15.33% and its
leverage ratio was 10.47%. When capital falls below the “well capitalized” requirement, consequences
can include: new branch approval could be withheld, more frequent examinations by the FDIC;
brokered deposits cannot be renewed without a waiver from the FDIC; and other potential limitation
as described in FDIC Rules and Regulations sections 337.6 and 303, and Federal Deposit Insurance
Act section 29. In addition, the FDIC insurance assessment increases when an institution falls below
the “well capitalized” classification.
In July 2013, the Board of Governors of the Federal Reserve System and the FDIC approved the final
rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks
(commonly known as Basel III). Under the final rules, which began for the Company and the Bank on
January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements
will increase for both the quantity and quality of capital held by the Company and the Bank. The rules
include a new common equity Tier 1 capital to risk-weighted assets ratio (“CET1 ratio”) of 4.5% and a
capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively
results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-
weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in
a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total
capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and
requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain
assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company
and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal
Reserve Board’s Small Bank Holding Company Policy Statement issued February 2015, and is no
longer obligated to report consolidated regulatory capital. The Bank continues to be subject to various
capital requirements administered by banking agencies. The capital amounts and ratios at December
31, 2016 and 2015 for the Bank are presented in the table below (dollars in thousands):
90
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
To be Well Capitalized
Amount
Ratio
$
49,225
15.33%
$
25,693
8.00%
$
42,117
10.00%
45,852
14.28%
12,847
4.00%
19,270
6.00%
45,852
10.47%
17,523
4.00%
21,903
5.00%
45,852
14.28%
14,452
4.50%
20,876
6.50%
$
42,695
14.02%
$
24,369
8.00%
$
30,461
10.00%
39,133
12.85%
12,184
4.00%
18,277
6.00%
39,133
9.33%
16,776
4.00%
20,970
5.00%
39,133
12.85%
13,707
4.50%
15,231
6.50%
December 31, 2016
Total capital (to risk-
weighted assets)
Village Bank
Tier 1 capital (to risk-
weighted assets)
Village Bank
Leverage ratio (Tier 1
capital to average
assets)
Village Bank
Common equity tier 1 (to risk-
weighted assets)
VillageBank
December 31, 2015
Total capital (to risk-
weighted assets)
Village Bank
Tier 1 capital (to risk-
weighted assets)
Village Bank
Leverage ratio (Tier 1
capital to average
assets)
Village Bank
Common equity tier 1 (to risk-
weighted assets)
VillageBank
Note 14.
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 stock incentive plan at the indicated
dates:
91
2016
Weighted
Average
Year Ended December 31,
2015
Weighted
Average
Exercise Fair Value
Intrinsic
Exercise Fair Value
Intrinsic
Options
Price
Per Share
Value
Options
Price
Per Share
Value
Options outstanding,
beginning of period
2,929
$
24.47
$
12.71
Granted
Forfeited
Exercised
Options outstanding,
-
-
-
(592)
25.48
12.53
-
-
-
6,830
$
92.34
$
57.97
-
-
-
(3,901)
168.79
95.85
-
-
-
end of period
2,337
$
24.21
$
12.76
$
-
2,929
$
24.47
$
12.71
$
-
Options exercisable,
end of period
2,337
1,730
Year Ended December 31,
2014
Weighted
Average
Exercise Fair Value
Intrinsic
Options
Price
Per Share
Value
Options outstanding,
beginning of period
6,210
$
99.03
$
64.96
Granted
Forfeited
Exercised
Options outstanding,
884
(264)
-
25.28
25.28
-
15.52
80.33
-
end of period
6,830
$
92.34
$
57.97
$
-
Options exercisable,
end of period
5,318
The following table summarizes information about stock options outstanding at December 31, 2016:
Outstanding
Weighted
Average
Range of
Exercise Prices
Remaining Weighted
Average
Years of
Number of Contractual Exercise
Life
Options
Price
Exercisable
Weighted
Average
Exercise
Price
Number of
Options
$16.00-$25.76
2,337
6.06
$
24.21
2,337
$
24.21
2,337
6.06
24.21
2,337
24.21
During the second quarter of 2016, we granted certain officers 4,000 performance based shares of
common stock with a weighted average fair market value of $20.00 at the date of grant. These
restricted stock awards vest over two years. During the third quarter of 2016, we granted certain
officers 6,250 restricted shares of common stock with a weighted average fair market value of $22.50
92
at the date of grant. These restricted stock awards have a three-year graded vesting. During the third
quarter of 2015, we granted certain officers 40,675 restricted shares of common stock with a weighted
average fair market value of $19.72 at the date of grant. 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 39,080 and 47,893 at
December 31, 2016 and 2015, respectively.
