Dear Shareholder,
On February 20, 2018, we published a letter commenting on our 2017 progress and results as well as
our 2018 priorities. We noted in that letter that we are continuing to focus on:
Sustaining commercial and consumer loan growth momentum;
Driving growth in low cost deposits by winning and growing commercial and consumer banking
relationships;
Liquidating low yielding assets to fund loan growth when that makes sense;
Growing noninterest income in banking operations by implementing a series of initiatives;
Rebuilding mortgage banking production and profitability by recruiting additional loan officers;
and
Bringing expenses for the Bank in line with higher performing peers in mid-size metropolitan
markets.
Since we published that letter, we have:
Issued subordinated debt and redeemed all outstanding Series A preferred stock, which will
result in meaningful savings to common shareholders.
Announced the retirement of Woody Hogg from the Board of Directors effective March 31,
2018.
Appointed Devon Henry to the Board of Directors effective March 27, 2018.
Identified Donnie Kaloski as the successor to Harril Whitehurst, our Chief Financial Officer,
when he retires May 31, 2018.
We are encouraged by several developments at this point in 2018:
Both the House of Representatives and the Senate have passed regulatory reform legislation
that will help community banks like Village Bank serve our clients and communities more
effectively. They now need to complete the difficult task of reconciling their respective bills and
putting a final bill on the President’s desk for signature.
The economy continues to perform well, and we are seeing business owners in our markets
hiring and investing for growth.
The Federal Open Market Committee raised its target Fed Funds rate by ¼ of 1% on March
21, 2018. We interpret that as a sign of confidence in the economy. As we have noted in the
past, Village Bank’s earnings are poised to benefit from rising interest rates.
We cannot close out this letter without expressing our gratitude for the leadership, commitment and
service of Tom Winfree, John Wash and Woody Hogg, our recent retirees from the Board of Directors.
We wish them good health and a joyful journey in the years ahead. I want to share a few comments
on their special contributions:
We thank Tom Winfree for his compassion for others and commitment to service that he
consistently models. Those qualities will forever be part of the core values of our Company. He
made certain that “You’re a Neighbor, Not a Number” became a reality at Village, and his
contributions will bear fruit for us for years to come.
We appreciate the fearless advocacy that John Wash has always done for Village Bank and
Village Bank Mortgage in the community. We continue to benefit from his entrepreneurial spirit
and his vast connections in the market. John was a source of optimism and positive energy
during the difficult years following the recession.
Woody Hogg infuses every question and observation with highly developed business instincts
and judgment. He consistently speaks his mind and asks the difficult questions that need to be
asked. He encouraged his friends and family to bank with Village, and they listened. We are
indebted to Woody for all of those things and will miss him.
We are very mindful of the fact that, when you combine the retirements of these gentlemen with Bill
Chandler’s retirement a year ago, our Board has lost significant institutional knowledge. Fortunately,
we are blessed to have seven long-serving directors on the Board who carry with them the hard
lessons learned during the last recession; and our three recent additions to the Board bring fresh
perspectives, new contacts and diverse business experience. This transition is part of our succession
planning for the Board, and we are confident that our Board is equipped to provide the governance
and leadership we need to help us thrive in the rapidly evolving marketplace.
We hope to see you at the shareholders meeting on May 22, 2018, and thank you for your continued
support.
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.
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 cause actual results to differ materially from those expressed in the forward-
looking statements including, but not limited to, changes in interest rates, the effects of future economic,
business and market conditions, legislative and regulatory changes, governmental monetary and fiscal
policies, changes in accounting policies, rules and practices, and other factors described from time to time
in our reports filed with the Securities and Exchange Commission (“SEC”). For further information, contact
C. Harril Whitehurst, Jr., Executive Vice President and Chief Financial Officer, at 804-897-3900 or
hwhitehurst@villagebank.com.
Additional Information
This letter may be deemed to be solicitation material in respect of the company’s 2018 annual meeting of
shareholders. The company filed a definitive proxy statement with the SEC on April 9, 2018 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.
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, 2017
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, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer (Do not check if smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
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 $21,866,000.
The number of shares of common stock outstanding as of February 28, 2018 was 1,430,627.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be used in conjunction with the 2018 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
Item 1.
Business ........................................................................................................ 3
Item 1A. Risk Factors ................................................................................................ 17
Item 1B. Unresolved Staff Comments ...................................................................... 17
Properties .................................................................................................... 17
Item 2.
Item 3.
Legal Proceedings ...................................................................................... 17
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 .................... 41
Item 8.
Financial Statements and Supplementary Data ......................................... 41
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ..................................................... 97
Item 9A. Controls and Procedures ............................................................................ 97
Item 9B. Other Information ........................................................................................ 97
Part III
Item 10. Directors, Executive Officers, and Corporate Governance ........................ 98
Item 11. Executive Compensation ............................................................................ 98
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters......................................... 98
Item 13. Certain Relationships and Related Transactions,
and Director Independence......................................................................... 98
Item 14. Principal Accounting Fees and Services .................................................... 98
Part IV
Item 15. Exhibits, Financial Statement Schedules ................................................... 99
Form 10-K Summary…………………………………………………………..102
Item 16
Signatures
................................................................................................................... 103
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 and
Williamsburg, Virginia metropolitan areas. 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 and expanded its services to Williamsburg, Virginia in 2017. 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 2017, revenue (after intercompany
eliminations) generated by the Bank totaled $19.1 million and the mortgage company generated $6.3
million in revenue.
Segment Reporting
The Company has two reportable segments: traditional commercial banking and mortgage
banking. For more financial data and other information about each of the Company’s operating
segments, refer to Item 7 – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” sections, “Segment Information – Commercial Banking Segment” and
“Segment Information – Mortgage Banking Segment”, and to Note 18 “Segment Reporting” in the
“Notes to Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
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
3
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, serve 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, realtors,
builders and financial advisors who work with us to exceptionally professional and caring
service.
Improve and sustain 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 continue to 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 will continue 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”).
o Streamline and rationalize our processes and organization to improve productivity
o
and efficiency.
Include a prudent amount of debt in our holding company capital structure to
leverage a strong ROA into an even stronger ROE.
4
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 and Williamsburg Metropolitan Statistical
Areas. We currently conduct business from ten full-service branch banking offices and a mortgage
loan production office in Central Virginia in the counties of Chesterfield, Hanover, Henrico, Powhatan
and James City. During the fourth quarter of 2017, we expanded into the Williamsburg, Virginia market
through the opening of a new Village Bank branch. At the end of the first quarter of 2017, we closed
our Manassas, Virginia mortgage production office after the retirement of its long term leader.
Banking Services
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 of 1950 (the “FDI Act”) to the limits
provided thereunder.
5
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 and Williamsburg markets where we have branch banking offices. 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, 2017, our legal lending limit for loans to one borrower was
approximately $6,827,000. However, we generally limit credit to any one individual or entity to a
maximum of $5,000,000.
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
6
to attract customers from the acquired institutions.
At June 30, 2017, the latest date such information is available from the FDIC, the Bank’s deposit
market share in Chesterfield County was 4.91%, 4.32% in Hanover County, 8.25% in Powhatan
County, 0.40% in the Richmond MSA and 0.08% in Henrico County. Due to the recent opening of the
Williamsburg, Virginia branch, our market share in this market is insignificant.
Supervision and 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.
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.
General. The Company is qualified as a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board
of Governors of the Federal Reserve System (the "Federal Reserve"). As a bank holding company,
the Company is subject to supervision, regulation and examination by the Federal Reserve and is
required to file various reports and additional information with the Federal Reserve. The Company is
also registered under the bank holding company laws of Virginia and is subject to supervision,
regulation and examination by the Bureau of Financial Institutions of the Virginia State Corporation
Commission (the "BFI"). The Bank is a Virginia chartered bank and is not a member of the Federal
Reserve System. The Bank is subject to regulation, supervision and examination by the FDIC and the
BFI.
The Dodd-Frank Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act represents a
significant overhaul of many aspects of the regulation of the financial services industry, although many
of its provisions (e.g., the interchange and trust preferred capital limitations) apply to companies that
are significantly larger than the Company. The Dodd-Frank Act directs applicable regulatory
authorities to promulgate regulations implementing its provisions, and its effect on the Company and
on the financial services industry as a whole will be clarified as those regulations are issued. Major
elements of the Dodd-Frank Act include:
The Dodd-Frank Act changed the assessment base for federal deposit insurance from the
amount of insured deposits to consolidated assets less its average tangible equity. In addition,
it increased the minimum size of the Deposit Insurance Fund (“DIF”) and eliminated its ceiling,
with the burden of the increase in the minimum size on institutions with more than $10 billion
of assets.
The Dodd-Frank Act made permanent the $250,000 limit for federal deposit insurance at all
insured depository institutions.
The Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand
deposits, thereby permitting depository institutions to pay interest on business transaction and
other accounts.
The Dodd-Frank Act implemented new corporate governance requirements for public
companies, such as the Company, requiring additional disclosure relating to executive
compensation and proxy access to shareholders.
7
The Dodd-Frank Act implemented amendments to the Truth in Lending Act aimed at improving
including originator
consumer protections with
compensation, minimum repayment standards, and prepayment considerations.
to mortgage originations,
respect
The Dodd-Frank Act established the Financial Stability Oversight Council, which is responsible
for identifying and monitoring systemic risks posed by financial firms, activities, and practices.
The Dodd-Frank Act amended the Electronic Fund Transfer Act to, among other things, require
that debit card interchange fees must be reasonable and proportional to the actual cost
incurred by the institution with respect to the transaction. In June 2011, the Federal Reserve
adopted regulations applicable to institutions with $10 billion or more of assets that established
a maximum permissible interchange fee that an institution may charge. Under the regulations,
the maximum permissible interchange fee for such institutions is the sum of 21 cents per
transaction and 5 basis points multiplied by the value of the transaction, with an additional
adjustment of up to one cent per transaction if the institution implements additional fraud-
prevention standards. Although institutions that have assets of less than $10 billion are
exempt, these regulations are expected to significantly affect the interchange fees that
institutions with less than $10 billion of assets are able to collect.
The Dodd-Frank Act eliminated (over time) the inclusion of trust preferred securities as a
permitted element of Tier 1 capital. However, the Company’s currently outstanding trust
preferred securities are grandfathered and will continue to qualify as Tier 1 capital.
The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), an
independent federal agency with broad rule-making, supervisory, and enforcement powers
under various federal consumer financial protection laws. The CFPB has examination and
primary enforcement authority with respect to depository institutions with $10 billion or more
of assets. Smaller institutions, such as the Company, are subject to rules promulgated by the
CFPB but are examined and supervised by federal banking regulators for consumer
compliance purposes.
The Dodd-Frank Act enhanced 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.
The Dodd-Frank Act has had, and may in the future have, a material impact on the Company’s
operations, particularly through increased compliance costs resulting from new and possible future
consumer and fair lending regulations.
Reporting Obligations Under Securities Laws. The Company is subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the
requirement to file with the Securities and Exchange Commission (the “SEC”) annual, quarterly and
other reports on the financial condition and performance of the organization. The Company’s common
stock is listed on the Nasdaq Capital Market and, as a result, the Company is subject to the rules and
listing standards adopted by The Nasdaq Stock Market, LLC (“Nasdaq”). The Company is also
affected by the corporate responsibility and accounting reform legislation signed into law on July 30,
2002, known as the Sarbanes-Oxley Act of 2002 (the “SOX Act”), and the related rules and regulations.
The SOX Act includes provisions that, among other things, require that periodic reports containing
financial statements that are filed with the SEC be accompanied by chief executive officer and chief
financial officer certifications as to the accuracy and compliance with law, additional disclosure
requirements and corporate governance and other related rules. The Company has expended
considerable time and money in complying with the rules and regulations of the SEC and Nasdaq, and
with the SOX Act, and expects to continue to incur additional expenses in the future.
Bank Holding Company Act. The Federal Reserve has jurisdiction under the BHC Act to approve
any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The
8
BHC Act, and other applicable laws and regulations, generally limit the activities of a bank holding
company and its subsidiaries to that of banking, managing or controlling banks, or any other activity
that is so closely related to banking or to managing or controlling banks as to be a proper incident
thereto.
Since September 1995, the BHC Act has permitted bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain conditions, including
nationwide and state imposed concentration limits. Banks are also able to branch across state lines,
provided certain conditions are met, including that applicable state laws expressly permit such
interstate branching. Virginia has adopted legislation that permits branching across state lines,
provided there is reciprocity with the state in which the out-of-state bank is based.
Support of Subsidiary Institutions. Under the Dodd-Frank Act, and previously under Federal
Reserve policy, the Company is required to act as a source of financial strength for the 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 the Company’s shareholders or creditors to provide it. In the event of the
Company’s 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.
The Company has periodically raised capital and contributed it to the Bank to support the Bank’s
operations.
Privacy Legislation. Several laws, including the Right To Financial Privacy Act and the Gramm-
Leach-Bliley Act, provide protections against the transfer and use of customer information by financial
institutions. Financial Institutions generally are prohibited from disclosing customer information to non-
affiliated third parties, unless the customer has been given the opportunity to object and has not
objected to such disclosure. Financial institutions must disclose their specific privacy policies to their
customers annually and must conduct an internal risk assessment of their ability to protect customer
information.
Mergers and Acquisitions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, as amended (the "Interstate Banking Act"), generally permits well capitalized and adequately
managed bank holding companies to acquire banks in any state, and preempts all state laws restricting
the ownership by a bank holding company of banks in more than one state. The Interstate Banking
Act also permits a bank to merge with an out-of-state bank and convert any offices into branches of
the resulting bank if both states have not opted out of interstate branching; and permits a bank to
acquire branches from an out-of-state bank if the law of the state where the branches are located
permits the interstate branch acquisition. Under the Dodd-Frank Act, a bank holding company or bank
must be well capitalized and well managed to engage in an interstate acquisition. Bank holding
companies and banks are required to obtain prior Federal Reserve approval to acquire more than 5%
of a class of voting securities, or substantially all of the assets, of a bank holding company, bank or
savings association. The Interstate Banking Act and the Dodd-Frank Act permit banks to establish and
operate de novo interstate branches to the same extent a bank chartered by the host state may
establish branches. Virginia law permits branching across state lines, provided there is reciprocity with
the state in which the out-of-state bank is based.
Limits on the 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 approval by the BFI. As of December 31, 2017, 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.
9
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.
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.
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
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.
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.
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 (the
“Basel Committee”) 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. On July 2, 2013, the federal
bank regulatory agencies approved certain revisions to the proposed rules and finalized new capital
requirements for such banking organizations.
10
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%.
Under new capital guidelines, 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.
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
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 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
11
were unchanged by the final rules. As of December 31, 2017, the Bank met the 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.
In September 2017, the federal bank regulatory agencies proposed to revise and simplify the capital
treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated
financial entities and minority interests for banking organizations, such as the Bank, that are not
subject to the advanced approaches requirements. In November 2017, the regulatory agencies
revised the capital rules enacted in 2013 to extend the current transitional treatment of these items for
non-advanced approaches banking organizations until the September 2017 proposal is finalized. The
September 2017 proposal would also change the capital treatment of certain commercial real estate
loans under the standardized approach, which the Bank uses to calculate its capital ratios.
In December 2017, the Basel Committee published standards that it described as the finalization of
the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”).
Among other things, these standards revise the Basel Committee’s standardized approach for credit
risk (including by recalibrating risk weights and introducing new capital requirements for certain
“unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a
new standardized approach for operational risk capital. Under the Basel framework, these standards
will generally be effective on January 1, 2022, with an aggregate output floor phasing in through
January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a
capital floor apply only to advanced approaches institutions, and not to the Bank. The impact of Basel
IV on us will depend on the manner in which it is implemented by the federal bank regulators.
At December 31, 2017, the Bank’s Tier 1 risk-based capital ratio was 11.96%, its total risk-based
capital ratio was 12.88% and its leverage ratio was 9.18%. More information concerning our
regulatory ratios at December 31, 2017 is included in Note 13 to the “Notes to Consolidated Financial
Statements” contained in Item 8 of this 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:
(i) a bank’s loans or extensions of credit, including purchases of assets subject to an agreement to
repurchase, to affiliates; (ii) a bank’s investment in affiliates; (iii) assets a bank may purchase from
affiliates, except for real and personal property exempted by the Federal Reserve; (iv) the amount of
loans or extensions of credit to third parties collateralized by the securities or debt obligations of
affiliates; (v) transactions involving the borrowing or lending of securities and any derivative transaction
that results in credit exposure to an affiliate; and (vi) 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
12
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
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.
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.
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:
(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, 2017, we had
not been made aware of any instances of non-compliance with this guidance.
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
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
13
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.
Mortgage Banking Regulation. The Bank’s mortgage company is subject to the rules and regulations
by the Department of Housing and Urban Development, the Federal Housing Administration, the
Department of Veteran Affairs and state regulatory authorities with respect to originating, processing,
servicing and selling mortgage loans. Those rules and regulations, among other things, establish
standards for loan origination, prohibit discrimination, provide for inspections and appraisals of
property, require credit reports on prospective borrowers and, in some cases, restrict certain loan
features, and fix maximum interest rates and fees. In addition to other federal laws, mortgage
origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home
Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Home Ownership Equity
Protection Act, and the regulations promulgated thereunder. These laws prohibit discrimination,
require the disclosure of certain basic information to mortgagors concerning credit and settlement
costs, limit payment for settlement services to the reasonable value of the services rendered and
require the maintenance and disclosure of information regarding the disposition of mortgage
applications based on race, gender, geographical distribution and income level.
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, 2017, the 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.
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
14
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.
Tax Reform. On December 22, 2017, the President of the United States signed into law the Tax Cut
and Jobs Act of 2017 (the “Tax Reform Act”). The legislation made key changes to the U.S. tax law,
including the reduction of the U.S. federal corporate tax rate from 35% to 21%, effective January 1,
2018. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the
Tax Reform Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017
and recognized $4,181,000 in tax expense for the year ended December 31, 2017. We are still
analyzing certain aspects of the new law and refining our calculations, which could affect the
measurement of these assets and liabilities or give rise to new deferred tax amounts. Although the
Tax Reform Act had a significant negative impact on the Company’s earnings for 2017 as a result of
the re-valuation of its deferred tax assets and liabilities, the reduction in the corporate tax rate to 21%
is expected to have a significant positive benefit to the Company in 2018 and beyond.