The fair value of the stock is calculated under the same methodology as stock options and the expense
is recognized over the vesting period. Unamortized stock-based compensation related to non-vested
share based compensation arrangements granted under the Incentive Plan as of December 31, 2016
and 2015 was $697,000 and $514,000, respectively. The time based unamortized compensation of
$374,000 is expected to be recognized over a weighted average period of 1.79 years. During 2016
there were forfeitures of 3,399 shares of restricted stock awards. There were no forfeitures of
restricted stock awards in 2015 and 2014.
A summary of changes in the Company’s nonvested restricted stock awards for the year follows:
Weighted-
Average
Grant-Date
Fair-Value
Aggregate
Intrinsic
Value
Shares
47,893
10,850
(16,264)
(3,399)
$
20.82
21.88
20.85
(21.53)
$
1,278,733
289,695
(434,257)
(90,727)
December 31, 2015
Granted
Vested
Forfeited
December 31, 2016
39,080
$
21.04
$
1,043,444
Stock-based compensation expense was $213,000, $262,000, and $131,000 for the years ended
December 31, 2016, 2015, and 2014, respectively.
Note 15.
Trust preferred securities
During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned
subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February
24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting.
The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which
adjusts, and is payable, quarterly. The interest rate was 3.13% and 2.69% at December 31, 2016 and
2015, respectively. 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 December 31, 2016 and there are no plans to do so. The principal asset of the Trust is
$5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest
rates to the Trust Preferred Capital Notes.
During the third quarter of 2007, Village Financial Statutory Trust II, a wholly–owned subsidiary of the
Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007,
$3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The
securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts
and is also payable quarterly. The interest rate at December 31, 2016 was 2.38%. 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 December 31, 2016 and there are no plans to do so. The
principal asset of the Trust is $3.6 million of the Company’s junior subordinated securities with like
maturities and like interest rates to the Trust Preferred Capital Notes.
93
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 16.
Retirement plans
401K Plan: The Bank provides a qualified 401K plan to all eligible employees which is administered
through the Virginia Bankers Association Benefits Corporation. Employees are eligible to participate
in the plan after three months of employment. Eligible employees may, subject to statutory limitations,
contribute a portion of their salary to the plan through payroll deduction. Due to the recent economic
conditions the Bank ceased its matching program in 2009 however beginning January 2013 the Bank
reinstituted the 401K match. The Bank provided a matching contribution of $.50 for every $1.00 the
participant contributes up to the first 4% of their salary. Participants are fully vested in their own
contributions and vest equally over three years of service in the Bank’s matching contributions. Total
contributions to the plan for the years ended December 31, 2016, 2015 and 2014 were $164,000,
$159,000 and $150,000, respectively.
Amendment to Village Bank Supplemental Executive Retirement Plan
On July 9, 2016, the Bank amended its supplemental executive retirement plan to provide that the
participants’ benefits will vest upon a change of control of the Bank. The plan previously provided that
a participant’s benefits would vest upon a change of control only if the participant experienced a
qualifying termination of employment within 12 months after the change of control.
Supplemental Executive Retirement Plan: The Bank established the Village Bank Supplemental
Executive Retirement Plan (the “SERP”) on January 1, 2005 to provide supplemental retirement
income to certain executive officers as designated by the Personnel Committee, later replaced by the
Compensation Committee, and approved by the board of directors. While we are subject to the
regulatory agreements, the respective regulatory agencies also review and approve new participants
or changes in benefits under the SERP. The SERP is an unfunded employee pension plan under the
provisions of ERISA. An eligible employee, once designated by the Committee and approved by the
board of directors in writing to participate in the SERP, becomes a participant in the SERP 60 days
following such approval (unless an earlier participation date is approved). There are currently five
executive officers who participate in the SERP. The retirement benefit to be received by a participant
is determined by the Committee and approved by the board of directors and is payable in equal
monthly installments over the period specified in the SERP for each respective participant,
commencing on the first day of the month following a participant’s retirement or termination of
employment, provided the participant has been employed by the Bank for a minimum of 10 years. The
Compensation Committee, in its sole discretion, may choose to treat a participant who has
experienced a termination of employment on or after attaining age 65 but prior to completing his
service requirement as having completed his service requirement. At December 31, 2016 and 2015,
the Bank’s liability under the SERP was $2,064,000 and $1,972,000, respectively, and expense for
the years ended December 31, 2016, 2015 and 2014 was $168,000, $201,000 and $257,000,
respectively. The increase in cash surrender value of the BOLI related to the participants was
$183,000 and $182,000 for the years ended December 31, 2015 and 2014, respectively, while the
cash surrender value decreased in 2016 by $37,000. The cash surrender value decreased in 2016
due to proceeds from bank owned life insurance claim of $266,000.
94
Directors’ Deferral Plan: The Bank established the Village Bank Outside Directors Deferral Plan (the
“Directors Deferral Plan”) on January 1, 2005 under which non-employee directors of Village Bank
have the opportunity to defer receipt of all or a portion of certain compensation until retirement or
departure from the board of directors. Deferral of compensation under the Directors Deferral Plan is
voluntary by non-employee directors and to participate in the plan a director must file a deferral election
as provided in the plan. A director shall become an active participant with respect to a plan year (as
defined in the plan) only if he is expected to have compensation during the plan year and he timely
files a deferral election. A separate account is established for each participant in the plan and each
account shall, in addition to compensation deferred at the election of the participant, be credited with
interest on the balance of the account, the rate of such interest to be established by the board of
directors in its sole discretion at the beginning of each plan year. For those directors electing to
purchase stock, the obligation will only be settled by delivery of the fixed number of shares they
purchased. At December 31, 2016 and 2015, the Bank’s liability under the Directors Deferral Plan
was $166,000 and $82,000, respectively, and expense for the years ended December 31, 2016, 2015
and 2014 was $89,000, $87,000 and $123,000, respectively. In the first quarter of 2015 and the fourth
quarter of 2013 certain directors elected to purchase common stock with funds from their deferred
compensation accounts causing the December 31, 2015 and December 31, 2103 liability to be lower
than the December 31, 2014 liability. A rabbi trust was established to hold the shares. At December
31, 2016 and 2015, the trust held 48,055 shares of Company common stock totaling $1,034,382.
Note 17. Fair Value
Effective January 1, 2008, the Company adopted the provisions of FASB Codification Topic 820: Fair
Value Measurements which defines fair value, establishes a framework for measuring fair value under
U.S GAAP, and expands disclosures about fair value measurements.
FASB Codification Topic 820: Fair Value Measurements and Disclosures establishes a hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:
• Level 1 Inputs— Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.
• Level 2 Inputs — Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
• Level 3 Inputs - Significant unobservable inputs that reflect a company’s own assumptions
about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods to determine the fair value of each type of financial
instrument:
Securities: Fair values for securities available-for-sale are obtained from an independent pricing
service. The prices are not adjusted. The independent pricing service uses industry-standard models
to price U.S. Government agency obligations and mortgage backed securities that consider various
assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates,
loss severity, current market and contractual prices for the underlying financial instruments, as well as
other relevant economic measures. Securities of obligations of state and political subdivisions are
valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury
rate based on credit rating. Substantially all assumptions used by the independent pricing service are
observable in the marketplace, can be derived from observable data, or are supported by observable
levels at which transactions are executed in the marketplace (Levels 1 and 2).
Impaired loans: The fair values of impaired loans are measured for impairment using the fair value of
the collateral for collateral-dependent loans on a nonrecurring basis. Collateral may be in the form of
real estate or business assets including equipment, inventory, and accounts receivable. The vast
95
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 when economic or other circumstances dictate a need to
obtain an updated appraisal of the property, 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, or
the net book value on the applicable business’s financial statements if not considered significant using
observable market data. Likewise, values for inventory and accounts receivables collateral are based
on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded
in the period incurred as provision for loan losses on the Consolidated Statements of Operations.
Real estate owned: Real estate owned assets are adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, real estate owned assets are carried at fair value less costs to sell.
Fair value is based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral. When the fair value of the collateral is based
on an observable market price or a current appraised value, the Company records the foreclosed
asset as nonrecurring Level 2. When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value and there is no observable
market price, the Company records the foreclosed asset as nonrecurring Level 3.
Assets held for sale: assets held for sale were transferred from premises and equipment at cost less
accumulated depreciation at the date of transfer. The Company periodically evaluates the value of
assets held for sale and records an impairment charge for any subsequent declines in fair value less
selling costs. Fair value is based upon independent market prices, appraised values of the collateral
or management’s estimation of the value of the collateral. When the fair value of the collateral is based
on an observable market price or a current appraised value, the Company records the assets held for
sale as nonrecurring Level 2. When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value and there is no observable
market price, the Company records the asset held for sale as nonrecurring Level 3.