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.
Employees
As of December 31, 2017, the Company and its subsidiaries had a total of 152 full-time employees
and 9 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.
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 SEC. 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).
15
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, one in Powhatan County and one in James City County.
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 in this report 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:
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.
During the first quarter of 2017, the Company received approval from state and federal regulators
allowing the Bank to pay a special dividend to the Company for the sole purpose of paying all accrued
and unpaid dividends on the preferred stock through February 15, 2017, as well as to redeem 688
shares of the total 5,715 shares outstanding. The accrued and unpaid dividends paid on February 15,
2017 amounted to $2,911,000. The 688 shares were redeemed on February 24, 2017 at a redemption
price of $1,000 per share plus accrued dividends from February 15, 2017 to the redemption date.
18
HighLow20161st quarter20.36$ 18.01$ 2nd quarter23.50 18.91 3rd quarter24.88 22.30 4th quarter27.45 23.10 20171st quarter29.50$ 26.70$ 2nd quarter32.20 27.30 3rd quarter33.95 29.00 4th quarter33.95 28.00
During the second quarter of 2017, the Company received approval from the state regulators
allowing the Bank to pay a special dividend to the Company for the purpose of paying the
preferred stock dividend due on May 15, 2017. No other dividends were paid by the Bank to the
Company during 2017.
At December 31, 2017, the aggregate amount of the Company’s total accrued dividend payments on
the preferred stock was $54,000 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.
Holders
At February 28, 2018, there were approximately 1,006 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 2017.
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 Act and other changes in
banking, securities, and tax laws and regulations and their application by our regulators, and
changes in scope and cost of FDIC insurance and other coverages;
our inability to maintain our regulatory capital position;
the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers
or breached due to employee error, malfeasance, or other disruptions despite security
measures implemented by the Company;
changes in market conditions, specifically declines in the residential and commercial real
estate market, volatility and disruption of the capital and credit markets, soundness of other
financial institutions we do business with;
risks inherent in making loans such as repayment risks and fluctuating collateral values;
changes in operations of the mortgage company as a result of the activity in the residential
real estate market;
exposure to repurchase loans sold to investors for which borrowers failed to provide full and
accurate information on or related to their loan application or for which appraisals have not
been acceptable or when the loan was not underwritten in accordance with the loan program
specified by the loan investor;
governmental monetary and fiscal policies;
changes in accounting policies, rules and practices;
reliance on our management team, including our ability to attract and retain key personnel;
competition with other banks and financial institutions, and companies outside of the banking
industry, including those companies that have substantially greater access to capital and other
resources;
demand, development and acceptance of new products and services;
problems with technology utilized by us;
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. Net interest income has
increased from $12,637,000 in 2015 to $13,380,000 in 2016 and $14,577,000 in 2017.
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, 2017 and 2016, and results of operations for the Company for the years
ended December 31, 2017, 2016 and 2015. 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:
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 a net loss of $3,096,000 and net loss available to common shareholders of $3,594,000
or $(2.55) in 2017 compared to net income of $13,513,000 and net income available to common
shareholders of $12,776,000 or $8.99 per fully diluted share in 2016 and a net income of $646,000
and a net income available to common shareholders of $6,591,000, or $5.49 per fully diluted share, in
2015.
The most significant event affecting the Company’s results for the fourth quarter of 2017 and the year
ended December 31, 2017 was a reduction in the corporate tax rate. On December 22, 2017, the
President signed into law the Tax Reform Act. The Tax Reform Act includes a number of changes in
existing tax law impacting businesses. One of the most significant changes is a permanent reduction
in the corporate income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018.
GAAP requires companies to re-value their deferred tax assets and liabilities as of the date of
enactment, with resulting tax effects accounted for in the reporting period of enactment.
22
201720162015Performance RatiosReturn on average assets(1) (2)(0.68)%3.15%0.15%Return on average equity(1)(2)(7.08)%38.81%2.30%Net interest margin(3)3.56%3.53%3.40%Efficiency(4)93.52%90.34%105.96%Loans to deposits89.64%88.12%84.27%Equity to assets8.24%9.81%7.23%Asset Quality RatiosALLL to loans at year-end0.88%1.00%1.16%ALLL to loans at year-endexcluding guaranteed student loans(5)1.00%1.16%1.41%ALLL to nonaccrual loans139.59%140.41%95.78%Nonperforming assets to total assets0.86%1.20%2.37%Nonperforming loans to total loans1.11%1.58%3.24%Net charge-offs to average loans0.04%0.06%0.06%(1) Return on Average Assets and Return on Average Equity for 2016 were positivelyimpacted by the reversal in the third quarter of 2016 of an $11,997,000 valuationallowance previously recorded against the net deferred tax asset.(2) Return on Average Assets and Return on Average Equity for 2017 were negativelyimpacted by the write-off of the net deferred tax asset of approximately $4,181,000as a result of the reduction in the corporate tax rate.(3) Net interest margin is computed by dividing net interest income for theperiod by average interest earning assets.(4) Efficiency ratio is computed by dividing noninterest expense by the sum ofnet interest income and noninterest income.(5) Student loans are guaranteed by the Department of Education forapproximately 98% of principal and interest and are evaluated separately for ALLL.
As of December 31, 2017, the Company had net deferred tax assets of $11 million. The Company
recorded a re-valuation of its deferred tax assets and liabilities as of December 31, 2017, at the new
rate of 21%, based upon balances in existence at date of enactment. As a result, the Company's net
deferred tax assets were written down by approximately $4,181,000 in the fourth quarter of 2017 with
a corresponding increase in tax expense. This write down decreased earnings per share for the fourth
quarter by $2.95 and for the year by $2.96. Although the Tax Reform Act had a significant negative
impact on the Company’s earnings for 2017 as a result of the re-valuation of its deferred tax assets
and liabilities, the reduction in the corporate tax rate to 21% is expected to have a significant positive
benefit to the Company in 2018 and beyond.
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 $6,619,000 associated with the rights offering to shareholders and concurrent standby
offering completed in March 2015.
There were significant changes in income and expense items when comparing the 2017 and 2016
results and 2016 to 2015. These changes are listed in the following table (in thousands):
Net interest income
Net interest income, which represents the difference between interest earned on interest-earning
assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of
earnings. Net interest income can be affected by changes in market interest rates as well as the level
23
2017 Compared2016 Comparedto 2016to 2015Increase (decrease) inNet interest income1,197$ 743$ (Recovery of) provision for loan losses- (2,000) Gains on loan sales(1,015) 354 Gain on sale of assets(504) 504 Gain on sale of investments(243) 156 Service charges and fees(51) (61) Rental income(582) (523) Other noninterest income(349) 362 (Increase) decrease inSalaries and benefits(786) (449) Commissions80 (51) Occupancy expense337 260 Professional and outside services5 (69) Writedown of assets held for sale(11) 2,429 Loss on branch consolidation377 (252) Expenses related to foreclosed real estate685 (240) FDIC premium(5) 624 Other operating expenses(46) (78) Other41 (14) (870)$ 1,695$
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.
The increase in net interest income of $1,197,000 in 2017 was a result of a positive movement in
interest income. Interest income increased by $1,309,000, with interest income on loans, investment
securities and federal funds sold increasing by $1,035,000, $396,000 and $69,000, respectively. The
increase in interest income on loans and investment securities was attributable to increases in average
balances outstanding of $20,065,000 and $18,040,000, respectively.
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 $11,365,000.
The following table illustrates average balances of total interest-earning assets and total interest-
bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities,
shareholders' equity and related income, expense and corresponding weighted-average yields and
rates (dollars in thousands). The average balances used in these tables and other statistical data
were calculated using daily average balances. We have no tax exempt assets for the periods
presented.
24
20172016ChangeAverage interest-earning assets408,945$ 379,163$ 29,782$ Interest income17,298$ 15,989$ 1,309$ Yield on interest-earning assets4.23%4.22%0.01%Average interest-bearing liabilities312,734$ 304,458$ 8,276$ Interest expense2,721$ 2,609$ 112$ Cost of interest-bearing liabilities0.87%0.86%0.01%Net interest income14,577$ 13,380$ 1,197$ Net interest margin3.56%3.53%0.03%Year Ended December 31,(dollars in thousands)20162015ChangeAverage interest-earning assets379,163$ 371,398$ 7,765$ Interest income15,989$ 15,504$ 485$ Yield on interest-earning assets4.22%4.17%0.05%Average interest-bearing liabilities304,458$ 315,823$ (11,365)$ Interest expense2,609$ 2,867$ (258)$ Cost of interest-bearing liabilities0.86%0.91%(0.05)%Net interest income13,380$ 12,637$ 743$ Net interest margin3.53%3.40%0.13%Year Ended December 31,(dollars in thousands)
25
InterestInterestInterestAverageIncome/YieldAverageIncome/YieldAverageIncome/YieldBalanceExpenseRateBalanceExpenseRateBalanceExpenseRateLoansCommercial40,536$ 1,664$ 4.11%29,989$ 1,427$ 4.76%21,291$ 1,096$ 5.15%Real estate - residential80,863 4,249 5.25%82,592 4,397 5.32%87,767 4,756 5.42%Real estate - commercial140,809 6,773 4.81%128,346 6,108 4.76%113,132 5,650 4.99%Real estate - construction34,580 1,742 5.04%31,440 1,533 4.88%30,828 1,609 5.22%Student loans46,242 1,577 3.41%50,742 1,529 3.01%42,610 1,204 2.83%Consumer1,846 123 6.66%1,702 99 5.82%1,795 72 4.01%Gross loans344,876 16,128 4.68%324,811 15,093 4.65%297,423 14,387 4.84%Investment securities45,667 751 1.64%27,627 355 1.28%38,246 616 1.61%Loans held for sale6,813 279 4.10%12,520 470 3.75%11,487 446 3.88%Federal funds and other11,589 140 1.21%14,205 71 0.50%24,242 55 0.22%Total interest earning assets408,945 17,298 4.23%379,163 15,989 4.22%371,398 15,504 4.17%Allowance for loan losses(3,308) (3,513) (5,678) Cash and due from banks10,210 13,860 9,765 Premises and equipment, net12,911 13,187 14,210 Other assets25,732 26,703 36,906 Total assets454,490$ 429,400$ 426,601$ Interest bearing depositsInterest checking45,986 82 0.18%42,783 77 0.18%43,450 79 0.18%Money market78,492 309 0.39%68,817 256 0.37%67,796 251 0.37%Savings22,530 39 0.17%20,119 36 0.18%20,282 37 0.18%Certificates152,341 1,971 1.29%158,203 1,998 1.26%163,956 2,114 1.29%Total deposits299,349 2,401 0.80%289,922 2,367 0.82%295,484 2,481 0.84%BorrowingsLong-tern debt - trustpreferred securities8,777 259 2.95%9,027 185 2.05%9,922 213 2.15%FHLB advances4,221 56 1.33%5,161 56 1.09%9,027 170 1.88%Other borrowings387 5 1.29%348 1 0.29%1,390 3 0.22%Total interest bearing liabilities312,734 2,721 0.87%304,458 2,609 0.86%315,823 2,867 0.91%Noninterest bearing deposits94,618 82,678 75,127 Other liabilities3,395 7,445 7,480 Total liabilities410,747 394,581 398,430 Equity capital43,743 34,819 28,171 Total liabilities and capital454,490$ 429,400$ 426,601$ Net interest income beforeprovision for loan losses14,577$ 13,380$ 12,637$ Interest spread - average yieldon interest earning assets,less average rate oninterest bearing liabilities3.36%3.36%3.27%Net interest margin(net interest incomeexpressed as a percentageof average earning assets)3.56%3.53%3.40%Year Ended December 31, 2015Year Ended December 31, 2017Year Ended December 31, 2016
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).
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 nonperforming loans, historical loan loss experience, delinquency trends,
underlying collateral values, the amount of actual losses charged to the reserve in a given period and
assessment of present and anticipated economic conditions.
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:
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:
26
VolumeRateTotalVolumeRateTotalInterest incomeLoans773$ 71$ 844$ 1,128$ (398)$ 730$ Investment securities277 119 396 (151) (110) (261) Fed funds sold and other(10) 79 69 (8) 24 16 Total interest income1,040 269 1,309 969 (484) 485 Interest expenseDepositsInterest checking6 (1) 5 (1) (1) (2) Money market accounts37 16 53 4 1 5 Savings accounts4 (1) 3 - (1) (1) Certificates of deposit(79) 52 (27) (73) (43) (116) Total deposits(32) 66 34 (70) (44) (114) BorrowingsLong-term debt(2) 76 74 3 (31) (28) FHLB Advances(10) 10 - (57) (57) (114) Other borrowings4 - 4 (2) - (2) Total interest expense(40) 152 112 (126) (132) (258) Net interest income1,080$ 117$ 1,197$ 1,095$ (352)$ 743$ 2016 vs. 2015Due to Changes inIncrease (Decrease)2017 vs. 2016Due to Changes inIncrease (Decrease)201720162015Classified assets8,313$ 10,454$ 15,375$ Nonaccrual loans2,320 2,402 3,718 Foreclosed real estate1,788 2,926 6,249 December 31,
allows us to take a more measurable approach to our evaluation of qualitative factors such as
economic conditions that may affect loss experience; and
is widely used by community banks which provides peer data that can be used as a benchmark
for comparison to our analysis.
In addition to the adoption of the software solution for our analysis, we reviewed the last twenty years
of historical loss data for peer banks in Virginia to assist us in our evaluation of environmental factors
and other conditions that could affect the loan portfolio and the overall adequacy of the allowance for
loan losses.
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 $347,000, $713,000 and $59,000 at December 31, 2017, 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 $118,000 for the construction and land development
portfolio at December 31, 2017 was attributed to a decline in the general component of the
allowance for loan losses as a result of a decrease in the historical loss experience from 0.38%
as of December 31, 2016 to 0.04% as of December 31, 2017.
The provision for loan losses totaling $286,000 for the construction and land development
portfolio at December 31, 2015 was attributed to a an increase in the historical loss experience
from a net recovery of 0.27% at December 31, 2014 to a net charge-off of 0.48% at December
31, 2015.
The provision for loan losses totaling $316,000 for the commercial and industrial loans (except
those secured by real estate) at December 31, 2017 was attributed to an increase of $369,000
in the specific reserve associated with loans evaluated individually for impairment.
The recovery of loan losses totaling $730,000 and $866,000 for the commercial real estate
portfolio at December 31, 2016 and 2015, respectively, was attributed to a decline in the
general component of the allowance for loan losses as a result of a decrease in the historical
loss experience from 0.96% 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 $146,000 and $1,143,000 for the consumer real estate
portfolio at December 31, 2016 and 2015, respectively, was attributed to a decline in the
general component of the allowance for loan losses as a result of a decrease in the historical
loss experience from 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.
For more financial data and other information about the provision for (recovery of) loan losses refer to
section, “Balance Sheet Analysis” under this Item 7 – “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, and Note 4 “Allowance for Loan Losses” in the “Notes
to Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
Noninterest income
Noninterest income includes service charges and fees on deposit accounts, fee income related to loan
27
origination, gains and losses on sale of mortgage loans and securities held for sale, and, in 2016 and
2015, rental income primarily on our previous headquarters building. The most significant noninterest
income item has been gain on loan sales generated by the mortgage company, representing 67% in
2017, 59% in 2016, and 60% in 2015 of total noninterest income. Noninterest income amounted to
$8,106,000 in 2017, $10,850,000 in 2016, and $10,058,000 in 2015.
The decrease in gain on sale of loans was due to decreased activity by our mortgage banking
segment during the latter part of 2017. At the end of the first quarter of 2017, we closed our
Manassas, VA mortgage production office after the retirement of its long term leader.
Additionally, the President of the mortgage banking segment retired in the first quarter of 2017.
Both of these events had a negative impact on the mortgage banking segments’ loan
production. The gain on sale is recognized at the date of sale to the investor and mortgage
loans sales decreased from $218,627,000 in 2016 to $170,539,000 in 2017.
The gain on sale of assets in 2016 was related to the sale of our previous headquarters building
and was a onetime event.
The Company sold approximately $10 million and $22 million in investments securities
resulting in a loss of $81,000 and a gain of $162,000 during the years ended 2017 and 2016,
respectively. These sales resulted from management’s efforts to reduce interest rate risk in
our investment portfolio.
The decline in rental income was a result of the sale of our previous headquarters building in
June 2016 that generated rental income from nonrelated entities.
The decrease in other income was primarily due to a gain of $266,000 from a bank owned life
insurance claim in 2016.
The increase in gain on sale of loans was 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 $218,627,000 in 2016.
28
20172016$%Service charges and fees2,408$ 2,459$ (51)$ (2.1)%Gain on sale of loans5,415 6,430 (1,015) (15.8)%Gain on sale of assets- 504 (504) 100.0%Gain (loss) on sale of investment securities(81) 162 (243) (150.0)%Rental income- 582 (582) (100.0)%Other364 713 (349) (48.9)%Total noninterest income8,106$ 10,850$ (2,744)$ (25.3)%For the Year Ended December 31,Change(dollars in thousands)20162015$%Service charges and fees2,459$ 2,520$ (61)$ (2.4)%Gain on sale of loans6,430 6,076 354 5.8%Gain on sale of assets504 - 504 100.0%Gain on sale of investment securities162 6 156 2600.0%Rental income582 1,105 (523) (47.3)%Other713 351 362 103.1%Total noninterest income10,850$ 10,058$ 792$ 7.9%For the Year Ended December 31,Change(dollars in thousands)
The gain on sale of assets in 2016 related 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 was 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 was primarily due to a gain of $266,000 from a bank owned life
insurance claim.
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
professional and outside services. Over the last three years, the most significant noninterest expense
item has been salaries and benefits including commissions, representing 64%, 59%, and 52% of
noninterest expense in 2017, 2016 and 2015, respectively. Noninterest expense decreased from
$24,049,000 in 2015 to $21,889,000 in 2016, and decreased to $21,212,000 in 2017.
The increase in salaries and benefits was due to staffing changes in key management
positions as well as retention and severance payments made to mortgage lending personnel.