Assets measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized
below (in thousands):
Fair Value Measurement
at December 31, 2016 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Inputs
(Level 2)
Other
Significant
Observable Unobservable
Carrying
Value
Inputs
(Level 3)
-
-
974
841
-
Financial Assets - Recurring
US Government Agencies
Mortgage-backed securities
Financial Assets - Non-Recurring
Impaired loans
Assets held for sale
Real estate owned
$
32,246
11,648
2,103
9,450
15,441
841
2,926
-
-
-
30,143
2,198
14,467
-
2,926
96
Financial Assets - Recurring
US Government Agencies
Mortgage-backed securities
Municipals
Financial Assets - Non-Recurring
Impaired loans
Assets held for sale
Real estate owned
Carrying
Value
$
33,713
3,001
1,205
20,509
12,631
6,249
Fair Value Measurement
at December 31, 2015 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Inputs
(Level 2)
Other
Significant
Observable Unobservable
3,307
-
-
-
-
30,406
3,001
1,205
-
18,862
-
6,190
Inputs
(Level 3)
-
-
-
1,647
12,631
59
The following table presents qualitative information about Level 3 fair value measurements for financial
instruments for the years ended December 31, 2016 and 2015 (dollars in thousands):
December 31, 2016
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
(In thousands)
Range
(Weighted
Average)
Impaired loans - real estate secured
$ 517
Appraisal (1) or Internal
Valuation (2)
Selling costs
6%-10% (7%)
Impaired loans - non-real estate secured
$ 457
Appraisal (1) or
Discounted Cash Flow
Real estate owned
$ -
Appraisal (1) or Internal
Valuation (2)
Discount for lack of
marketability and age
of appraisal
Selling costs
Discount for lack of
6%-30% (10%)
10%
marketability or practical life
0%-50% (20%)
Selling costs
6%-10% (7%)
Discount for lack of
marketability and age
of appraisal
6%-30% (15%)
Assets held for sale
$ 841
Appraisal (1) or Internal
Valuation (2)
Selling costs
6%-10% (7%)
Discount for lack of
marketability and age
of appraisal
6%-30% (15%)
97
December 31, 2015
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
(In thousands)
Range
(Weighted
Average)
Impaired loans - real estate secured
$ 1,042
Appraisal (1) or Internal
Valuation (2)
Selling costs
6%-10% (7%)
Impaired loans - non-real estate secured
$ 605
Appraisal (1) or
Discounted Cash Flow
Real estate owned
$ 59
Appraisal (1) or Internal
Valuation (2)
Discount for lack of
marketability and age
of appraisal
Selling costs
Discount for lack of
6%-30% (10%)
10%
marketability or practical life
0%-50% (20%)
Selling costs
6%-10% (7%)
Discount for lack of
marketability and age
of appraisal
6%-30% (15%)
Assets held for sale
$ 12,631
Appraisal (1) or Internal
Valuation (2)
Selling costs
6%-10% (7%)
Discount for lack of
marketability and age
of appraisal
6%-30% (15%)
(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally
included various level 3 inputs which are not identifiable.
(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances.
The following table presents the changes in the Level 3 fair value category for the years ended
December 31, 2016 and 2015 (in thousands):
Impaired
Loans
Real Estate Assets Held
Owned
for Sale
Total Assets
Balance at December 31, 2014
$ 2,263
$ 1,337
$ 11,743
$ 15,343
Total realized and unrealized gains (losses)
Included in earnings
Included in other comprehensive income
Net transfers in and/or out of Level 3
-
-
(616)
142
-
(1,420)
-
-
888
142
-
(1,148)
Balance at December 31, 2015
$ 1,647
$ 59
$ 12,631
$ 14,337
Total realized and unrealized gains (losses)
Included in earnings
Included in other comprehensive income
Net transfers in and/or out of Level 3
-
-
(673)
15
-
(74)
-
-
(11,790)
15
-
(12,537)
Balance at December 31, 2016
$ 974
$ -
$ 841
$ 1,815
In general, fair value of securities is based upon quoted market prices, where available. If such quoted
market prices are not available, fair value is based upon market prices determined by an outside,
independent entity that primarily uses as inputs, observable market-based parameters. Fair value of
loans held for sale is based upon internally developed models that primarily use as inputs, observable
market-based parameters. Valuation adjustments may be made to ensure that financial instruments
are recorded at fair value. These adjustments may include amounts to reflect counterparty credit
quality, the Company’s creditworthiness, among other things, as well as unobservable parameters.
98
Any such valuation adjustments are applied consistently over time. The Company valuation
methodologies may produce a fair value calculation that may not be indicative of net realizable value
or reflective of future fair values. While management believes the Company’s valuation methodologies
are appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could result in a different
estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are
recognized on the actual date of the event or circumstances that caused the transfer, which generally
coincides with the Company’s monthly and or quarter valuation process.
Cash and cash equivalents – The carrying amount of cash and cash equivalents approximates fair
value.
Investment securities – The fair value of investment securities held-to-maturity and available-for-sale
is estimated based on quoted prices for similar assets or liabilities determined by bid quotations
received from independent pricing services. The carrying amount of other investments approximates
fair value.
Loans – For variable rate loans that reprice frequently and have no significant change in credit risk,
fair values are based on carrying values. For all other loans, fair values are calculated by discounting
the contractual cash flows using estimated market discount rates which reflect the credit and interest
rate risk inherent in the loans, or by using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Assets held for sale – The carrying value of assets held for sale is based on fair value less selling
costs. Fair values for assets held for sale are estimated based on appraised values of the asset or
management’s estimation of the value of the assets.
Deposits – The fair value of deposits with no stated maturity, such as demand, interest checking and
money market, and savings accounts, is equal to the amount payable on demand at year-end. The
fair value of certificates of deposit is based on the discounted value of contractual cash flows using
the rates currently offered for deposits of similar remaining maturities.
Borrowings – The fair value of borrowings is based on the discounted value of contractual cash flows
using the rates currently offered for borrowings of similar remaining maturities.
Accrued interest – The carrying amounts of accrued interest receivable and payable approximate fair
value.
99
December 31,
2016
December 31,
2015
Level in Fair
Value
Hierarchy
Carrying
Value
Estimated
Fair Value
(In thousands)
Carrying
Value
Estimated
Fair Value
Financial assets
Cash
Cash equivalents
Investment securities available for sale
Investment securities available for sale
Federal Home Loan Bank stock
Loans held for sale
Loans
Impaired loans
Impaired loans
Assets held for sale
Other real estate owned
Other real estate owned
Bank owned life insurance
Accrued interest receivable
Financial liabilities
Deposits
FHLB borrowings
Trust preferred securities
Other borrowings
Accrued interest payable
Level 1
Level 2
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
Level 3
Level 2
Level 3
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Note 18. Segment Reporting
$
10,848
948
11,553
32,341
512
14,784
321,659
14,467
974
841
2,926
-
7,093
2,274
$
10,848
948
11,553
32,341
512
14,784
310,337
14,467
974
841
2,926
-
7,093
2,274
$
17,076
186
3,307
34,612
685
14,373
286,262
18,862
1,647
12,631
6,190
59
7,130
2,060
$
17,076
186
3,307
34,612
685
14,373
274,230
18,862
1,647
12,631
6,190
59
7,130
2,060
383,277
2,400
8,764
81
70
383,985
2,402
8,565
81
70
364,848
6,000
8,764
508
1,346
365,294
6,004
8,984
508
1,346
In previous reports, the Company concluded that it had one operating and reportable
segment, “Community Banking”. This conclusion was based on the fact that the Company’s
activities are interrelated, and each activity is dependent and assessed based on how each
of the activities supports the others. The Company has re-assessed its segment reporting
and decided to report two segments: traditional commercial banking and mortgage banking,
as management has changed the information it reviews to make decisions. 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 years ended December
31, 2016, 2015 and 2014. (in thousands):
100
Year Ended December 31, 2016
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Commercial Mortgage
Banking
Banking
Eliminations
Consolidated
Totals
$
15,636
-
3,868
19,504
$
470
6,430
742
7,642
$
(117)
-
(190)
(307)
$
15,989
6,430
4,420
26,839
2,609
7,702
-
8,088
18,399
117
3,593
1,606
1,090
6,406
(117)
-
-
(190)
(307)
2,609
11,295
1,606
8,988
24,498
Income before income taxes
$
1,105
$
1,236
$
-
$
2,341
Total assets
$
448,373
$
10,026
$
(13,597)
$
444,802
Year Ended December 31, 2015
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Commercial Mortgage
Banking
Banking
Eliminations
Consolidated
Totals
$
15,165
-
3,473
18,638
$
446
6,076
749
7,271
$
(107)
-
(240)
(347)
$
15,504
6,076
3,982
25,562
2,877
7,346
-
8,787
19,010
107
3,500
1,555
1,091
6,253
(117)
-
-
(230)
(347)
2,867
10,846
1,555
9,648
24,916
Income (loss) before income taxes
$
(372)
$
1,018
$
-
$
646
Total assets
$
426,038
$
8,806
$
(14,903)
$
419,941
101
Year Ended December 31, 2014
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Commercial Mortgage
Banking
Banking
Eliminations
Consolidated
Totals
$
16,287
-
3,078
19,365
$
347
4,449
706
5,502
$
(56)
-
(344)
(400)
$
16,578
4,449
3,440
24,467
3,561
7,454
-
9,237
20,252
55
3,231
1,165
1,201
5,652
(56)
-
-
(344)
(400)
3,560
10,685
1,165
10,094
25,504
Income (loss) before income taxes
$
(887)
$
(150)
$
-
$
(1,037)
Total assets
$
435,046
$
8,081
$
(9,123)
$
434,004
102
Note 19.