Occupancy declined due to the sale of our previous headquarters building in June 2016.
During the fourth quarter of 2016, the Company recorded a loss from branch consolidation of
$252,000 related to a future lease obligation, which was settled for a lower amount late in the
first quarter of 2017 resulting in a partial recovery of $125,000.
The decrease in expense related to foreclosed real estate was due to the recognition of gains
on the sale of foreclosed assets of $380,000 during 2017 as well as lower expenses and write
downs due to declines in foreclosed real estate.
29
20172016$%Salaries and benefits12,081$ 11,295$ 786$ 7.0%Commissions1,526 1,606 (80) (5.0)%Occupancy1,133 1,470 (337) (22.9)%Equipment757 762 (5) (0.7)%Write down of assets held for sale231 220 11 5.0%Cease use lease obligation(125) 252 (377) (149.6)%Supplies244 265 (21) (7.9)%Professional and outside services2,994 2,999 (5) (0.2)%Advertising and marketing340 355 (15) (4.2)%Foreclosed assets, net(292) 393 (685) (174.3)%FDIC insurance premium297 292 5 1.7%Other operating expense2,026 1,980 46 2.3%Total noninterest income21,212$ 21,889$ (677)$ (3.1)%For the Year Ended December 31,Change(dollars in thousands)
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 $504,000.
Cease use lease obligation is due to recording a loss related to consolidating two branches.
Costs associated with foreclosed assets increased due to gains on sale in 2015 as we
disposed of these assets. We did not have similar gains in 2016.
The decrease in the FDIC insurance premium was due to the improvement in the Bank’s risk
rating with the FDIC based on the removal of the Consent Order in December 2015.
Income taxes
The Company has a net deferred tax asset which is included in other assets on the balance sheet.
For more financial data and other information about income taxes refer to Note 1 “Summary of
Significant Accounting Policies” and Note 9 “Income Taxes” in the “Notes to Consolidated Financial
Statements” contained in Item 8 of this Form 10-K.
Balance Sheet Analysis
Investment securities
At December 31, 2017 and 2016, all of our investment securities were classified as available for sale.
The following table presents the composition of our investment portfolio at the dates indicated (dollars
in thousands).
30
20162015$%Salaries and benefits11,295$ 10,846$ 449$ 4.1%Commissions1,606 1,555 51 3.3%Occupancy1,470 1,730 (260) (15.0)%Equipment762 765 (3) (0.4)%Write down of assets held for sale220 2,649 (2,429) (91.7)%Cease use lease obligation252 - 252 Supplies265 278 (13) (4.7)%Professional and outside services2,999 2,930 69 2.4%Advertising and marketing355 325 30 9.2%Foreclosed assets, net393 153 240 156.9%FDIC insurance premium292 916 (624) (68.1)%Other operating expense1,980 1,902 78 4.1%Total noninterest income21,889$ 24,049$ (2,160)$ (9.0)%For the Year Ended December 31,Change(dollars in thousands)
For more financial data and other information about investment securities refer to Note 1 “Summary
of Significant Accounting Policies” and Note 2 “Investment Securities Available for Sale” in the “Notes
to Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
Loans
One of management’s objectives is to improve the quality of the loan portfolio. The Company seeks
to achieve this objective by maintaining rigorous underwriting standards coupled with regular
evaluation of the creditworthiness of and the designation of lending limits for each borrower. The
portfolio strategies include seeking industry, loan type and loan size diversification in order to minimize
credit concentration risk. Management also focuses on originating loans in markets with which the
Company is familiar. Additionally, as a significant amount of the loan losses we have experienced in
the past is attributable to construction and land development loans, our strategy has shifted from
reducing this type of lending to closely manage the quality and concentration in these loan types.
Approximately 77% 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 12% of
the loan portfolio consists of rehabilitated student loans purchased by the Bank in 2017, 2016, 2015
and 2014 (see discussion following). Commercial and industrial loans represented $37 million, or 10%,
of the portfolio at December 31, 2017. Loans in this category are typically made to individuals, small
and medium-sized businesses and range between $250,000 and $2.5 million. Based on underwriting
standards, these loans may be secured in whole or in part by collateral such as liquid assets, accounts
receivable, equipment, inventory, and real property. The collateral securing any loan may depend on
the type of loan and may vary in value based on market conditions. The remainder of our loan portfolio
is in consumer loans which represent 1% of the total.
31
GrossGross EstimatedParAmortizedUnrealizedUnrealizedFairAverageValueCostGainsLossesValueYieldDecember 31, 2017US Government AgenciesOne to five years21,400$ 21,561$ -$ (276)$ 21,285$ 1.44%More than ten years2,411 2,415 - (17) 2,398 1.74%23,811 23,976 - (293) 23,683 1.47%Mortgage-backed securitiesFive to ten years3,400 3,472 - (43) 3,429 1.72%More than ten years18,518 18,655 1 (145) 18,511 2.39%21,918 22,127 1 (188) 21,940 2.28%Subordinated debtFive to ten years4,050 4,103 11 (26) 4,088 3.08%Total investment securities49,779$ 50,206$ 12$ (507)$ 49,711$ 1.96%December 31, 2016US Government AgenciesOne to five years29,400$ 29,607$ -$ (213)$ 29,394$ 1.25%More than ten years2,862 2,868 - (16) 2,852 1.08%32,262 32,475 - (229) 32,246 1.24%Mortgage-backed securitiesOne to five years3,457 3,524 - (33) 3,491 1.78%More than ten years8,253 8,170 1 (14) 8,157 2.16%11,710 11,694 1 (47) 11,648 2.05%Total investment securities43,972$ 44,169$ 1$ (276)$ 43,894$ 1.45%
The following tables present the composition of our loan portfolio at the dates indicated (in thousands).
Maturities by loan type at December 31, 2017 were as follows (in thousands):
For more financial data and other information about loans refer to Note 1 “Summary of Significant
Accounting Policies” and Note 3 “Loans” in the “Notes to Consolidated Financial Statements”
contained in Item 8 of this Form 10-K.
32
20172016201520142013Construction and land developmentResidential 5,361$ 6,770$ 5,202$ 4,315$ 2,931$ Commercial25,456 27,092 25,948 25,152 28,179 Total construction and land development30,817 33,862 31,150 29,467 31,110 Commercial real estateOwner occupied85,004 66,021 69,256 58,804 73,585 Non-owner occupied70,845 57,944 38,037 38,892 43,868 Multifamily9,386 8,824 8,537 11,438 11,560 Farmland270 310 388 434 1,463 Total commercial real estate165,505 133,099 116,218 109,568 130,476 Consumer real estateHome equity lines22,849 20,691 20,333 20,082 21,246 Secured by 1-4 family residentialFirst deeds of trust57,919 54,791 56,776 61,837 66,872 Second deeds of trust7,460 5,768 6,485 7,854 8,675 Total consumer real estate88,228 81,250 83,594 89,773 96,793 Commercial and industrial loans(except those secured by real estate)36,506 39,390 20,086 22,165 26,254 Guaranteed student loans45,805 47,398 53,989 33,562 - Consumer and other 1,848 2,101 1,734 1,611 1,930 Total Loans368,709 337,100 306,771 286,146 286,563 Deferred loan cost, net699 660 670 722 683 Less: Allowance for loan losses(3,239) (3,373) (3,562) (5,729) (7,239) Total loans, net366,169$ 334,387$ 303,879$ 281,139$ 280,007$ December 31,Within1 to 5After1 to 5AfterTotal1 YearYears5 YearsTotalYears5 YearsTotalMaturitiesConstruction and land developmentResidential 5,229$ 132$ -$ 132$ -$ -$ -$ 5,361$ Commercial22,417 2,876 - 2,876 112 51 163 25,456 Total construction and land development27,646 3,008 - 3,008 112 51 163 30,817 Commercial real estateOwner occupied19,411 27,931 29,429 57,360 6,269 1,964 8,233 85,004 Non-owner occupied17,098 30,588 18,483 49,071 4,676 - 4,676 70,845 Multifamily2,757 6,164 465 6,629 - - - 9,386 Farmland140 40 - 40 - 90 90 270 Total commercial real estate39,406 64,723 48,377 113,100 10,945 2,054 12,999 165,505 Consumer real estateHome equity lines19,153 128 3,568 3,696 - - - 22,849 Secured by 1-4 family residentialFirst deeds of trust21,151 23,220 4,414 27,634 9,109 25 9,134 57,919 Second deeds of trust1,918 1,278 1,438 2,716 2,814 12 2,826 7,460 Total consumer real estate42,222 24,626 9,420 34,046 11,923 37 11,960 88,228 Commercial and industrial loans(except those secured by real estate)19,123 8,357 8,493 16,850 533 - 533 36,506 Guaranteed student loans- - - - 45,805 - 45,805 45,805 Consumer and other582 1,266 1,266 - - - 1,848 128,979$ 101,980$ 66,290$ 168,270$ 69,318$ 2,142$ 71,460$ 368,709$ Fixed RateVariable Rate
Allowance for loan losses
We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses
inherent in the loan portfolio. For more financial data and other information about loans refer to
Note 1 “Summary of Significant Accounting Policies” and Note 4 “Allowance for Loan Losses” in the
“Notes to Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
The following table presents an analysis of the changes in the allowance for loan losses for the periods
indicated (dollars in thousands).
33
20172016201520142013Beginning balance3,373$ 3,562$ 5,729$ 7,239$ 10,808$ (Recovery of), provision for loan losses- - (2,000) 100 1,173 Charge-offsConstruction and land developmentCommercial(31) (10) (252) (100) (279) Commercial real estateOwner occupied- (66) (127) (631) (454) Non-owner occupied- (1) - (518) (619) Multifamily- Farmland- - - (96) (896) Consumer real estateHome equity lines- (53) (62) (476) (266) Secured by 1-4 family residentialFirst deed of trust(107) (140) (103) (277) (1,953) Second deed of trust- (25) (55) (86) (367) Commercial and industrial(except those secured by real estate)- (15) (162) (172) (760) Guaranteed student loans(146) (221) - - Consumer and other(2) (13) (55) (25) (64) (286) (544) (816) (2,381) (5,658) RecoveriesConstruction and land developmentResidential 1 1 2 2 102 Commercial4 10 49 44 424 Commercial real estateOwner occupied13 - 33 - 43 Non-owner occupied- 53 4 25 20 Farmland- 125 - - - Consumer real estateHome equity lines2 3 5 15 9 Secured by 1-4 family residentialFirst deed of trust64 25 380 72 94 Second deed of trust34 29 50 190 38 Commercial and industrial(except those secured by real estate)17 100 100 401 177 Guranteed student loansConsumer and other17 9 26 22 9 152 355 649 771 916 Net charge-offs(134) (189) (167) (1,610) (4,742) Ending balance3,239$ 3,373$ 3,562$ 5,729$ 7,239$ Loans outstanding at end of period(1)369,408$ 337,760$ 307,441$ 286,868$ 287,246$ Ratio of allowance for loan losses asa percent of loans outstanding atend of period0.88%1.00%1.16%2.00%2.52%Average loans outstanding for the period(1)344,876$ 324,811$ 297,423$ 274,429$ 315,642$ Ratio of net charge-offs to average loansoutstanding for the period0.04%0.06%0.06%0.59%1.50%(1) Loans are net of unearned income.Year Ended December 31,
Asset quality
The following table summarizes asset quality information at the dates indicated (dollars in thousands).
The following table presents an analysis of the changes in nonperforming assets for 2017 (in
thousands).
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 nonaccrual 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 nonaccrual 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
34
20172016201520142013Nonaccrual loans2,320$ 2,402$ 3,718$ 7,478$ 18,647$ Foreclosed properties1,788 2,926 6,249 12,638 16,742 Total nonperforming assets4,108$ 5,328$ 9,967$ 20,116$ 35,389$ Restructured loans (not included innonaccrual loans above)8,313$ 10,154$ 14,260$ 24,812$ 28,236$ Loans past due 90 days and still accruing (1)7,229$ 8,174$ 8,590$ 719$ 60$ Nonperforming assets to loans (2)1.11%1.58%3.25%7.03%12.35%Nonperforming assets to total assets0.9%1.2%2.4%4.6%8.0%Allowance for loan losses to nonaccrual loans139.6%140.4%95.8%76.6%38.8%(1) All loans 90 days past due and still accruing are rehabilitated student loans which have a 98% guarantee by the DOE.(2) Loans are net of unearned income and deferred cost.December 31,NonaccrualLoansOREOTotalBalance December 31, 20162,402$ 2,926$ 5,328$ Additions1,289 - 1,289 Loans placed back on accrual(384) - (384) Transfers to OREO(285) 285 - Repayments(490) - (490) Charge-offs(212) (20) (232) Sales- (1,403) (1,403) Balance December 31, 20172,320$ 1,788$ 4,108$
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 $2,320,000 at December 31, 2017 that were considered impaired, 13
loans totaling $1,053,000 had specific allowances for loan losses totaling $454,000. This compares
to $2,402,000 in nonaccrual loans at December 31, 2016 of which 8 loans totaling $660,000 had
specific allowances for loan losses of $97,000.
Cumulative interest income that would have been recorded had nonaccrual loans been performing
would have been $159,000, $119,000 and $146,000 for 2017, 2016 and 2015, respectively. Student
loans totaling $7,229,000 and $8,174,000 at December 31, 2017 and 2016, 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. $1,503,000 of
the $1,788,000 other real estate owned at December 31, 2017, or 84%, 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).
Total deposits have increased steadily over the last three years by 7.4%, 5.1% and 3.7% in 2017,
2016 and 2015, respectively. All of this growth occurred in low cost relationship deposits (checking,
money market and savings) which increased by $27.4 million, or 11.7%, from 2016 to 2017, and by
$28.1 million, or 13.6%, from 2015 to 2016. This growth is a result of our focus on building customer
relationships that provide lower cost deposits. The cost of deposits declined from .084% for 2015 to
.082% for 2016 and to 0.80% for 2017. Higher cost time deposits declined as a percentage of total
deposits from 43.3% at December 31, 2015 to 38.7% at December 31, 2016 and to 36.2% at
December 31, 2017.
The variety of deposit accounts offered by the Company has allowed us to be competitive in obtaining
funds and has allowed us to respond with flexibility to, although not to eliminate, the threat of
disintermediation (the flow of funds away from depository institutions such as banking institutions into
direct investment vehicles such as government and corporate securities). Our ability to attract and
retain deposits, and our cost of funds, has been, and will continue to be, significantly affected by money
market conditions.
The following table is a schedule of average balances and average rates paid for each deposit
category for the periods presented (dollars in thousands).
35
Amount%Amount%Amount%Checking accountsNoninterest bearing demand104,138$ 25.3%92,574$ 24.2%78,282$ 21.5%Interest bearing48,042 11.7%44,390 11.6%44,256 12.1%Money market accounts82,523 20.1%71,290 18.6%64,841 17.8%Savings accounts27,596 6.7%26,598 6.9%19,403 5.3%Time deposits of $250,000 and over21,592 5.2%13,372 3.5%9,717 2.7%Other time deposits127,733 31.0%135,053 35.2%148,349 40.6%Total411,624$ 100.0%383,277$ 100.0%364,848$ 100.0%December 31, 2017December 31, 2016December 31, 2015
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 2017, 2016 and 2015.
The following table is a schedule of maturities for time deposits of $100,000 or more at December 31,
2017 (in thousands).
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. For more
financial data and other information about borrowings refer to Note 8 “Borrowings” in the “Notes to
Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
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. For more financial data and other information about loans refer to Note 12
“Commitments and Contingencies” in the “Notes to Consolidated Financial Statements” contained in
Item 8 of this Form 10-K.
Capital resources
Shareholders’ equity at December 31, 2017 was $39,334,000, compared to $43,614,000 at December
31, 2016 and $30,359,000 at December 31, 2015. The $4,280,000 decrease in shareholders’ equity
in 2017 is primarily due to the reduction in the corporate tax rate. On December 22, 2017, the
President signed into law the Tax Reform Act. The Tax Reform Act includes a number of changes in
existing tax law impacting businesses. One of the most significant changes is a permanent reduction
in the corporate income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018.
GAAP requires companies to re-value their deferred tax assets and liabilities as of the date of
enactment, with resulting tax effects accounted for in the reporting period of enactment.
36
AmountRateAmountRateAmountRateNoninterest-bearing demand accounts94,618$ 82,678$ 75,127$ Interest-bearing depositsInterest checking accounts45,986 0.18%42,783 0.18%43,450 0.18%Money market accounts78,492 0.39%68,817 0.37%67,796 0.37%Savings accounts22,530 0.17%20,119 0.18%20,282 1.80%Other time deposits152,341 1.29%158,203 1.26%163,956 1.29%Total interest-bearing deposits299,349 0.80%289,922 0.82%295,484 0.84%Total average deposits393,967$ 372,600$ 370,611$ Year Ended December 31,201720162015Due within three months8,318$ Due after three months through six months9,386 Due after six months through twelve months22,616 Over twelve months40,405 80,725$
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 following table presents the composition of regulatory capital and the capital ratios for the Bank
at the dates indicated (dollars in thousands).
For more financial data and other information about capital resources refer to Note 13
“Shareholders’ Equity and Regulatory Matters” and Note 15 “Trust Preferred Securities” in the “Notes
to Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
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, 2017 and 2016, our liquid assets, consisting of cash, cash equivalents and
investment securities available for sale, totaled $67,521,000 and $55,690,000, or 14.2% and 12.5%
of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity
37
20172016Tier 1 capitalTotal bank equity capital44,748$ 50,231$ Net unrealized loss on available-for-sale securities401 181 Defined benefit postretirement plan51 60 Dissallowed deferred tax asset(2,935) (4,619) Disallowed intangible assets- (1) Total Tier 1 capital42,265 45,852 Tier 2 capitalAllowance for loan losses3,239 3,373 Total Tier 2 capital3,239 3,373 Total risk-based capital45,504 49,225 Risk-weighted assets353,349$ 321,166$ Average assets460,556$ 438,069$ Capital ratiosLeverage ratio (Tier 1 capital toaverage assets)9.18%10.47%Common equity tier 1 capital ratio (CET 1)11.96%14.28%Tier 1 capital to risk-weighted assets11.96%14.28%Total capital to risk-weighted assets12.88%15.33%Equity to total assets9.42%11.37%December 31,
since they can be converted into cash in a timely manner. There were no securities pledged as
collateral on borrowings as of December 31, 2017.
Our holdings of liquid assets plus the ability to maintain and expand our deposit base and borrowing
capabilities serve as our principal sources of liquidity. We plan to meet our future cash needs through
the liquidation of temporary investments, the generation of deposits, and from additional borrowings.
In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment
securities. We maintain two federal funds lines of credit with correspondent banks totaling $15 million
for which there were no borrowings against the lines at December 31, 2017.
We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB
requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be
pledged to secure any advances from the FHLB. The unused borrowing capacity currently available
from the FHLB at December 31, 2017 was $8.5 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, 2017, we had commitments to originate $83,998,000 of loans. Fixed commitments
to incur capital expenditures were approximately $275,000 at December 31, 2017. Certificates of
deposit scheduled to mature or reprice in the 12-month period ending December 31, 2017 total
$74,225,000. We believe that a significant portion of such deposits will remain with us. We further
believe that deposit growth, loan repayments and other sources of funds will be adequate to meet our
foreseeable short-term and long-term liquidity needs.
Interest Rate Sensitivity
An important element of asset/liability management is the monitoring of our sensitivity to interest rate
movements. In order to measure the effects of interest rates on our net interest income, management
takes into consideration the expected cash flows from the securities and loan portfolios and the
expected magnitude of the repricing of specific asset and liability categories. We evaluate interest
sensitivity risk and then formulate guidelines to manage this risk based on management’s outlook
regarding the economy, forecasted interest rate movements and other business factors. Our goal is
to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.
Contractual principal repayments of loans do not necessarily reflect the actual term of our loan
portfolio. The average lives of mortgage loans are substantially less than their contractual terms
because of loan prepayments and because of enforcement of due-on-sale clauses, which gives us the
right to declare a loan immediately due and payable in the event, among other things, the borrower
sells the real property subject to the mortgage and the loan is not repaid. In addition, certain borrowers
increase their equity in the security property by making payments in excess of those required under
the terms of the mortgage.
The sale of fixed rate loans is intended to protect us from precipitous changes in the general level of
interest rates. The valuation of adjustable rate mortgage loans is not as directly dependent on the level
of interest rates as is the value of fixed rate loans. As with other investments, we regularly monitor
the appropriateness of the level of adjustable rate mortgage loans in our portfolio and may decide from
time to time to sell such loans and reinvest the proceeds in other adjustable rate investments.
Critical Accounting Policies 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
38
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 “Summary of Significant Accounting Policies” in
the “Notes to Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
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 Financial Accounting Standards Board Codification Topic 310:
Receivables. Loans evaluated individually for impairment include nonperforming loans, such as loans
on nonaccrual, loans past due by 90 days or more, restructured loans and other loans selected by
management. The evaluations are based upon discounted expected cash flows or collateral
valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is
established for the amount of impairment.
Loans are grouped by similar characteristics, including the type of loan, the assigned loan classification
and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is
derived based upon historical net charge-off rates, the predominant collateral type for the group and
the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant
environmental factors and other conditions of the portfolio of loans and leases, including: borrower
and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes
in underwriting standards and risk selection; level of experience, ability and depth of lending
management; and national and local economic conditions.
The amounts of estimated impairment for individually evaluated loans and groups of loans are added
together for a total estimate of loan losses. This estimate of losses is compared to our allowance for
loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an
additional provision to the allowance would be made. If the estimate of losses is less than the
allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether
the allowance falls outside a range of estimates. We recognize the inherent imprecision in estimates
of losses due to various uncertainties and variability related to the factors used, and therefore a
reasonable range around the estimate of losses is derived and used to ascertain whether the
allowance is too high. If different assumptions or conditions were to prevail and it is determined that
the allowance is not adequate to absorb the new estimate of probable losses, an additional provision
for loan losses would be made, which amount may be material to the financial statements.
39
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.
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 $281,000 and $612,000 at December 31, 2017
and 2016, respectively. Fair value is based on an assessment of information available at the end of
a reporting period and depends upon a number of factors, including historical experience, economic
conditions, and issues specific to individual properties. The evaluation of these factors involves
subjective estimates and judgments that may change.
Income taxes
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
40
for all of the net deferred tax asset that is dependent on future earnings of the Company of
approximately $11,807,000.
On December 22, 2017, the President signed into law the Tax Reform Act. The Tax Reform Act
includes a number of changes in existing tax law impacting businesses. One of the most significant
changes is a permanent reduction in the corporate income tax rate from 35% to 21%. The rate
reduction took effect on January 1, 2018. GAAP requires companies to re-value their deferred tax
assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the
reporting period of enactment.
As of December 31, 2017, the Company had net deferred tax assets of $11 million. The Company
recorded a re-valuation of its deferred tax assets and liabilities as of December 31, 2017, at the new
rate of 21%, based upon balances in existence at date of enactment. As a result, the Company's net
deferred tax assets were written down by approximately $4,181,000 in the fourth quarter of 2017 with
a corresponding increase in tax expense. Although the Tax Reform Act had a significant negative
impact on the Company’s earnings for 2017 as a result of the re-valuation of its deferred tax assets
and liabilities, the reduction in the corporate tax rate to 21% is expected to have a significant positive
benefit to the Company in 2018 and beyond.
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.
New accounting standards
For information regarding recent accounting pronouncements and their effect on us, see “New
Accounting Pronouncements” in Note 1 “Summary of Significant Accounting Policies” in the “Notes to
Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
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.
41
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Village Bank and Trust Financial Corp.
Midlothian, Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Village Bank and Trust Financial
Corp. (the “Company”) and Subsidiary as of December 31, 2017 and 2016, the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2017, and the related notes (collectively referred to as
the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company and subsidiaries at December 31,
2017 and 2016, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2017, in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over
financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 1999.
Richmond, Virginia
March 30, 2018
42
43
20172016AssetsCash and due from banks17,810$ 10,848$ Federal funds sold- 948 Total cash and cash equivalents17,810 11,796 Investment securities available for sale49,711 43,894 Loans held for sale8,047 14,784 LoansOutstandings368,709 337,100 Allowance for loan losses(3,239) (3,373) Deferred fees and costs, net699 660 Total loans, net366,169 334,387 Other real estate owned, net of valuation allowance1,788 2,926 Assets held for sale610 841 Premises and equipment, net12,982 12,758 Bank owned life insurance7,268 7,093 Accrued interest receivable2,600 2,274 Other assets9,989 14,049 476,974$ 444,802$ Liabilities and Shareholders' EquityLiabilitiesDepositsNoninterest bearing demand104,138$ 92,574$ Interest bearing307,486 290,703 Total deposits411,624 383,277 Federal Home Loan Bank advances12,300 2,400 Long-term debt - trust preferred securities8,764 8,764 Other borrowings1,584 81 Accrued interest payable93 70 Other liabilities3,275 6,596 Total liabilities437,640 401,188 Shareholders' equityPreferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 sharesauthorized; 5,027 shares issued and outstanding at December 31, 201720 23 and 5,715 shares issued and outstanding at December 31, 2016Common stock, $4 par value - 10,000,000 shares authorized; 1,430,751 shares issued and outstanding at December 31, 2017 and1,428,261 shares issued and outstanding at December 31, 20165,672 5,629 Additional paid-in capital58,055 58,643 Accumulated deficit(24,693) (21,172) Common stock warrant732 732 Stock in directors rabbi trust(1,010) (1,034) Directors deferred fees obligation1,010 1,034 Accumulated other comprehensive loss(452) (241) Total shareholders' equity39,334 43,614 476,974$ 444,802$ See accompanying notes to consolidated financial statements.Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Balance SheetsDecember 31, 2017 and 2016(in thousands, except share data)
44
201720162015Interest incomeLoans16,407$ 15,563$ 14,833$ Investment securities751 355 616 Federal funds sold140 71 55 Total interest income17,298 15,989 15,504 Interest expenseDeposits2,401 2,367 2,481 Borrowed funds320 242 386 Total interest expense2,721 2,609 2,867 Net interest income14,577 13,380 12,637 Provision for (recovery of) loan losses- - (2,000) Net interest income after provisionfor (recovery of) loan losses14,577 13,380 14,637 Noninterest incomeService charges and fees2,408 2,459 2,520 Gain on sale of loans5,415 6,430 6,076 Gain on sale of asset held for sale- 504 - Gain (loss) on sale of investment securities(81) 162 6 Rental income- 582 1,105 Other364 713 351 Total noninterest income8,106 10,850 10,058 Noninterest expenseSalaries and benefits12,081 11,295 10,846 Commissions1,526 1,606 1,555 Occupancy1,133 1,470 1,730 Equipment757 762 765 Write down of assets held for sale231 220 2,649 Cease use lease obligation(125) 252 - Supplies244 265 278 Professional and outside services2,994 2,999 2,930 Advertising and marketing340 355 325 Foreclosed assets, net(292) 393 153 FDIC insurance premium297 292 916 Other operating expense2,026 1,980 1,902 Total noninterest expense21,212 21,889 24,049 Income before income tax expense (benefit)1,471 2,341 646 Income tax expense (benefit)4,567 (11,172) - Net income (loss)(3,096) 13,513 646 Preferred stock dividends and amortization of discount(498) (737) (674) Preferred stock principal forgiveness- - 4,404 Preferred stock dividend forgiveness- - 2,215 Net income (loss) available tocommon shareholders(3,594)$ 12,776$ 6,591$ Earnings (loss) per share, basic(2.55)$ 8.99$ 5.65$ Earnings (loss) per share, diluted(2.55)$ 8.99$ 5.49$ See accompanying notes to consolidated financial statements. Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of OperationsYears Ended December 31, 2017, 2016 and 2015(in thousands, except per share data)
45
201720162015Net income (loss)(3,096)$ 13,513$ 646$ Other comprehensive income (loss)Unrealized holding gains (losses) arising during the period(266) 552 317 Tax effect(55) 188 108 Net change in unrealized holding gains (losses) onsecurities available for sale, net of tax(211) 364 209 Reclassification adjustmentReclassification adjustment for (gains) lossesrealized in net income (loss)81 (162) (6) Tax effect17 (55) (2) Reclassification for (gains) losses includedin net income (loss), net of tax64 (107) (4) Minimum pension adjustment14 14 14 Tax effect5 5 5 Minimum pension adjustment, net of tax9 9 9 Total other comprehensive income (loss)(138) 266 214 Total comprehensive income (loss)(3,234)$ 13,779$ 860$ See accompanying notes to consolidated financial statements.Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of Comprehensive Income (Loss)Years Ended December 31, 2017, 2016 and 2015(in thousands)
46
DirectorsAccumulatedAdditionalRetainedStock in DeferredOtherPreferred Common Paid-inEarningsDirectorsFees ComprehensiveStockStockCapital(Deficit)WarrantRabbi TrustObligationIncome (loss)TotalBalance, December 31, 201459$ 1,339$ 58,188$ (40,539)$ 732$ (878)$ 878$ (721)$ 19,058$ Preferred stock dividend- - - (674) - - (674) Restricted stock issuance- 16 (95) - - (156) 156 - (79) Issuance of common stock, net of offeringexpense of $1,200- 2,875 5,842 - - - - - 8,717 Preferred stock exchanged for common stock(18) 1,332 (1,314) - - - - - - Preferred stock principal forgiveness(18) - (4,386) 4,404 - - - - - Preferred stock dividend forgiveness- - - 2,215 - - - - 2,215 Stock based compensation- - 262 - - - 262 Minimum pension adjustment(net of income taxes of $5)- - - - - 9 9 Net income- - - 646 - - 646 Change in unrealized gain on investment securities available-for-sale,net of reclassification and tax effect- - - - - - - 205 205 Balance, December 31, 201523 5,562 58,497 (33,948) 732 (1,034) 1,034 (507) 30,359 Preferred stock dividend- - - (737) - (737) Restricted stock issuance67 (67) - - - - - Stock based compensation- - 213 - - - - - 213 Minimum pension adjustment(net of income taxes of $5)- - - - - - - 9 9 Net income- - - 13,513 - - - - 13,513 Change in unrealized gain on investment securities available-for-sale,net of reclassification and tax effect- - - - - - - 257 257 Balance, December 31, 201623$ 5,629$ 58,643$ (21,172)$ 732$ (1,034)$ 1,034$ (241)$ 43,614$ Preferred stock redemption(3) - (685) - - - - - (688) Preferred stock dividend- - - (498) - - - - (498) Ristricted stock redemption- - - - - 24 (24) - - Issuance of common stock- 43 (43) - - - - - - Stock based compensation - - 140 - - - - - 140 Minimum pension adjustment(net of income taxes of $5)- - - - - - - 9 9 Net loss- - - (3,096) - - - - (3,096) Reclassification due to the adoption of ASU 2018-02- - - 73 - - - (73) - Change in unrealized loss on investment securities available-for-sale,net of reclassification and tax effect- - - - - - - (147) (147) Balance, December 31, 201720$ 5,672$ 58,055$ (24,693)$ 732$ (1,010)$ 1,010$ (452)$ 39,334$ See accompanying notes to consolidated financial statements.Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of Shareholders' EquityYears Ended December 31, 2017, 2016 and 2015(in thousands)
47
201720162015Cash Flows from Operating ActivitiesNet income (loss)(3,096)$ 13,513$ 646$ Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization742 765 843 Deferred income taxes385 813 277 Valuation allowance (recovery) on net deferred tax asset- (11,997) (277) Write-off of deferred tax assets4,181 Provision for (recovery of) loan losses- - (2,000) Write-down of other real estate owned20 624 690 Valuation allowance other real estate owned162 (393) (35) Write-down of assets held for sale20 220 2,649 (Gain) loss on securities sold81 (162) (6) Gain on loans sold(5,415) (6,430) (6,076) Gain on sale of assets held for sale- (504) - Loss on sale and disposal of premises and equipment- 2 12 Gain on sale of other real estate owned(380) (15) (862) Stock compensation expense140 213 262 Proceeds from sale of mortgage loans170,539 218,627 208,479 Origination of mortgage loans for sale(158,387) (212,608) (206,862) Amortization of premiums and accretion of discounts on securities, net95 142 287 Increase in interest receivable(326) (214) (688) Increase in bank owned life insurance(175) (185) (183) Income recognized from death benefit on bank owned life insurance- (226) - Decrease (increase) in other assets(213) 2,660 (190) Increase (decrease) in interest payable23 (1,276) 179 (Decrease) increase in other liabilities(562) (2,257) 505 Net cash provided by (used in) operating activities7,834 1,312 (2,350) Cash Flows from Investing ActivitiesPurchases of available for sale securities(18,366) (27,822) (6,748) Proceeds from the sale of available for sale securities9,949 21,041 7,566 Proceeds from maturities, calls and paydowns of available for sale securities2,204 1,216 836 Proceeds from the sale of assets held for sale- 7,338 - Net increase in loans(32,067) (26,169) (21,181) Proceeds from bank owned life insurance death benefit- 448 - Proceeds from sale of other real estate owned1,621 3,680 7,037 Purchases of premises and equipment(966) (912) (1,080) Net cash used in investing activities(37,625) (21,180) (13,570) Cash Flows from Financing ActivitiesIssuance of common stock- - (79) Net proceeds from sale of common stock- - 8,965 Redeemption of preferred stock (688) - - Payment of preferred dividends(3,257) - - Net increase (decrease) in deposits28,347 18,429 (14,012) Net increase (decrease) in Federal Home Loan Bank advances9,900 (3,600) (8,000) Net increase (decrease) in other borrowings1,503 (427) (2,794) Net cash provided by (used in) financing activities35,805 14,402 (15,920) Net increase (decrease) in cash and cash equivalents6,014 (5,466) (31,840) Cash and cash equivalents, beginning of period11,796 17,262 49,103 Cash and cash equivalents, end of period17,810$ 11,796$ 17,263$ Supplemental Disclosure of Cash Flow InformationCash payments for interest2,698$ 3,233$ 2,688$ Supplemental Schedule of Non Cash ActivitiesReal estate owned assets acquired in settlement of loans285$ 268$ 461$ Assets moved to held for sale-$ -$ 831$ Accrual of additions on held for sale-$ -$ 547$ Bank financed sale of asset held for sale-$ 4,912$ -$ Dividends on preferred stock accrued57$ 737$ 674$ Non-Cash conversion of preferred shares-$ -$ 4,619$ Forgiveness of principal and accrued dividends-$ -$ 6,619$ See accompanying notes to consolidated financial statements.Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of Cash FlowsYears Ended December 31, 2017, 2016 and 2015(in thousands)
Village Bank and Trust Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2017, 2016 and 2015
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. In 2017, the Bank entered a
new market by opening a branch in Williamsburg, Virginia. 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 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
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
48
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 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 $5,415,000, $6,430,000 and $6,076,000 were realized
during the years ended December 31, 2017, 2016 and 2015, 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, 2017, Village Mortgage had rate lock commitments to originate mortgage loans
aggregating approximately $13,888,000 and loans held for sale of approximately $8,047,000. Village
Mortgage has entered into corresponding commitments with third party investors to sell loans of
approximately $21,935,000. 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,
49
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 2017, 2016 and 2015, 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 nonaccrual 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 nonaccrual 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 amounts represent credit risk was approximately
$4,615,000 at December 31, 2017 and approximately $4,397,000 at December 31, 2016.
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.
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 nonperforming 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
50
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 (“TDR”) 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 TDR 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. TDRs generally remain categorized as
nonperforming loans and leases until a six-month payment history has been maintained.
In accordance with current accounting guidance, loans modified as 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 TDRs may have been previously measured for impairment under
a general allowance methodology (i.e., pooling), thus at the time the loan is modified as a TDR the
allowance will be impacted by the difference between the results of these two measurement
methodologies. Loans modified as TDRs that subsequently default are factored into the determination
of the allowance in the same manner as other defaulted loans.
Real estate acquired in settlement of loans
Real estate acquired 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 $281,000 and $612,000 at December 31, 2017 and 2016, 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.
Assets held for sale
Assets held for sale at December 31, 2017 and December 31, 2016 included a branch building we
previously closed. 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.