Parent corporation only financial statements
Village Bank and Trust Financial Corp.
(Parent Corporation Only)
Condensed Balance Sheet
(in thousands)
Assets
Cash and due from banks
Investment in subsidiaries
Investment in special purpose subsidiary
Prepaid expenses and other assets
Liabilities and Shareholders' Equity
Liabilities
Balance due to nonbank subsidiaries
Other liabilities
Total liabilities
Shareholders' equity
Preferred stock
Common stock
Additional paid-in capital
Warrant surplus
Accumulated deficit
Stock in directors rabbi trust
Directors deferred fees obligation
Accumulated other comprehensive loss
Total stockholders' equity
December 31, December 31,
2016
2015
$
1,770
50,230
264
2,935
$
3,494
38,665
264
45
$
55,199
$
42,468
$
8,764
2,821
11,585
$
8,764
3,345
12,109
23
5,629
58,643
732
(21,172)
(1,034)
1,034
(241)
43,614
23
5,562
58,497
732
(33,948)
(1,034)
1,034
(507)
30,359
$
55,199
$
42,468
103
Village Bank and Trust Financial Corp.
(Parent Corporation Only)
Condensed Statements of Operations and Comprehensive Income (Loss)
Years Ended December 31, 2016, 2015 and 2014
(in thousands)
Interest income
Village Bank money market
Interest expense
Interest on trust preferred securities
Total interest expense
2016
2015
2014
$
8
$
10
$
1
185
185
213
213
215
215
Net interest expense
(177)
(203)
(214)
Noninterest expense
Write down of assets held for sale
Supplies
Professional and outside services
Other
Total noninterest expense
Net loss before undistributed income
(loss) of subsidiary
Undistributed income (loss) of subsidiary
Net income (loss) before income tax
expense (benefit)
Income tax expense (benefit)
-
48
199
33
280
(457)
11,087
10,630
(2,883)
1,759
48
412
52
2,271
(2,474)
3,120
646
-
-
54
53
52
159
(373)
(664)
(1,037)
-
Net income (loss)
$
13,513
$
646
$
(1,037)
Total comprehensive income
$
13,779
$
860
$
2,080
104
Village Bank and Trust Financial Corp.
(Parent Corporation Only)
Condensed Statements of Cash Flows
Years Ended December 31, 2016, 2015 and 2014
(in thousands)
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Writedown on assets held for sale
Undistributed (income) loss of subsidiary
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash used in operating activities
Cash Flows from Investing Activities
Investment in subsidiary
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from issuance of common stock
Net proceeds from sale of common stock,
net of expenses of $990
Net cash provided by (used in)
financing activities
Net increase (decrease) in cash
Cash, beginning of year
2016
2015
2014
$
13,513
$
646
$
(1,037)
-
(11,087)
(2,890)
(1,260)
(1,724)
-
-
-
-
-
(1,724)
3,494
1,759
(3,120)
258
(19)
(476)
(5,000)
(5,000)
(79)
8,965
8,886
3,410
84
-
664
(239)
247
(365)
-
-
(11)
-
(11)
(376)
460
Cash, end of year
$
1,770
$
3,494
$
84
105
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company, under the supervision and with the participation
of the Company’s management, including the Company’s Chief Executive Officer and the Chief
Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer have concluded that as of December 31, 2016, the
Company’s disclosure controls and procedures were effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in Securities
and Exchange Commission 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.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that the Company’s disclosure controls and procedures will detect or uncover
every situation involving the failure of persons within the Company or its subsidiaries to disclose
material information otherwise required to be set forth in the Company’s periodic reports.