51
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 2017, 2016 and 2015.
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, 2017 and 2016 the accumulated other comprehensive income was comprised of
unrealized losses on securities available for sale of $391,000 and $181,000 and unfunded pension
liability of $61,000 and $60,000 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
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.
52
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 (the “2006 Plan”) and any new awards will be made pursuant to the 2015 Plan. The prior awards
made under the 2006 Plan were unchanged by the adoption of the 2015 Plan and continue to be
governed by the terms of the 2006 Plan. See Note 14 for more information on the stock incentive
plans.
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 Deposit Insurance Fund (“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
The Company has two reportable segments: traditional commercial banking and mortgage banking.
Revenues from commercial banking operations consist primarily of interest earned on loans and
securities and fees from deposit services. Mortgage banking operating revenues consist principally
of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage
market, and loan origination fee income.
The commercial banking segment provides the mortgage banking segment with the short-term funds
needed to originate mortgage loans through a warehouse line of credit and charges the mortgage
banking segment interest based on the commercial banking segment’s cost of funds. Additionally, the
mortgage banking segment leases premises from the commercial banking segment. These
transactions are eliminated in the consolidation process.
53
New accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU revised
guidance for the recognition, measurement, and disclosure of revenue from contracts with customers.
The original guidance has been amended through subsequent accounting standard updates that
resulted in technical corrections, improvements, and a one-year deferral of the effective date to
January 1, 2018. The guidance, as amended, is applicable to all entities and will replace significant
portions of existing industry and transaction-specific revenue recognition rules with a more principles-
based recognition model. Most revenue associated with financial instruments, including interest
income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and
losses on investment securities, derivatives, and sales of financial instruments are similarly excluded
from the scope. Entities can elect to adopt the guidance either on a full or modified retrospective basis.
Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the
beginning of the earliest comparative period presented. Modified retrospective adoption will require a
cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which
the entity first applies the new guidance. The Company has adopted this guidance as of the effective
date, January 1, 2018, via the modified retrospective approach. The Company has completed its
assessment of the adoption of this ASU, noting the standard will result in expanded disclosures related
to non-interest income and enhance the qualitative disclosures on the revenues within the scope of
the new guidance. The Company has concluded the adoption of this accounting guidance will not
have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial
Assets and Financial Liabilities.” This ASU requires an entity to: (i) measure equity investments at fair
value through net income, with certain exceptions; (ii) present in Other Comprehensive Income the
changes in instrument-specific credit risk for financial liabilities measured using the fair value option;
(iii) present financial assets and financial liabilities by measurement category and form of financial
asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit
price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS
debt securities in combination with other deferred tax assets. The ASU provides an election to
subsequently measure certain nonmarketable equity investments at cost less any impairment and
adjusted for certain observable price changes. The ASU also requires a qualitative impairment
assessment of such equity investments and amends certain fair value disclosure requirements. This
ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017. Early adoption is only permitted for the provision related to instrument-specific
credit risk. The Company does not expect ASU 2016-01 to have a material impact on the Company’s
financial position, results of operations, or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This ASU requires
lessees to recognize assets and liabilities arising from most operating leases on the statement of
financial position. ASU 2016-02 will be effective for the Company for the fiscal years beginning after
December 15, 2018 with early adoption permitted. The Company has determined that the provisions
of ASU-2016-02 may result in an increase in assets to recognize the present value of the lease
obligations with a corresponding increase in liabilities, however, the Company does not expect this to
have a material impact on the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several
aspects of the accounting for employee share-based payment transactions, including the accounting
for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2016. The Company has concluded the adoption of ASU
No. 2016-09 has not had a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” This ASU amends guidance on reporting
credit losses for assets held at amortized cost basis and available-for-sale debt securities by
54
eliminating the probable initial recognition threshold (incurred loss methodology) and requiring entities
to reflect its current estimate of all expected credit losses. The amendments in the ASU are effective
beginning after December 15, 2019 and for interim periods within that year. Early adoption is permitted
beginning after December 15, 2018. Entities will apply the amendments in this ASU through a
cumulative-effect adjustment to retained earnings in the first period effective. While the Company is
currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new
standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare
for the implementation when it becomes effective, such as forming an internal task force, gathering
pertinent data, consulting with outside professionals, and evaluating its current IT systems. This
guidance may result in material changes in the Company's accounting for credit losses on financial
instruments
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.
The Company has concluded the adoption of ASU No. 2016-15 will not have a material impact on its
consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other
Cost (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” These
amendments shorten the amortization period for certain callable debt securities held at a premium.
Specifically, the amendments require the premium to be amortized to the earliest call date. The
amendments do not require an accounting change for securities held at a discount; the discount
continues to be amortized to maturity. The guidance is effective for public business entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. Early
adoption is permitted including adoption in an interim period. If an entity early adopts in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes the
interim period. The amendments should be applied on a modified retrospective basis, with a
cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
The Company does have exposure and is assessing the impact of ASU 2017-08, and may choose
early adoption. Overall, the Company does not expect it to have a material impact on its accounting.
In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting.” The amendment
clarifies Topic 718, Compensation – Stock Compensation, such that an entity must apply modification
accounting to changes in the terms or conditions of a share-based payment award unless all of the
following criteria are met: (1) the fair value of the modified award is the same as the fair value of the
original award immediately before the modification, provided that the ASU indicates that if the
modification does not affect any of the inputs to the valuation technique used to value the award, the
entity is not required to estimate the value immediately before and after the modification; (2) the vesting
conditions of the modified award are the same as the vesting conditions of the original award
immediately before the modification; and (3) the classification of the modified award as an equity
instrument or a liability instrument is the same as the classification of the original award immediately
before the modification. The ASU is effective for all entities for fiscal years beginning after December
15, 2017, including interim periods within those years. The Company has concluded the adoption of
ASU No. 2017-09 will not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income”, to address a narrow-scope financial reporting issue that arose as a consequence of the
change in the tax law. On December 22, 2017 the U.S. federal government enacted the Tax Cuts and
Jobs Act of 2017 (“Tax Act”). ASU No. 2018-02 permits a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects resulting from the new federal
corporate income tax rate under the Tax Act. The amount of the reclassification would be the
difference between the historical corporate income tax rate of 35% and the newly enacted 21%
55
corporate income tax rate. This ASU is effective for all entities for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years with early adoption permitted,
including adoption in any interim period, for (i) public business entities for reporting periods for which
financial statements have not yet been issued and (ii) all other entities for reporting periods for which
financial statements have not yet been made available for issuance. The changes are required to be
applied retrospectively to each period (or periods) in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Act is recognized. The Corporation's early adoption of ASU No.
2018-02 resulted in the reclassification from accumulated other comprehensive income (loss) to
retained earnings of $73,000, reflected in the Consolidated Statements of Changes in Shareholders'
Equity.
Note 2.
Investment Securities Available for Sale
The amortized cost and estimated fair value of investment securities available for sale as of December
31, 2017 and 2016 are as follows (in thousands):
There were no investment securities pledged to secure deposit repurchase agreements at
December 31, 2017 and approximately $1,050,000 at December 31, 2016.
Gross realized gains and losses pertaining to available for sale securities are detailed as follows for
the years ending December 31, 2017, 2016 and 2015 (in thousands):
The Company sold approximately $10 million, $22 million and $8 million of investment securities
available for sale at a loss of $81,000 in 2017 and a gain of $162,000 and $6,000 in 2016 and 2015,
respectively. The sale of these securities, which had fixed interest rates, allowed the Company to
decrease its exposure to the anticipated upward movement in interest rates that would result in
unrealized losses being recognized in shareholders’ equity.
56
GrossGrossAmortizedUnrealizedUnrealizedEstimatedCostGainsLossesFair ValueDecember 31, 2017U.S. Government agencies23,976$ -$ (293)$ 23,683$ Mortgage-backed securities22,127 1 (188) 21,940 Corporate debt4,103 11 (26) 4,088 50,206$ 12$ (507)$ 49,711$ December 31, 2016U.S. Government agencies32,475$ -$ (229)$ 32,246$ Mortgage-backed securities11,694 1 (47) 11,648 44,169$ 1$ (276)$ 43,894$ 201720162015Gross realized gains-$ 162$ 13$ Gross realized losses(81) - (7) (81)$ 162$ 6$ December 31,
Investment securities available for sale that have an unrealized loss position at December 31, 2017
and December 31, 2016 are detailed below (in thousands):
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, 2017.
The amortized cost and estimated fair value of investment securities available for sale as of December
31, 2017, by contractual maturity, are as follows (in thousands):
57
Fair UnrealizedFair UnrealizedFair Unrealized ValueLossesValueLossesValueLossesDecember 31, 2017US Government Agencies6,153$ (76)$ 17,530$ (217)$ 23,683$ (293)$ Mortgage-backed securities20,227 (160) 1,651 (28) 21,878 (188) Corporate debt1,021 (26) - - 1,021 (26) 27,401$ (262)$ 19,181$ (245)$ 46,582$ (507)$ December 31, 2016US Government Agencies27,291$ (213)$ 2,852$ (16)$ 33,143$ (229)$ Mortgage-backed securities9,450 (47) - - 9,450 (47) 36,741$ (260)$ 2,852$ (16)$ 42,593$ (276)$ TotalSecurities in a lossSecurities in a lossposition for less thanposition for more than12 Months12 MonthsAmortizedEstimatedCostFair ValueOne to five years21,561$ 21,285$ Five to ten years7,575 7,517 More than ten years21,070 20,909 Total50,206$ 49,711$
Note 3.
Loans
Loans classified by type as of December 31, 2017 and 2016 are as follows (in thousands):
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 $29,615,000 and $27,073,000 as of December 31,
2017 and 2016, 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, 2017 and 2016 (in thousands):
Executive officers and directors also had unused credit lines totaling $2,590,000 and $3,219,000 at
December 31, 2017 and 2016, respectively. All loans and credit lines to executive officers and
directors were made in the ordinary course of business at the Company’s normal credit terms,
58
20172016Construction and land developmentResidential 5,361$ 6,770$ Commercial25,456 27,092 30,817 33,862 Commercial real estateOwner occupied85,004 66,021 Non-owner occupied70,845 57,944 Multifamily9,386 8,824 Farmland270 310 165,505 133,099 Consumer real estateHome equity lines22,849 20,691 Secured by 1-4 family residential,First deed of trust57,919 54,791 Second deed of trust7,460 5,768 88,228 81,250 Commercial and industrial loans(except those secured by real estate)36,506 39,390 Guaranteed student loans45,805 47,398 Consumer and other 1,848 2,101 Total loans368,709 337,100 Deferred loan cost, net699 660 Less: allowance for loan losses(3,239) (3,373) 366,169$ 334,387$ 20172016Beginning balance7,711$ 8,073$ Additions5,793 2,703 Reductions(4,547) (3,065) Ending balance8,957$ 7,711$
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, 2017 and 2016 were as follows
(in thousands):
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.
59
20172016Construction and land developmentCommercial43$ 102$ 43 102 Commercial real estateOwner occupied183 225 183 225 Consumer real estateHome equity lines135 163 Secured by 1-4 family residential,First deed of trust1,000 1,404 Second deed of trust67 72 1,202 1,639 Commercial and industrial loans(except those secured by real estate)870 430 Consumer and other 22 6 Total loans2,320$ 2,402$
The following tables provide information on the risk rating of loans at the dates indicated (in
thousands):
60
Risk RatedRisk RatedRisk RatedRisk RatedTotal 1-4567LoansDecember 31, 2017Construction and land developmentResidential 5,361$ -$ -$ -$ 5,361$ Commercial24,305 1,108 43 - 25,456 29,666 1,108 43 - 30,817 Commercial real estateOwner occupied78,791 2,716 3,497 - 85,004 Non-owner occupied70,845 - - - 70,845 Multifamily9,210 176 - - 9,386 Farmland270 - - - 270 159,116 2,892 3,497 - 165,505 Consumer real estateHome equity lines21,777 932 140 - 22,849 Secured by 1-4 family residentialFirst deed of trust53,591 2,637 1,691 - 57,919 Second deed of trust7,140 181 139 - 7,460 82,508 3,750 1,970 - 88,228 Commercial and industrial loans(except those secured by real estate)35,143 139 529 695 36,506 Guaranteed student loans45,805 - - - 45,805 Consumer and other1,826 4 18 - 1,848 Total loans354,064$ 7,893$ 6,057$ 695$ 368,709$ Risk RatedRisk RatedRisk RatedRisk RatedTotal 1-4567LoansDecember 31, 2016Construction and land developmentResidential 6,770$ -$ -$ -$ 6,770$ Commercial25,342 1,648 102 - 27,092 32,112 1,648 102 - 33,862 Commercial real estateOwner occupied58,788 3,565 3,668 - 66,021 Non-owner occupied57,944 - - - 57,944 Multifamily8,634 190 - - 8,824 Farmland310 - - - 310 125,676 3,755 3,668 - 133,099 Consumer real estateHome equity lines19,501 487 703 - 20,691 Secured by 1-4 family residentialFirst deed of trust49,648 2,847 2,296 - 54,791 Second deed of trust5,399 125 244 - 5,768 74,548 3,459 3,243 - 81,250 Commercial and industrial loans(except those secured by real estate)39,390 - 39,390 Guaranteed student loans46,009 739 650 - 47,398 Consumer and other2,043 52 6 - 2,101 Total loans319,778$ 9,653$ 7,669$ -$ 337,100$
The following tables present the aging of the recorded investment in past due loans as of the dates
indicated (in thousands):
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 nonperforming loans, such as loans on nonaccrual, 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
61
`Recorded Greater Investment >30-59 Days60-89 DaysThan Total PastTotal90 Days and Past DuePast Due90 DaysDueCurrentLoansAccruingDecember 31, 2017Construction and land developmentResidential -$ -$ -$ -$ 5,361$ 5,361$ -$ Commercial- - - - 25,456 25,456 - - - - - 30,817 30,817 - Commercial real estateOwner occupied- - - - 85,004 85,004 - Non-owner occupied- - - - 70,845 70,845 - Multifamily- - - - 9,386 9,386 - Farmland- - - - 270 270 - - - - - 165,505 165,505 - Consumer real estateHome equity lines18 - - 18 22,831 22,849 - Secured by 1-4 family residentialFirst deed of trust457 - - 457 57,462 57,919 - Second deed of trust91 - - 91 7,369 7,460 - 566 - - 566 87,662 88,228 - Commercial and industrial loans(except those secured by real estate)- 3 - 3 36,503 36,506 - Guaranteed student loans2,891 1,300 7,229 11,420 34,385 45,805 7,229 Consumer and other2 - - 2 1,846 1,848 - Total loans3,459$ 1,303$ 7,229$ 11,991$ 356,718$ 368,709$ 7,229$ Recorded Greater Investment >30-59 Days60-89 DaysThan Total PastTotal90 Days and Past DuePast Due90 DaysDueCurrentLoansAccruingDecember 31, 2016Construction and land developmentResidential -$ -$ -$ -$ 6,770$ 6,770$ -$ Commercial- - - - 27,092 27,092 - - - - - 33,862 33,862 - Commercial real estateOwner occupied- - - - 66,021 66,021 - Non-owner occupied- - - - 57,944 57,944 - Multifamily190 - - 190 8,634 8,824 - Farmland- - - - 310 310 - 190 - - 190 132,909 133,099 - Consumer real estateHome equity lines- - - - 20,691 20,691 - Secured by 1-4 family residentialFirst deed of trust414 63 - 477 54,314 54,791 - Second deed of trust128 - - 128 5,640 5,768 - 542 63 - 605 80,645 81,250 - Commercial and industrial loans(except those secured by real estate)15 62 - 77 39,313 39,390 - Guaranteed student loans2,743 1,923 8,174 12,840 34,558 47,398 8,174 Consumer and other11 - - 11 2,090 2,101 - Total loans3,501$ 2,048$ 8,174$ 13,723$ 323,377$ 337,100$ 8,174$
existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest
payments on impaired loans are typically applied to principal unless collectability of the principal
amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans,
or portions thereof, are charged off when deemed uncollectible. Impaired loans are set forth in the
following table as of the dates indicated (in thousands):
62
63
UnpaidRecorded PrincipalRelated InvestmentBalanceAllowanceWith no related allowance recordedConstruction and land developmentCommercial502$ 600$ -$ 502 600 - Commercial real estateOwner occupied3,879 3,879 - Non-owner occupied2,153 2,153 - 6,032 6,032 - Consumer real estateHome equity lines577 577 - Secured by 1-4 family residentialFirst deed of trust3,931 3,931 - Second deed of trust505 713 - 5,013 5,221 - Commercial and industrial loans(except those secured by real estate)480 827 - Consumer and other3 3 - 12,030 12,683 - With an allowance recordedCommercial real estateOwner occupied1,491 1,506 18 1,491 1,506 18 Consumer real estateHome equity lines135 135 2 Secured by 1-4 family residentialFirst deed of trust814 814 98 Second deed of trust85 85 4 1,034 1,034 104 Commercial and industrial loans(except those secured by real estate)740 740 375 Consumer and other19 19 18 3,284 3,299 515 TotalConstruction and land developmentCommercial502 600 - 502 600 - Commercial real estateOwner occupied5,370 5,385 18 Non-owner occupied2,153 2,153 - 7,523 7,538 18 Consumer real estateHome equity lines712 712 2 Secured by 1-4 family residential,First deed of trust4,745 4,745 98 Second deed of trust590 798 4 6,047 6,255 104 Commercial and industrial loans(except those secured by real estate)1,220 1,567 375 Consumer and other22 22 18 15,314$ 15,982$ 515$ December 31, 2017
64
UnpaidRecorded PrincipalRelated InvestmentBalanceAllowanceWith no related allowance recordedConstruction and land developmentCommercial102$ 169$ -$ Commercial real estateOwner occupied1,487 1,487 Non-owner occupied2,236 2,236 - 3,723 3,723 - Consumer real estateHome equity lines703 703 - Secured by 1-4 family residentialFirst deed of trust3,514 3,518 - Second deed of trust619 865 - 4,836 5,086 - Commercial and industrial loans(except those secured by real estate)538 768 - 9,199 9,746 - With an allowance recordedConstruction and land developmentCommercial479 479 9 Commercial real estateOwner occupied4,117 4,132 86 Non-Owner occupied- - - 4,117 4,132 86 Consumer real estateSecured by 1-4 family residentialFirst deed of trust1,550 1,550 144 Second deed of trust90 90 90 1,640 1,640 234 Commercial and industrial loans(except those secured by real estate)6 122 6 6,242 6,373 335 TotalConstruction and land developmentCommercial581 648 9 581 648 9 Commercial real estateOwner occupied5,604 5,619 86 Non-owner occupied2,236 2,236 - 7,840 7,855 86 Consumer real estateHome equity lines703 703 - Secured by 1-4 family residential,First deed of trust5,064 5,068 144 Second deed of trust709 955 90 6,476 6,726 234 Commercial and industrial loans(except those secured by real estate)544 890 6 15,441$ 16,119$ 335$ December 31, 2016
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):
65
AverageInterestAverageInterestRecordedIncomeRecordedIncomeInvestmentRecognizedInvestmentRecognizedWith no related allowance recordedConstruction and land developmentCommercial200$ 4$ 87$ 40$ 200 4 87 40 Commercial real estateOwner occupied3,137 90 1,040 69 Non-owner occupied2,186 116 2,501 121 5,323 206 3,541 190 Consumer real estateHome equity lines730 17 1,030 51 Secured by 1-4 family residentialFirst deed of trust3,719 126 4,019 233 Second deed of trust535 36 753 47 4,984 179 5,802 331 Commercial and industrial loans(except those secured by real estate)478 65 421 44 Consumer and other3 2 - 1 10,988 456 9,851 606 With an allowance recordedConstruction and land developmentCommercial352 24 1,118 23 352 24 1,118 23 Commercial real estateOwner occupied2,322 173 4,511 226 Non-Owner occupied- - 46 24 2,322 173 4,557 250 Consumer real estateHome equity lines103 6 - - Secured by 1-4 family residentialFirst deed of trust936 33 1,624 26 Second deed of trust130 4 131 15 1,169 43 1,755 41 Commercial and industrial loans(except those secured by real estate)429 5 66 5 Consumer and other7 - - - 4,279 245 7,496 319 TotalConstruction and land developmentCommercial552 28 1,206 63 552 28 1,206 63 Commercial real estateOwner occupied5,459 263 5,551 295 Non-owner occupied2,186 116 2,547 145 7,645 379 8,098 440 Consumer real estateHome equity lines833 23 1,030 51 Secured by 1-4 family residential,First deed of trust4,655 159 5,643 259 Second deed of trust665 40 884 62 6,153 222 7,557 372 Commercial and industrial loans(except those secured by real estate)907 70 487 49 Consumer and other10 2 - 1 15,267$ 701$ 17,348$ 925$ December 31,20172016
As of December 31, 2017, 2016 and 2015, the Company had impaired loans of $2,320,000,
$2,402,000 and $3,718,000, respectively, which were on nonaccrual status. These loans had
valuation allowances of $454,000, $97,000 and $370,000 as of December 31, 2017, 2016 and 2015,
respectively. Cumulative interest income that would have been recorded had nonaccrual loans been
performing would have been $159,000, $119,000 and $146,000 for 2017, 2016 and 2015,
respectively.
Included in impaired loans are loans classified as TDRs. A modification of a loan’s terms constitutes
a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the
borrowers financial difficulties that it would not otherwise consider. For loans classified as impaired
TDRs, the Company further evaluates the loans as performing or nonaccrual. To restore a nonaccrual
loan that has been formally restructured in a TDR to accrual status, we perform a current, well
documented credit analysis supporting a return to accrual status based on the borrower’s financial
condition and prospects for repayment under the revised terms. Otherwise, the TDR must remain in
nonaccrual status. The analysis considers the borrower’s sustained historical repayment performance
for a reasonable period to the return-to-accrual date, but may take into account payments made for a
reasonable period prior to the restructuring if the payments are consistent with the modified terms. A
sustained period of repayment performance generally would be a minimum of six months and would
involve payments in the form of cash or cash equivalents.
An accruing loan that is modified in a TDR can remain in accrual status if, based on a current well-
documented credit analysis, collection of principal and interest in accordance with the modified terms
is reasonably assured, and the borrower has demonstrated sustained historical repayment
performance for a reasonable period before modification. The following is a summary of performing
and nonaccrual TDRs and the related specific valuation allowance by portfolio segment as of
December 31, 2017 and 2016 (dollars in thousands).
66
SpecificValuationTotalPerformingNonaccrualAllowanceDecember 31, 2017Construction and land developmentCommercial459$ 459$ -$ -$ 459 459 - - Commercial real estateOwner occupied4,188 4,005 183 18 Non-owner occupied2,153 2,153 - - 6,341 6,158 183 18 Consumer real estateSecured by 1-4 family residentialFirst deeds of trust3,398 2,709 689 57 Second deeds of trust590 523 67 4 3,988 3,232 756 61 Commercial and industrial loans(except those secured by real estate)385 344 41 - 11,173$ 10,193$ 980$ 79$ Number of loans50 43 710
The following table provides information about TDRs identified during the indicated periods (dollars in
thousands).
67
SpecificValuationTotalPerformingNonaccrualAllowanceDecember 31, 2016Construction and land developmentCommercial479$ 479$ -$ 9$ 479 479 - 9 Commercial real estateOwner occupied4,342 4,117 225 86 Non-owner occupied2,236 2,236 - - Multifamily- - - - 6,578 6,353 225 86 Consumer real estateHome equity lines- - - - Secured by 1-4 family residentialFirst deeds of trust3,853 3,012 841 139 Second deeds of trust547 547 - - 4,400 3,559 841 139 Commercial and industrial loans(except those secured by real estate)397 - 397 - Consumer and other- - - - 11,854$ 10,391$ 1,463$ 234$ Number of loans55 36 16 3 Pre-Post-Pre-Post-ModificationModificationModificationModificationNumber ofRecordedRecordedNumber ofRecordedRecordedLoansBalanceBalanceLoansBalanceBalanceSecured by 1-4 family residentialFirst deed of trust1 190$ 190$ 1 234 234 Second deed of trust1 68 68 - - - 2 258 258 1 234 234 Commercial and industrial loans(except those secured by real estate)- - - 3 352 352 2 258$ 258$ 4 586$ 586$ December 31, 2017December 31, 2016
The following table provides information about defaults on TDRs for the indicated periods (dollars in
thousands).
68
Number ofRecordedNumber ofRecordedLoansBalanceLoansBalanceCommercial real estateOwner occupied2 330$ 1 225$ 2 330 1 225 Consumer real estateSecured by 1-4 family residentialFirst deed of trust7 689 13 1,134 Second deed of trust2 73 2 83 9 762 15 1,217 Commercial and industrial(except those secured by real estate)3 271 - - 14 1,363$ 16 1,442$ December 31, 2016December 31, 2017
Note 4.
Allowance for Loan Losses
Activity in the allowance for loan losses was as follows for the periods indicated (in thousands):
69
Provision forBeginning(Recovery of)EndingBalanceLoan LossesCharge-offsRecoveriesBalanceYear Ended December 31, 2017Construction and land developmentResidential 41$ (10)$ -$ 1$ 32$ Commercial300 (108) (31) 4 165 341 (118) (31) 5 197 Commercial real estateOwner occupied611 - - 13 624 Non-owner occupied406 94 - - 500 Multifamily56 4 - - 60 Farmland3 - - - 3 1,076 98 - 13 1,187 Consumer real estateHome equity lines271 (5) - 2 268 Secured by 1-4 family residentialFirst deed of trust447 98 (107) 64 502 Second deed of trust136 (123) - 34 47 854 (30) (107) 100 817 Commercial and industrial loans (except those secured by real estate)223 316 - 17 556 Student loans158 96 (146) - 108 Consumer and other8 4 (2) 17 27 Unallocated713 (366) - - 347 3,373$ -$ (286)$ 152$ 3,239$ Year Ended December 31, 2016Construction and land developmentResidential 30$ 10$ -$ 1$ 41$ Commercial291 9 (10) 10 300 321 19 (10) 11 341 Commercial real estateOwner occupied1,167 (490) (66) - 611 Non-owner occupied460 (106) (1) 53 406 Multifamily51 5 - - 56 Farmland17 (139) - 125 3 1,695 (730) (67) 178 1,076 Consumer real estateHome equity lines448 (127) (53) 3 271 Secured by 1-4 family residentialFirst deed of trust602 (40) (140) 25 447 Second deed of trust111 21 (25) 29 136 1,161 (146) (218) 57 854 Commercial and industrial loans (except those secured by real estate)94 44 (15) 100 223 Student loans230 149 (221) - 158 Consumer and other2 10 (13) 9 8 Unallocated59 654 - - 713 3,562$ -$ (544)$ 355$ 3,373$
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:
During the fourth quarter of 2015, we adopted a software solution for the analysis of the allowance for
loan losses. While our methodology of evaluating the adequacy of the allowance for loan losses
generally did not change, the software is more robust in that it:
allows us to take a more measurable approach to our evaluation of qualitative factors such as
economic conditions that may affect loss experience; and
is widely used by community banks which provides peer data that can be used as a benchmark
for comparison to our analysis.
In addition to the adoption of the software solution for our analysis, we reviewed the last twenty years
of historical loss data for peer banks in Virginia to assist us in our evaluation of environmental factors
and other conditions that could affect the loan portfolio and the overall adequacy of the allowance for
loan losses.
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 $347,000, $713,000 and $59,000 at December 31, 2017, 2016 and 2015, respectively.
70
Year Ended December 31, 2015Construction and land developmentResidential 34$ (6)$ -$ 2$ 30$ Commercial202 292 (252) 49 291 236 286 (252) 51 321 Commercial real estateOwner occupied1,837 (576) (127) 33 1,167 Non-owner occupied607 (151) - 4 460 Multifamily77 (26) - - 51 Farmland130 (113) - - 17 2,651 (866) (127) 37 1,695 Consumer real estateHome equity lines469 36 (62) 5 448 Secured by 1-4 family residentialFirst deed of trust1,345 (1,020) (103) 380 602 Second deed of trust275 (159) (55) 50 111 2,089 (1,143) (220) 435 1,161 Commercial and industrial loans (except those secured by real estate)506 (350) (162) 100 94 Student loans217 13 - - 230 Consumer and other30 1 (55) 26 2 Unallocated- 59 - - 59 5,729$ (2,000)$ (816)$ 649$ 3,562$ 201720162015Classified assets8,313$ 10,454$ 15,375$ Nonaccrual loans2,320 2,402 3,718 Foreclosed real estate1,788 2,926 6,249 December 31,
Discussion of the recovery of loan losses related to specific loan types are provided following:
The recovery of loan losses totaling $118,000 for the construction and land development
portfolio at December 31, 2017 was attributed to a decline in the general component of the
allowance for loan losses as a result of a decrease in the historical loss experience from 0.38%
as of December 31, 2016 to 0.04% as of December 31, 2017.
The provision for loan losses totaling $286,000 for the construction and land development
portfolio at December 31, 2015 was attributed to a an increase in the historical loss experience
from a net recovery of 0.27% at December 31, 2014 to a net charge-off of 0.48% at December
31, 2015.
The provision for loan losses totaling $316,000 for the commercial and industrial loans (except
those secured by real estate) at December 31, 2017 was attributed to an increase of $369,000
in the specific reserve associated with loans evaluated individually for impairment.
The recovery of loan losses totaling $730,000 and $866,000 for the commercial real estate
portfolio at December 31, 2016 and 2015, respectively, was attributed to a decline in the
general component of the allowance for loan losses as a result of a decrease in the historical
loss experience from 0.96% 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 $146,000 and $1,143,000 for the consumer real estate
portfolio at December 31, 2016 and 2015, respectively, was attributed to a decline in the
general component of the allowance for loan losses as a result of a decrease in the historical
loss experience from 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 $215,000 in
2015.
71
Loans were evaluated for impairment as follows for the periods indicated (in thousands):
72
EndingEnding BalanceIndividuallyCollectivelyBalanceIndividuallyCollectivelyYear Ended December 31, 2017Construction and land developmentResidential 32$ -$ 32$ 5,361$ -$ 5,361$ Commercial165 - 165 25,456 502 24,954 197 - 197 30,817 502 30,315 Commercial real estateOwner occupied624 18 606 85,004 5,370 79,634 Non-owner occupied500 - 500 70,845 2,153 68,692 Multifamily60 - 60 9,386 - 9,386 Farmland3 - 3 270 - 270 1,187 18 1,169 165,505 7,523 157,982 Consumer real estateHome equity lines268 2 266 22,849 712 22,137 Secured by 1-4 family residentialFirst deed of trust502 98 404 57,919 4,745 53,174 Second deed of trust47 4 43 7,460 590 6,870 817 104 713 88,228 6,047 82,181 Commercial and industrial loans (except those secured by real estate)556 375 181 36,506 1,220 35,286 Student loans108 - 108 45,805 - 45,805 Consumer and other374 18 356 1,848 22 1,826 3,239$ 515$ 2,724$ 368,709$ 15,314$ 353,395$ Year Ended December 31, 2016Construction and land developmentResidential 41$ -$ 41$ 6,770$ -$ 6,770$ Commercial300 9 291 27,092 581 26,511 341 9 332 33,862 581 33,281 Commercial real estateOwner occupied611 86 525 66,021 5,604 60,417 Non-owner occupied406 - 406 57,944 2,236 55,708 Multifamily56 - 56 8,824 - 8,824 Farmland3 - 3 310 - 310 1,076 86 990 133,099 7,840 125,259 Consumer real estateHome equity lines271 - 271 20,691 703 19,988 Secured by 1-4 family residentialFirst deed of trust447 144 303 54,791 5,064 49,727 Second deed of trust136 90 46 5,768 709 5,059 854 234 620 81,250 6,476 74,774 Commercial and industrial loans (except those secured by real estate)223 6 217 39,390 544 38,846 Student loans158 - 158 47,398 - 47,398 Consumer and other721 - 721 2,101 - 2,101 3,373$ 335$ 3,038$ 337,100$ 15,441$ 321,659$ Year Ended December 31, 2015Construction and land developmentResidential 30$ -$ 30$ 5,202$ -$ 5,202$ Commercial291 2 289 25,948 1,822 24,126 321 2 319 31,150 1,822 29,328 Commercial real estateOwner occupied1,167 383 784 69,256 6,785 62,471 Non-owner occupied460 26 434 38,037 2,867 35,170 Multifamily51 - 51 8,537 - 8,537 Farmland17 - 17 388 - 388 1,695 409 1,286 116,218 9,652 106,566 Consumer real estateHome equity lines448 - 448 20,333 1,238 19,095 Secured by 1-4 family residentialFirst deed of trust602 324 278 56,776 5,759 51,017 Second deed of trust111 98 13 6,485 1,212 5,273 1,161 422 739 83,594 8,209 75,385 Commercial and industrial loans (except those secured by real estate)94 18 76 20,086 826 19,260 Student loans230 - 230 53,989 - 53,989 Consumer and other61 - 61 1,734 - 1,734 3,562$ 851$ 2,711$ 306,771$ 20,509$ 286,262$ Recorded Investment in LoansAllowanceLoans
Note 5.
Premises and Equipment
The following is a summary of premises and equipment as of December 31, 2017 and 2016 (in
thousands):
Depreciation and amortization of premises and equipment for 2017, 2016 and 2015 amounted to
$742,000, $765,000 and $843,000, 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 $13,723,000 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, 2017 and 2016 was approximately $7,268,000 and $7,093,000, respectively.
Note 7.
Deposits
Deposits as of December 31, 2017 and 2016 were as follows (in thousands):
The following are the scheduled maturities of time deposits as of December 31, 2017 (in thousands):
73
20172016Land4,352$ 4,352$ Buildings and improvements9,651 9,087 Furniture, fixtures and equipment8,008 7,613 Total premises and equipment22,011 21,052 Less: Accumulated depreciation and amortization(9,029) (8,294) Premises and equipment, net12,982$ 12,758$ 20172016Checking accountsNoninterest bearing demand104,138$ 92,574$ Interest bearing48,042 44,390 Money market accounts82,523 71,290 Savings accounts27,596 26,598 Time deposits of $250,000 and over21,592 13,372 Other time deposits127,733 135,053 Total411,624$ 383,277$ Greater thanLess Thanor Equal toYear Ending December 31,$250,000$250,000Total201862,312$ 11,913$ 74,225$ 201921,435 2,836 24,271 202013,958 1,091 15,049 202121,080 3,159 24,239 20228,948 2,593 11,541 127,733$ 21,592$ 149,325$
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,
approximated $9,916,000 and $5,709,000 at December 31, 2017 and 2016, 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 $920,000 in
FHLB stock at December 31, 2017 and $512,000 at December 31, 2016 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 $12,300,000 at December 31, 2017 maturing through 2018. At December
31, 2016, approximately $2,400,000 of advances was outstanding.
The Company had advances from the FHLB for the periods indicated that consisted of the following
(in thousands):
The Company uses federal funds purchased and repurchase agreements for short-term borrowing
needs. Securities sold under agreements to repurchase are classified as borrowings and generally
mature within one to four days from the transaction date. Securities sold under agreements to
repurchase are reflected at the amount of cash received in connection with the transaction. The
Company may be required to provide additional collateral based on the fair value of the underlying
securities. The carrying value of these short-term borrowing agreements was $1,584,000 and $81,000
at December 31, 2017 and 2016, respectively.
74
MaturityInterestAdvanceTypeDateRateAmountFixed Rate 06/01/20181.48%800$ Fixed Rate 06/08/20181.63%5,000 Fixed Rate11/15/20181.71%6,500 12,300$ MaturityInterestAdvanceTypeDateRateAmountFixed Rate 06/01/20171.06%800$ Fixed Rate 12/01/20171.27%800 Fixed Rate06/01/20181.48%800 2,400$ Year Ended December 31, 2016Year Ended December 31, 2017
Information related to borrowings as of December 31, 2017, 2016 and 2015 is as follows (dollars in
thousands):
Note 9.