Management’s Report on Internal Control over Financial Reporting. Management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control
over financial reporting is designed to provide reasonable assurance to the Company’s management
and board of directors regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2016. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated
Framework (2013). Based on our assessment, we believe that, as of December 31, 2016, the
Company’s internal control over financial reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting. There has been no change in the Company’s
internal control over financial reporting during the fourth quarter of the fiscal year ended December 31,
2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
106
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required to be disclosed in this Item 10 is contained in the Company’s Proxy Statement
for the 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be disclosed in this Item 11 is contained in the Company’s Proxy Statement
for the 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required to be disclosed in this Item 12 is contained in the Company’s Proxy Statement
for the 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required to be disclosed in this Item 13 is contained in the Company’s Proxy Statement
for the 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required to be disclosed in this Item 14 is contained in the Company’s Proxy Statement
for the 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
107
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements and reports are included in Part II, Item 8, of this report
on Form 10K.
Report of Independent Registered Public Accounting Firm (BDO USA, LLP)
Consolidated Balance Sheets – December 31, 2016 and 2015
Consolidated Statements of Operations – Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Shareholders’ Equity – Years Ended December 31, 2016,
2015 and 2014
Consolidated Statements of Comprehensive Income – Years Ended
December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows – Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information
is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1
Description
Articles of Incorporation of Village Bank and Trust Financial Corp., as amended
(incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on
Form 10-Q for the period ended September 30, 2014, filed with the SEC on
October 31, 2014).
Amended and Restated Bylaws of Village Bank and Trust Financial Corp.
(incorporated herein by reference to Exhibit 3.2 of the Current Report on Form
8-K, filed with the SEC on March 27, 2015).
Specimen of Certificate for Village Bank and Trust Financial Corp. common
stock (incorporated by reference to Exhibit 4.1 of the Form S-1 Registration
Statement filed with the Securities and Exchange Commission on November
12, 2014 (SEC File No. 333-200147)).
Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock,
Series A (incorporated by reference to Exhibit 4.1 of the Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 6, 2009).
Warrant to Purchase Shares of Common Stock, dated May 1, 2009
(incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 6, 2009).
Employment Agreement, dated August 8, 2013, by and between Village Bank
and Trust Financial Corp. and William G. Foster (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 19, 2013).*
108
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Employment Agreement, dated January 6, 2017, by and between Village Bank
and Trust Financial Corp. and C. Harril Whitehurst, Jr. (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 9, 2017).*
Employment Agreement, dated April 5, 2016, by and between Village Bank
and James E. Hendricks, Jr. (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 8, 2016).*
Employment Agreement, dated April 5, 2016, by and between Village Bank
and Max C. Morehead, Jr. (incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 8, 2016).*
Employment Agreement, dated January 24, 2017, by and between Village
Bank Mortgage Corporation and George Karousos.*
Incentive Plan, as amended June 18, 2014 (incorporated by reference to
Exhibit 99.1 of the Form S-8 Registration Statement filed with the Securities
and Exchange Commission on June 18, 2014 (SEC File No. 333-196893)).*
Form of Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.5 of the Annual Report on Form 10-KSB for the year ended
December 31, 2004).*
Form of Non-Employee Director Non-Qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.6 of the Annual Report on Form 10-
KSB for the year ended December 31, 2004).*
Village Bank and Trust Financial Corp. 2015 Stock
Incentive Plan
(incorporated herein by reference to Exhibit 99.0 of the Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on July 1,
2015 (SEC File No. 333-205407)).*
Form of Performance-Based Restricted Stock Unit Award Agreement under
the Village Bank and Trust Financial Corp. 2015 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 of the Current Report on Form
8-K filed with the Securities and Exchange Commission on July 8, 2015).*
Form of Time-Based Restricted Stock Award Agreement under the Village
Bank and Trust Financial Corp. 2015 Stock Incentive Plan (incorporated herein
by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 8, 2015).*
Outside Directors Deferral Plan, dated January 1, 2005 (incorporated by
reference to Exhibit 10.9 of the Annual Report on Form 10-K for the year ended
December 31, 2010).*
Supplemental Executive Retirement Plan, dated January 1, 2005
(incorporated by reference to Exhibit 10.10 of the Annual Report on Form 10-
K for the year ended December 31, 2010).*
Standby Purchase Agreement, dated November 11, 2014, between Village
Bank and Trust Financial Corp. and Kenneth R. Lehman (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 12, 2014).
109
10.15
10.16
10.17
10.18
10.19
10.20
10.21
21
23.1
31.1
31.2
32
101
Letter Agreement, dated as of May 1, 2009, by and between Village Bank and
Trust Financial Corp. and the United States Department of the Treasury
(incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 6, 2009).
Side Letter Agreement, dated as of May 1, 2009, by and between Village Bank
and Trust Financial Corp. and the United States Department of the Treasury
(incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 6, 2009).