Income Taxes
The following summarizes the tax effects of temporary differences which comprise net deferred tax
assets and liabilities at December 31, 2017 and 2016 (in thousands):
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
75
201720162015Maximum outstanding during the yearFHLB advances12,300$ 12,200$ 14,000$ Balance outstanding at end of yearFHLB advances12,300 2,400 6,000 Average amount outstanding during the yearFHLB advances4,223 5,161 9,027 Average interest rate during the yearFHLB advances1.33%1.09%1.88%Average interest rate at end of yearFHLB advances1.66%1.46%1.58%Year Ended December 31,20172016Deferred tax assetsNet operating loss carryforward4,818$ 7,471$ Capital loss carryforward26 14 State net operating loss carryfoward80 50 AMT credit22 - Allowance for loan losses680 1,147 Unrealized loss on available-for-sale securities104 93 Interest on nonaccrual loans33 41 Expenses and writedowns related to foreclosedproperty225 883 Stock compensation53 253 Employee benefits689 1,079 Pension expense16 31 Depreciation125 144 Lease Obligation- 74 Other, net2 71 Goodwill5 23 Total deferred tax assets6,878 11,374 Deferred tax liabilitiesAmortization of intangibles- 1 Total deferred tax liabilities- 1 Net deferred tax asset6,878$ 11,373$
that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting
realization.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax
Reform Act”). The Tax Reform Act includes a number of changes in existing tax law impacting
businesses. One of the most significant changes is a permanent reduction in the corporate income tax
rate from 35% to 21%. The rate reduction took effect on January 1, 2018. GAAP requires companies
to re-value their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects
accounted for in the reporting period of enactment.
As of December 31, 2017, the Company had net deferred tax assets of $11 million. The Company
recorded a re-valuation of its deferred tax assets and liabilities as of December 31, 2017, at the new
rate of 21%, based upon balances in existence at date of enactment. As a result, the Company's net
deferred tax assets were written down by approximately $4,181,000 in the fourth quarter of 2017 with
a corresponding increase in tax expense. Although the Tax Reform Act had a significant negative
impact on the Company’s earnings for 2017 as a result of the re-valuation of its deferred tax assets
and liabilities, the reduction in the corporate tax rate to 21% is expected to have a significant positive
benefit to the Company in 2018 and beyond.
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. The Company has demonstrated consistent
earnings while its level of nonperforming assets, which was the primary cause of the Company’s
losses, has steadily decreased. Additionally, the Reserve Bank, the FDIC and the Virginia Bureau of
Financial Institutions have terminated their formal agreements with the Company and the Bank,
reducing regulatory risk.
Given the consistent earnings and improving asset quality, the Company’s analysis concluded that, it
is more likely than not that the Company will generate sufficient taxable income within the applicable
carry-forward periods to realize its net deferred tax asset. As such, the full valuation allowance of
$11,997,000 was released.
The net operating losses available to offset future taxable income amounted to $22,942,000 at
December 31, 2017 and begin expiring in 2028.
76
The income tax expense (benefit) charged to operations for the years ended December 31, 2017,
2016 and 2015 consists of the following (in thousands):
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, 2017, 2016 and 2015 (in thousands):
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 $341,000 and $75,000 for the years ended December 31,
2017 and 2016, respectively. Due to the Company’s adjusted capital level we were not subject to
franchise tax expense for the year ended December 31, 2015.
Note 10.
Earnings (Loss) per Share
The following table presents the basic and diluted earnings per share computations (in thousands
except per share data):
77
201720162015Current tax expense (benefit)1$ 12$ -$ Deferred tax expense (benefit)385 813 277 Write-down deferred tax assets4,181 - - Valuation allowance- (11,997) (277) Income tax expense (benefit)4,567$ (11,172)$ -$ 201720162015Income before income tax expense (benefit)1,471$ 2,341$ 646$ Computed "expected" tax expense (benefit)500$ 796$ 220$ Write-down of deferred tax assets4,181 - - Valuation allowance change- (11,997) (277) State taxes, net of fed(17) (39) - Cash surrender value of life insurance(60) (63) (62) Other(37) 131 119 Income tax expense (benefit)4,567$ (11,172)$ -$ 201720162015NumeratorNet income (loss) - basic and diluted(3,096)$ 13,513$ 646$ Preferred stock dividend and accretion(498) (737) (674) Preferred stock principal forgiveness- - 4,404 Preferred stock dividend forgiveness- - 2,215 Net income (loss) available to common shareholders(3,594)$ 12,776$ 6,591$ DenominatorWeighted average shares outstanding - basic1,412 1,421 1,166 Dilutive effect of common stock options and restricted stock awards- - 35 Weighted average shares outstanding - diluted1,412 1,421 1,201 Earnings (loss) per share - basic(2.55)$ 8.99$ 5.65$ Earnings (loss) per share - diluted(2.55)$ 8.99$ 5.49$
Outstanding options and warrants to purchase common stock were considered in the computation of
diluted earnings per share for the periods ended December 31, 2016 and 2015. Stock options for
2,245 shares of common stock were not included in computing diluted earnings per share in 2017,
because their effects were anti-dilutive.
Note 11.
Lease Commitments
Certain premises and equipment are leased under various operating leases. Total rent expense
charged to operations was $243,000, $387,000 and $422,000 in 2017, 2016 and 2015, respectively.
At December 31, 2017, the minimum total rental commitment under such non-cancelable operating
leases was as follows (in thousands):
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 nonperformance 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, 2017 and 2016, the Company had outstanding the following approximate off-
balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):
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
78
2018437 2019415 2020416 2021278 2022113 1,659$ 20172016Undisbursed credit lines65,495$ 55,315$ Commitments to extend or originate credit13,888 16,467 Standby letters of credit 4,615 4,397 Total commitments to extend credit83,998$ 76,179$ December 31,
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
“Supervisory Authorities”), and the Supervisory Authorities issued the related Consent Order effective
February 3, 2012 (the “Consent Order”). In June 2012, the Company entered into a similar written
agreement (the “Written Agreement”) with the Reserve Bank. As a result of the steps the Company
and the Bank took to, among other things, improve asset quality, increase capital, augment
management and board oversight, and increase earnings, the Consent Order was terminated effective
December 14, 2015. In place of the Consent Order, the Bank’s Board of Directors made certain written
assurances to the Supervisory Authorities in the form of a Memorandum of Understanding (“MOU”)
that became effective November 17, 2015. Due to further improvements by the Company and the
Bank in asset quality and earnings, and the correction of a prior Regulation W violation, the MOU was
terminated effective May 12, 2016, and the Written Agreement was terminated effective July 28, 2016.
Note 13.
Shareholders’ Equity and Regulatory Matters
Preferred Stock
On May 1, 2009, as part of the Capital Purchase Program established by the U.S. Department of the
Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008, the Company
entered into a Letter Agreement and Securities Purchase Agreement—Standard Terms (collectively,
the “Purchase Agreement”) with the Treasury, pursuant to which the Company sold (i) 14,738 shares
of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $4.00 per
share, having a liquidation preference of $1,000 per share (the “preferred stock”) and (ii) a warrant
(the “Warrant”) to purchase 499,029 shares of the Company’s common stock at an initial exercise
price of $4.43 per share, subject to certain anti-dilution and other adjustments, for an aggregate
purchase price of $14,738,000 in cash. As a result of the Company’s 1 for 16 reverse stock split
completed in August 2014, the number of shares underlying the Warrant and the exercise price per
share were adjusted to 31,190 and $70.88, respectively. The fair value of the preferred stock was
estimated using discounted cash flow methodology at an assumed market equivalent rate of 13%,
with 20 quarterly payments over a five year period, and was determined to be $10,208,000. The fair
value of the Warrant was estimated using the Black-Scholes option pricing model, with assumptions
of 25% volatility, a risk-free rate of 2.03%, a yield of 6.162% and an estimated life of 5 years, and was
determined to be $534,000. The aggregate fair value for both the preferred stock and Warrant was
determined to be $10,742,000 with 95% of the aggregate attributable to the preferred stock and 5%
attributable to the Warrant. Therefore, the $14,738,000 issuance was allocated with $14,006,000
being assigned to the preferred stock and $732,000 being allocated to the Warrant. The difference
between the $14,738,000 face value of the preferred stock and the amount allocated of $14,006,000
to the preferred stock was accreted as a discount on the preferred stock using the effective interest
rate method over five years.
The preferred stock qualifies as Tier 1 capital and accrued cumulative dividends at a rate of 5% until
May 1, 2014 and now accrues at a 9% rate. The preferred stock is generally non-voting, other than
on certain matters that could adversely affect the preferred stock.
The Warrant was immediately exercisable. The Warrant provides for the adjustment of the exercise
price and the number of shares of common stock issuable upon exercise pursuant to customary anti-
dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of
common stock, and upon certain issuances of common stock at or below a specified price relative to
79
the then-current market price of common stock. The Warrant expires ten years from the issuance
date. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power
with respect to any shares of common stock issued upon exercise of the Warrant.
In November 2013, the Company participated in a successful auction of the Company’s preferred
stock by the Treasury that resulted in the purchase of the securities by private and institutional
investors.
In accordance with the Company’s prior Written Agreement with the Reserve Bank, the Company had
been deferring quarterly cash dividends on the preferred stock since May 2011. The Written
Agreement was terminated by the Reserve Bank as of July 28, 2016. With the termination of the
Written Agreement, the Company is not required to defer the quarterly cash dividends on the preferred
stock.
During the first quarter of 2017, the Company received approval from state and federal regulators
allowing the Bank to pay a special dividend to the Company for the sole purpose of paying all accrued
and unpaid dividends on the preferred stock through February 15, 2017, as well as to redeem 688
shares of the total 5,715 shares outstanding. The accrued and unpaid dividends paid on February 15,
2017 amounted to $2,911,000. The 688 shares were redeemed on February 24, 2017 at a redemption
price of $1,000 per share plus accrued dividends from February 15, 2017 to the redemption date.
During the second quarter of 2017, the Company received approval from the state regulators allowing
the Bank to pay a special dividend to the Company for the purpose of paying the preferred stock
dividend due on May 15, 2017. No other dividends were paid by the Bank to the Company during
2017.
At December 31, 2017, the aggregate amount of the Company’s total accrued dividend payments on
the preferred stock was $56,000 and reflected as a reduction of retained earnings.
Common Stock
On August 6, 2014, the Company filed Articles of Amendment to its Articles of Incorporation with the
Virginia State Corporation Commission to affect a reverse stock split of its outstanding common stock
which became effective on August 8, 2014. As a result of the reverse split, every sixteen shares of
the Company’s issued and outstanding common stock were consolidated into one issued and
outstanding share of common stock.
On March 27, 2015, the Company completed a rights offering to shareholders (the “Rights Offering”)
and concurrent standby offering to Kenneth R. Lehman (the “Standby Offering”), in which the Company
issued an aggregate of 1,051,866 shares of common stock (the total number of shares offered) at
$13.87 per share for aggregate gross proceeds of $14,589,381 (including the value of the Company’s
preferred stock exchanged by Mr. Lehman for shares of common stock of $4,618,813). In connection
with the Rights Offering, 283,293 shares were issued to shareholders upon exercise of their basic
subscription rights and 191,773 shares were issued to shareholders upon exercise of their
oversubscription privileges (approximately 36.9% of the total number of shares requested pursuant to
oversubscription privileges). In connection with the Standby Offering, Mr. Lehman purchased an
aggregate of 576,800 shares of the Company’s common stock, 333,007 of which were issued in
exchange for 9,023 shares of the Company’s preferred stock and 243,793 of which were purchased
for cash. Also, as part of the Standby Offering, Mr. Lehman forgave $2,215,009 in accrued and unpaid
dividends on the preferred stock.
Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal and state
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Bank’s financial statements. Under the capital adequacy guidelines and the regulatory
80
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 established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital (as
defined in the regulations) to risk-weighted assets, and of Tier 1 Capital to average assets (the
Leverage ratio).
In July 2013, the Board of Governors of the Federal Reserve System and the FDIC approved the final
rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks
(commonly known as Basel III). Under the final rules, which began for the Company and the Bank on
January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements
will increase for both the quantity and quality of capital held by the Company and the Bank. The rules
include a new common equity Tier 1 capital to risk-weighted assets ratio (“CET1 ratio”) of 4.5% and a
capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively
results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-
weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in
a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total
capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and
requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain
assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company
and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.
The capital amounts and ratios at December 31, 2017 and 2016 for the Bank are presented in the
table below (dollars in thousands):
81
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.
82
AmountRatioAmountRatioAmountRatioDecember 31, 2017Total capital (to risk-weighted assets)Village Bank45,504$ 12.88%28,268$ 8.00%35,335$ 10.00%Tier 1 capital (to risk-weighted assets)Village Bank42,265 11.96%14,134 4.00%21,201 6.00%Leverage ratio (Tier 1capital to averageassets)Village Bank42,265 9.18%18,422 4.00%23,028 5.00%Common equity tier 1 (to risk-weighted assets)VillageBank42,265 11.96%15,901 4.50%22,968 6.50%December 31, 2016Total capital (to risk-weighted assets)Village Bank49,225$ 15.33%25,693$ 8.00%32,117$ 10.00%Tier 1 capital (to risk-weighted assets)Village Bank45,852 14.28%12,847 4.00%19,270 6.00%Leverage ratio (Tier 1capital to averageassets)Village Bank45,852 10.47%17,523 4.00%21,903 5.00%Common equity tier 1 (to risk-weighted assets)VillageBank45,852 14.28%14,452 4.50%20,876 6.50%Adequacy PurposesTo be Well CapitalizedActualFor Capital
The following table summarizes options outstanding under the Company’s stock incentive plans at the
indicated dates:
The following table summarizes information about stock options outstanding at December 31, 2017:
During the second quarter of 2017, we granted certain officers 600 restricted shares of common stock
with a weighted average fair market value of $28.83 at the date of grant. These restricted stock awards
vest over two years. During the third quarter of 2017, we granted certain officers 5,450 restricted
83
Weighted Weighted AverageAverageExerciseFair ValueIntrinsic ExerciseFair ValueIntrinsic OptionsPricePer ShareValueOptionsPricePer ShareValueOptions outstanding,beginning of period2,337 24.21$ 12.76$ 2,929 24.47$ 12.71$ Granted- - - - - - Forfeited(92) 25.28 9.76 (592) 25.48 12.53 Exercised- - - - - - Options outstanding,end of period2,245 24.17$ 12.88$ -$ 2,337 24.21$ 12.76$ -$ Options exercisable,end of period2,245 2,337 Weighted AverageExerciseFair ValueIntrinsic OptionsPricePer ShareValueOptions outstanding,beginning of period6,830 92.34$ 57.97$ Granted- - - Forfeited(3,901) 168.79 95.85 Exercised- - - Options outstanding,end of period2,929 24.47$ 12.71$ -$ Options exercisable,end of period1,730 Year Ended December 31,2015Year Ended December 31,20172016WeightedAverageRemainingWeightedWeightedYears ofAverageAverageRange ofNumber ofContractualExerciseNumber ofExerciseExercise PricesOptionsLifePriceOptionsPrice$16.00-$25.762,245 5.71 24.17$ 2,245 24.17$ 2,245 5.71 24.17 2,245 24.17 OutstandingExercisable
shares of common stock with a weighted average fair market value of $31.00 at the date of grant.
These restricted stock awards vest over three years. During the fourth quarter of 2017, we granted
certain officers 660 restricted shares of common stock with a weighted average fair market value of
$30.65 at the date of grant. These restricted stock awards vest over one year. 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 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 23,920 and 39,080 at December 31, 2017 and
2016, respectively.
The fair value of the stock is based on the grant date of the award and the expense is recognized over
the vesting period. Unamortized stock-based compensation related to nonvested shares based
compensation arrangements granted under the stock incentive plan as of December 31, 2017 and
2016 was $422,000 and $697,000, respectively. The time based unamortized compensation of
$251,000 is expected to be recognized over a weighted average period of 1.79 years. During 2017
and 2016, there were forfeitures of 10,845 and 3,399 shares of restricted stock awards, respectively.
There were no forfeitures of restricted stock awards in 2015.
A summary of changes in the Company’s nonvested restricted stock awards for the year follows:
Stock-based compensation expense was $140,000, $213,000, and $262,000 for the years ended
December 31, 2017, 2016, and 2015, 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 3.74% and 3.13% at December 31, 2017 and
2016, 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, 2017 and there are no plans to do so. The principal asset of the Trust is
$5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest
rates to the Trust Preferred Capital Notes.
During the third quarter of 2007, Village Financial Statutory Trust II, a wholly–owned subsidiary of the
Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007,
84
Weighted-AverageAggregateGrant-DateIntrinsicSharesFair-ValueValueDecember 31, 201639,080 21.04$ 1,197,791$ Granted6,710 30.64 205,662 Vested(11,025) 22.79 (337,916) Forfeited(10,845) 20.34 (332,399) December 31, 201723,920 23.03$ 733,137$
$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, 2017 was 2.99%. 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, 2017 and there are no plans to do so. The
principal asset of the Trust is $3.6 million of the Company’s junior subordinated securities with like
maturities and like interest rates to the Trust Preferred Capital Notes.
The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy
determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the Trust Preferred
Capital Notes not considered as Tier 1 capital may be included in Tier 2 capital.
The obligations of the Company with respect to the issuance of the Trust Preferred Capital Notes
constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect
to the Trust Preferred Capital Notes. Subject to certain exceptions and limitations, the Company may
elect from time to time to defer interest payments on the junior subordinated debt securities, which
would result in a deferral of distribution payments on the related Trust Preferred Capital Notes and
require a deferral of common dividends. The Company is current on these interest payments.
Note 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 economic conditions
at the time, 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 100% of the first 1%
the participant contributes, and then 50% of the next 5% of their salary, totaling a maximum 3.5%.
Participants are always fully vested in their own contributions, and the Bank’s matching contributions
vest 100% after two years. Total contributions to the plan for the years ended December 31, 2017,
2016 and 2015 were $304,000, $164,000 and $159,000, respectively.
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 four
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, 2017 and 2016,
the Bank’s liability under the SERP was $2,116,000 and $2,064,000, respectively, and expense for
the years ended December 31, 2017, 2016 and 2015 was $190,000, $168,000 and $201,000,
respectively. The increase in cash surrender value of the BOLI related to the participants was
$175,000 and $183,000 for the years ended December 31, 2017 and 2015, 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.
85
On July 9, 2016, the Bank amended the SERP to provide that the participants’ benefits will vest upon
a change of control of the Bank. The SERP 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.
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 the 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, 2017 and 2016, the Bank’s liability under the Directors Deferral Plan
was $235,000 and $166,000, respectively, and expense for the years ended December 31, 2017,
2016 and 2015 was $74,000, $89,000 and $87,000, 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, 2013 liability to
be lower than the December 31, 2014 liability. A rabbi trust was established to hold the shares. At
December 31, 2017 and 2016, the trust held 46,555 and 47,560 shares, respectively of Company
common stock totaling $1,010,000 and $1,034,382, respectively.
Note 17. Fair Value
The fair value of an asset or liability is the price that would be received to sell that asset or paid to
transfer that liability in an orderly transaction between market participants. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for
the asset or liability or, in the absence of a principal market, the most advantageous market for the
asset or liability. The price in the principal (or most advantageous) market used to measure the fair
value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the measurement date to allow
for marketing activities that are usual and customary for transactions involving such assets and
liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal
market that are independent, knowledgeable, able to transact and willing to transact.
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:
86
Securities: Fair values for securities available-for-sale are obtained from an independent pricing
service. The prices are not adjusted. The independent pricing service uses industry-standard models
to price U.S. Government agency obligations and mortgage backed securities that consider various
assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates,
loss severity, current market and contractual prices for the underlying financial instruments, as well as
other relevant economic measures. Securities of obligations of state and political subdivisions are
valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury
rate based on credit rating. Substantially all assumptions used by the independent pricing service are
observable in the marketplace, can be derived from observable data, or are supported by observable
levels at which transactions are executed in the marketplace (Levels 1 and 2). If the inputs used to
provide the evaluation for certain securities are unobservable and/or there is little, if any, market
activity, then the security would fall to the lowest level of the hierarchy (Level 3).
Impaired loans: The fair values of impaired loans are measured for impairment using the fair value of
the collateral for collateral-dependent loans on a nonrecurring basis. Collateral may be in the form of
real estate or business assets including equipment, inventory, and accounts receivable. The vast
majority of the Company’s collateral is real estate. The value of real estate collateral is determined
utilizing an income or market valuation approach based on an appraisal conducted by an independent,
licensed appraiser using observable market data (Level 2). However, if the collateral is a house or
building in the process of construction or 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.
87
Assets measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized
below (in thousands):
88
Quoted Pricesin ActiveOtherSignificantMarkets forObservableUnobservableCarryingIdentical AssetsInputsInputsValue(Level 1)(Level 2)(Level 3)Financial Assets - RecurringUS Government Agencies23,683$ -$ 23,683$ -$ Mortgage-backed securities21,940 - 21,940 - Subordinated debt4,088 757 1,531 1,800 Financial Assets - Non-RecurringImpaired loans15,314 - 13,722 1,592 Assets held for sale610 - - 610 Real estate owned1,788 - 1,788 - Fair Value Measurementat December 31, 2017 UsingQuoted Pricesin ActiveOtherSignificantMarkets forObservableUnobservableCarryingIdentical AssetsInputsInputsValue(Level 1)(Level 2)(Level 3)Financial Assets - RecurringUS Government Agencies32,246$ 2,103$ 30,143$ -$ Mortgage-backed securities11,648 9,450 2,198 - Financial Assets - Non-RecurringImpaired loans15,441 - 14,467 974 Assets held for sale841 - - 841 Real estate owned2,926 - 2,926 - at December 31, 2016 UsingFair Value Measurement
The following table presents qualitative information about Level 3 fair value measurements for financial
instruments for the years ended December 31, 2017 and 2016 (dollars in thousands):
89
RangeFair ValueValuationUnobservable(Weighted EstimateTechniquesInputAverage)Impaired loans - real estate secured $ 284 Appraisal (1) or Internal Valuation (2)Selling costs 6%-10% (7%)Discount for lack of marketability and ageof appraisal6%-30% (10%)Impaired loans - non-real estate secured $ 1,308 Appraisal (1) or Discounted Cash FlowSelling costs 10%Discount for lack of marketability or practical life0%-50% (20%)Assets held for sale $ 610 Appraisal (1) or Internal Valuation (2)Selling costs 6%-10% (7%)Discount for lack of marketability and ageof appraisal6%-30% (15%)Investment securities available for sale $ 1,800 Valuation serviceDiscounted cash flows3%-6% (5%)December 31, 2017RangeFair ValueValuationUnobservable(Weighted EstimateTechniquesInputAverage)Impaired loans - real estate secured $ 517 Appraisal (1) or Internal Valuation (2)Selling costs 6%-10% (7%)Discount for lack of marketability and ageof appraisal6%-30% (10%)Impaired loans - non-real estate secured $ 457 Appraisal (1) or Discounted Cash FlowSelling costs 10%Discount for lack of marketability or practical life0%-50% (20%)Assets held for sale $ 841 Appraisal (1) or Internal Valuation (2)Selling costs 6%-10% (7%)Discount for lack of marketability and ageof appraisal6%-30% (15%)December 31, 2016(In thousands)(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, 2017 and 2016 (in thousands):
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.
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.
Bank owned life insurance – The carrying value of BOLI approximates fair value. The Company
records these policies at their cash surrender value, which is estimated using information provided by
insurance carriers.
90
ImpairedSubordinated Real Estate Assets HeldLoansDebtOwnedfor SaleTotal AssetsBalance at December 31, 2015 $ 1,647 $ - $ 59 $ 12,631 $ 14,337 Total realized and unrealized gains (losses)Included in earnings - - 15 - 15 Included in other comprehensive income - - - - - Net transfers in and/or out of Level 3 (673) - (74) (11,790) (12,537)Balance at December 31, 2016 $ 974 $ - $ - $ 841 $ 1,815 Total realized and unrealized gains (losses)Included in earnings - - - - - Included in other comprehensive income - - - - - Net transfers in and/or out of Level 3 618 1,800 - (231) 2,187 Balance at December 31, 2017 $ 1,592 $ 1,800 $ - $ 610 $ 4,002
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.
Note 18. Segment Reporting
The Company has two reportable segments: traditional commercial banking and mortgage banking.
Revenues from commercial banking operations consist primarily of interest earned on loans and
securities and fees from deposit services. Mortgage banking operating revenues consist principally of
interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage
market, and loan origination fee income.
The commercial banking segment provides the mortgage banking segment with the short-term funds
needed to originate mortgage loans through a warehouse line of credit and charges the mortgage
banking segment interest based on the commercial banking segment’s cost of funds. Additionally, the
mortgage banking segment leases premises from the commercial banking segment. These
transactions are eliminated in the consolidation process.
91
Level in FairValueCarryingEstimatedCarryingEstimatedHierarchyValueFair ValueValueFair ValueFinancial assetsCashLevel 117,810$ 17,810$ 10,848$ 10,848$ Cash equivalentsLevel 2- - 948 948 Investment securities available for saleLevel 1757 757 11,553 11,553 Investment securities available for saleLevel 247,154 47,154 32,341 32,341 Investment securities available for saleLevel 31,800 1,800 - - Federal Home Loan Bank stockLevel 2920 920 512 512 Loans held for saleLevel 28,047 8,047 14,784 14,784 LoansLevel 2353,395 353,490 321,659 322,386 Impaired loansLevel 213,722 13,722 14,467 14,467 Impaired loansLevel 31,592 1,592 974 974 Assets held for saleLevel 3610 610 841 841 Other real estate ownedLevel 21,788 1,788 2,926 2,926 Bank owned life insuranceLevel 37,268 7,268 7,093 7,093 Accrued interest receivableLevel 22,600 2,600 2,274 2,274 Financial liabilitiesDepositsLevel 2411,624 411,044 383,277 383,985 FHLB borrowingsLevel 212,300 12,294 2,400 2,402 Trust preferred securitiesLevel 28,764 9,099 8,764 8,565 Other borrowingsLevel 21,584 1,584 81 81 Accrued interest payableLevel 293 93 70 70 (In thousands)20162017December 31,December 31,
The following table presents segment information as of and for the years ended December 31, 2017,
2016 and 2015 (in thousands):
92
Commercial Mortgage Consolidated BankingBankingEliminationsTotalsYear Ended December 31, 2017RevenuesInterest income17,036$ 279$ (17)$ 17,298$ Gain on sale of loans- 5,415 - 5,415 Other revenues2,194 685 (188) 2,691 Total revenues19,230 6,379 (205) 25,404 ExpensesInterest expense2,721 17 (17) 2,721 Salaries and benefits8,198 3,883 - 12,081 Commissions- 1,526 - 1,526 Other expenses6,883 910 (188) 7,605 Total operating expenses17,802 6,336 (205) 23,933 Income before income taxes1,428$ 43$ -$ 1,471$ Total assets480,069$ 10,130$ (13,225)$ 476,974$ Commercial Mortgage Consolidated BankingBankingEliminationsTotalsYear Ended December 31, 2016RevenuesInterest income15,636$ 470$ (117)$ 15,989$ Gain on sale of loans- 6,430 - 6,430 Other revenues3,868 742 (190) 4,420 Total revenues19,504 7,642 (307) 26,839 ExpensesInterest expense2,609 117 (117) 2,609 Salaries and benefits7,702 3,593 - 11,295 Commissions- 1,606 - 1,606 Other expenses8,088 1,090 (190) 8,988 Total operating expenses18,399 6,406 (307) 24,498 Income before income taxes1,105$ 1,236$ -$ 2,341$ Total assets448,373$ 10,026$ (13,597)$ 444,802$
93
Commercial Mortgage Consolidated BankingBankingEliminationsTotalsYear Ended December 31, 2015RevenuesInterest income15,165$ 446$ (107)$ 15,504$ Gain on sale of loans- 6,076 - 6,076 Other revenues3,473 749 (240) 3,982 Total revenues18,638 7,271 (347) 25,562 ExpensesInterest expense2,877 107 (117) 2,867 Salaries and benefits7,346 3,500 - 10,846 Commissions- 1,555 - 1,555 Other expenses8,787 1,091 (230) 9,648 Total operating expenses19,010 6,253 (347) 24,916 Income (loss) before income taxes(372)$ 1,018$ -$ 646$ Total assets426,038$ 8,806$ (14,903)$ 419,941$
Note 19.
Parent Corporation Only Financial Statements
94
December 31,December 31,20172016AssetsCash and due from banks1,210$ 1,770$ Investment in subsidiaries44,747 50,230 Investment in special purpose subsidiary264 264 Prepaid expenses and other assets1,931 2,935 48,152$ 55,199$ Liabilities and Shareholders' EquityLiabilitiesBalance due to nonbank subsidiaries8,764$ 8,764$ Other liabilities54 2,821 Total liabilities8,818 11,585 Shareholders' equityPreferred stock20 23 Common stock5,672 5,629 Additional paid-in capital58,055 58,643 Warrant surplus732 732 Accumulated deficit(24,693) (21,172) Stock in directors rabbi trust(1,010) (1,034) Directors deferred fees obligation1,010 1,034 Accumulated other comprehensive loss(452) (241) Total stockholders' equity39,334 43,614 48,152$ 55,199$ Village Bank and Trust Financial Corp.(Parent Corporation Only)Condensed Balance Sheet(in thousands)
95
201720162015Interest incomeVillage Bank money market5$ 8$ 10$ Interest expenseInterest on trust preferred securities259 185 213 Total interest expense259 185 213 Net interest expense(254) (177) (203) Noninterest expenseWrite down of assets held for sale- - 1,759 Supplies48 48 48 Professional and outside services140 199 412 Other 32 33 52 Total noninterest expense220 280 2,271 Net loss before undistributed income (loss) of subsidiary(474) (457) (2,474) Undistributed income (loss) of subsidiary(1,619) 11,087 3,120 Net income (loss) before income taxexpense (benefit)(2,093) 10,630 646 Income tax expense (benefit)1,003 (2,883) - Net income (loss)(3,096)$ 13,513$ 646$ Total comprehensive income (loss)(3,306)$ 13,779$ 860$ Village Bank and Trust Financial Corp. (Parent Corporation Only)Condensed Statements of Operations and Comprehensive Income (Loss)Years Ended December 31, 2017, 2016 and 2015(in thousands)
Note 20. Subsequent Events
On March 21, 2018, the Company issued $5.7 million of fixed-to-floating rate subordinated notes due
March 31, 2028 in a private placement. The Company expects to receive approximately $5.525 million
in net proceeds after deducting issuance costs, which will be used to redeem all of the Company’s
remaining 5,027 shares of its Series A, Fixed Rate Cumulative Perpetual Preferred Stock on March
30, 2018. The subordinated notes accrue interest at a fixed rate of 6.50% for the first five years until
March 21, 2023. From and including this date and for the remaining five years of the subordinated
notes’ term, interest will accrue at a floating rate of three-month LIBOR plus 3.73%. The Company
may redeem the subordinated notes in whole or in part, on or after March 21, 2023, with certain
exceptions provided in the subordinated notes that allow the Company to redeem the subordinated
notes prior to that date. The subordinated notes are unsecured obligations subordinate and junior in
right of payment to all of the Company’s existing and future senior indebtedness, whether secured or
unsecured, including claims of depositors and general creditors, and rank equally in right of payment
with any unsecured, subordinated indebtedness that the Company may incur in the future that rank
equally with the subordinated notes
96
201720162015Cash Flows from Operating ActivitiesNet income (loss)(3,096)$ 13,513$ 646$ Adjustments to reconcile net income (loss) to net cash used in operating activitiesDepreciation and amortization- - - Write-off of deferred tax assets1,164 - - Writedown on assets held for sale- - 1,759 Undistributed (income) loss of subsidiary1,619 (11,087) (3,120) (Increase) decrease in other assets(160) (2,890) 258 Decrease in other liabilities(9) (1,260) (19) Net cash used in operating activities(482) (1,724) (476) Cash Flows from Investing ActivitiesInvestment in subsidiary3,867 - (5,000) Net cash used in investing activities3,867 - (5,000) Cash Flows from Financing ActivitiesProceeds from issuance of common stock- - (79) Redemption of preferred stock(688) - - Payment of preferred dividends(3,257) - - Net proceeds from sale of common stock,net of expenses of $990- - 8,965 Net cash provided by (used in)financing activities(3,945) - 8,886 Net increase (decrease) in cash(560) (1,724) 3,410 Cash, beginning of year1,770 3,494 84 Cash, end of year1,210$ 1,770$ 3,494$ (Parent Corporation Only)Condensed Statements of Cash FlowsYears Ended December 31, 2017, 2016 and 2015(in thousands)
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, 2017, 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, 2017. 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, 2017, 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,
2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
97
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 2018 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 2018 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 2018 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 2018 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 2018 Annual Meeting of Shareholders and is incorporated herein by reference.
98
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, 2017 and 2016
Consolidated Statements of Operations – Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Shareholders’ Equity – Years Ended December 31, 2017,
2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) – Years Ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows – Years Ended December 31, 2017, 2016 and 2015
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
4.4
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).
Form of Subordinated Note (incorporated by reference to Exhibit 4.1 of the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 21, 2018).
99
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
Employment Agreement, dated October 1, 2017, 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 October 4, 2017).*
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).*
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
100
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
21
23.1
31.1
31.2
32
101
reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 12, 2014).
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).
Form of Subordinated Note Purchase Agreement (incorporated by reference
to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 21, 2018).
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, 2017
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.
101
ITEM 16. FORM 10-K Summary
None.
102
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 30, 2018
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 30, 2018
/s/ C. Harril Whitehurst, Jr._
C. Harril Whitehurst, Jr.
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
March 30, 2018
/s/ R.T. Avery, III
R.T. Avery, III
/s/ Craig D. Bell_
Craig D. Bell
/s/ O. Woodland Hogg, Jr._
O. Woodland Hogg, Jr.
/s/ Michael A. Katzen
Michael A. Katzen
/s/ Charles E. Walton_
Charles E. Walton
/s/ George R. Whittemore
George R. Whittemore
Director
March 30, 2018
Director and
Chairman of the Board
March 30, 2018
Director
March 30, 2018
Director
March 30, 2018
Director
March 30, 2018
Director
March 30, 2018
103
/s/ Michael L. Toalson_
Michael L. Toalson
/s/ Kenneth Lehman
Kenneth R. Lehman
/s/ Frank E Jenkins, Jr.
Frank E Jenkins, Jr.
/s/ Devon M. Henry
Devon M. Henry
Director
March 30, 2018
Director
March 30, 2018
Director
March 30, 2018
Director
March 30, 2018
104
Exhibit 21
105
Name of SubsidiaryState of OrganizationVillage BankVirginiaVillage Bank Mortgage CorporationVirginia(wholly-owned subsidiary of Village Bank)Village Insurance Agency, Inc.Virginia(wholly-owned subsidiary of Village Bank)Village Financial Services CorporationVirginia(wholly-owned subsidiary of Village Bank)Southern Community Financial Capital Trust IVirginiaVillage Financial Statutory Trust IIVirginiaSubsidiaries of Village Bank and Trust Financial Corp.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Board of Directors
Village Bank and Trust Financial Corp.
We hereby consent to the incorporation by reference in the Registration Statements on Form S 3 (Nos.
333-159594, 333-192408, 333-196893) and Form S-8 (No. 333-205407) of Village Bank and Trust
Financial Corp. of our report dated March 30, 2018, relating to the consolidated financial statements
which appear in this Annual Report on Form 10-K for the year ended December 31, 2017.
/s/ BDO USA, LLP
Richmond, Virginia
March 30, 2018
106
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, 2017;
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 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 30, 2018
By: /s/ William G. Foster, Jr.
William G. Foster, Jr.
President and
Chief Executive Officer
107
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, 2017;
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 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 30, 2018
By: /s/ C. Harril Whitehurst, Jr.
C. Harril Whitehurst, Jr.
Executive Vice President and
Chief Financial Officer
108
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, 2017 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 30, 2018
Date
/s/ C. Harril Whitehurst, Jr.
C. Harril Whitehurst, Jr.
Executive Vice President and Chief Financial Officer
March 30, 2018
Date
109