Form of Senior Executive Officer Waiver (incorporated by reference to Exhibit
10.3 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2009).*
Form of Senior Executive Officer Consent Letter (incorporated by reference to
Exhibit 10.4 of the Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 6, 2009).*
Stipulation and Consent to the Issuance of a Consent Order (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 9, 2012).
Consent Order (incorporated by reference to Exhibit 10.2 of the Current Report
on Form 8-K filed with the Securities and Exchange Commission on February
9, 2012).
Written Agreement by and between Village Bank and Trust Financial Corp. and
the Federal Reserve Bank of Richmond (incorporated by reference to Exhibit
10.1 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 2, 2012).
Subsidiaries of Village Bank and Trust Financial Corp.
Consent of Independent Registered Public Accounting Firm.
Section 302 Certification by Chief Executive Officer.
Section 302 Certification by Chief Financial Officer.
Section 906 Certification.
The following materials from the Village Bank and Trust Financial Corp.
Annual Report on Form 10-K for the year ended December 31, 2016
formatted in eXtensible Business Reporting (XBRL) (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Operations, (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.
_____________________________
* Management contracts and compensatory plans and arrangements.
ITEM 16. FORM 10-K Summary
None.
110
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 31, 2017
By /s/ William G. Foster, Jr.
William G. Foster, Jr.
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ William G. Foster Jr._
William G. Foster, Jr.
President, Chief Executive
Officer and Director
(Principal Executive Officer)
March 31, 2017
/s/ C. Harril Whitehurst, Jr._
C. Harril Whitehurst, Jr.
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
March 31, 2017
/s/ R.T. Avery, III
R.T. Avery, III
/s/ Craig D. Bell_
Craig D. Bell
/s/ William B. Chandler_
William B. Chandler
/s/ O. Woodland Hogg, Jr._
O. Woodland Hogg, Jr.
/s/ Michael A. Katzen
Michael A. Katzen
/s/ Charles E. Walton_
Charles E. Walton
Director
March 31, 2017
Director and
Chairman of the Board
March 31, 2017
Director
March 31, 2017
Director
March 31, 2017
Director
March 31, 2017
Director
March 31, 2017
111
Signature
Title
Date
/s/ John T. Wash, Sr._
John T. Wash, Sr.
/s/ George R. Whittemore
George R. Whittemore
/s/ Thomas W. Winfree
Thomas W. Winfree
/s/ Michael L. Toalson_
Michael L. Toalson
/s/ Kenneth Lehman
Kenneth R. Lehman
Director
Director
March 31, 2017
March 31, 2017
Director
March 31, 2017
Director
March 31, 2017
Director
March 31, 2017
112
Exhibit 21
Subsidiaries of Village Bank and Trust Financial Corp.
Name of Subsidiary
State of Organization
Village Bank
Village Bank Mortgage Corporation
(wholly-owned subsidiary of Village Bank)
Village Insurance Agency, Inc.
(wholly-owned subsidiary of Village Bank)
Village Financial Services Corporation
(wholly-owned subsidiary of Village Bank)
Southern Community Financial Capital Trust I
Village Financial Statutory Trust II
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
113
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Board of Directors
Village Bank and Trust Financial Corp.
Midlothian, Virginia
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3
and S-8 (Nos. 333-159594, 333-192408, 333-196893, and 333-205407) of Village Bank and Trust
Financial Corp. of our report dated March 31, 2017, relating to the consolidated financial
statements, which appear in this Annual Report on Form 10-K for the year ended December 31,
2016.
/s/ BDO USA, LLP
Richmond, Virginia
March 31, 2017
114
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, William G. Foster, Jr., certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Village Bank and Trust Financial Corp. for the year ended
December 31, 2016;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-a5(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2017
By: /s/ William G. Foster, Jr.
William G. Foster, Jr.
President and
Chief Executive Officer
115
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, C. Harril Whitehurst, Jr., certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Village Bank and Trust Financial Corp. for the year ended
December 31, 2016;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-a5(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2017
By: /s/ C. Harril Whitehurst, Jr.
C. Harril Whitehurst, Jr.
Executive Vice President and
Chief Financial Officer
116
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Village Bank and Trust Financial Corp. (the “Company”) on Form 10-K
for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on
their knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of and for the periods covered in the Report.
/s/ William G. Foster, Jr.
William G. Foster, Jr.
President and Chief Executive Officer
March 31, 2017
Date
/s/ C. Harril Whitehurst, Jr.
C. Harril Whitehurst, Jr.
Executive Vice President and Chief Financial Officer
March 31, 2017
Date
117
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