10-Q 1 tm2029588-1_10q.htm FORM 10-Q

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission file number: 0-50765

 

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Virginia 16-1694602
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

13319 Midlothian Turnpike, Midlothian, Virginia 23113
(Address of principal executive offices) (Zip code)

 

804-897-3900

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

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

 

Large Accelerated Filer ¨ Accelerated Filer ¨
Non-Accelerated Filer x Smaller Reporting Company x
Emerging growth company ¨  

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

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

 

1,466,216 shares of common stock, $4.00 par value, outstanding as of November 5, 2020

 

 

 

 

 

 

Village Bank and Trust Financial Corp.

Form 10-Q

 

TABLE OF CONTENTS

     
Part I – Financial Information  
     
  Item 1. Financial Statements  
     
  Consolidated Balance Sheets September 30, 2020 (unaudited) and December 31, 2019 3
     
  Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 5
     
Consolidated Statements of Shareholders’ Equity For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 6
     
  Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2020 and 2019 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8
     
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
     
  Item 3.    Quantitative and Qualitative Disclosures About Market Risk 58
     
  Item 4.    Controls and Procedures 58
     
Part II – Other Information  
     
  Item 1.    Legal Proceedings 59
     
  Item 1A. Risk Factors 59
     
  Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds 59
     
  Item 3.    Defaults Upon Senior Securities 60
     
  Item 4.    Mine Safety Disclosures 60
     
  Item 5.    Other Information 60
     
  Item 6.    Exhibits 61
     
Signatures 62

 

2

 

 

Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
September 30, 2020 (Unaudited) and December 31, 2019*
(in thousands, except share and per share data)
         
   September 30,   December 31, 
   2020   2019 
Assets          
Cash and due from banks  $19,605   $19,967 
Federal funds sold   18,482    - 
Total cash and cash equivalents   38,087    19,967 
Investment securities available for sale, at fair value   36,305    46,937 
Restricted stock, at cost   2,482    2,035 
Loans held for sale, at fair value   27,525    12,722 
Loans          
Outstandings   600,089    429,295 
Allowance for loan losses   (4,050)   (3,186)
Deferred fees and costs, net   (3,606)   764 
Total loans, net   592,433    426,873 
Other real estate owned, net of valuation allowance   336    526 
Assets held for sale, at fair value   -    514 
Premises and equipment, net   11,711    12,036 
Bank owned life insurance   7,756    7,612 
Accrued interest receivable   4,880    2,597 
Other assets   5,849    8,494 
           
Total Assets  $727,364   $540,313 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $217,204   $131,228 
Interest bearing   356,648    311,980 
Total deposits   573,852    443,208 
Federal Home Loan Bank advances   39,000    29,000 
Long-term debt - trust preferred securities   8,764    8,764 
Subordinated debt, net   5,620    5,595 
Other borrowings   45,120    5,317 
Accrued interest payable   231    221 
Other liabilities   5,902    5,294 
Total liabilities   678,489    497,399 
           
Shareholders' equity          
Common stock, $4 par value, 10,000,000 shares authorized;          
1,466,240 shares issued and outstanding at September 30, 2020 and 1,453,009 shares issued and outstanding at December 31, 2019        5,790           5,779   
Additional paid-in capital   54,431    54,285 
Accumulated deficit   (11,790)   (17,292)
Stock in directors rabbi trust   (771)   (856)
Directors deferred fees obligation   771    856 
Accumulated other comprehensive income   444    142 
Total shareholders' equity   48,875    42,914 
           
Total liabilities and shareholders' equity  $727,364   $540,313 

 

* Derived from audited consolidated financial statements

 

See accompanying notes to consolidated financial statements.

 

3

 

  

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(in thousands, except per share data)
                 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Interest income                    
Loans  $6,307   $5,594   $17,622   $16,515 
Investment securities   230    284    740    848 
Federal funds sold   3    132    55    227 
Total interest income   6,540    6,010    18,417    17,590 
                     
Interest expense                    
Deposits   728    1,041    2,502    2,831 
Borrowed funds   341    357    1,073    1,129 
Total interest expense   1,069    1,398    3,575    3,960 
                     
Net interest income   5,471    4,612    14,842    13,630 
Provision for loan losses   250    -    950    - 
Net interest income after provision for loan losses        5,221           4,612           13,892           13,630   
                     
Noninterest income                    
Service charges and fees   535    557    1,502    1,556 
Mortgage banking income, net   2,859    1,784    6,517    3,767 
Gain on sale of asset held for sale   1    -    1    - 
Gain on sale of investment securities   -    -    12    101 
Gain on sale of Small Business Administration loans   -    18    86    246 
Other   86    107    238    262 
Total noninterest income   3,481    2,466    8,356    5,932 
                     
Noninterest expense                    
Salaries and benefits   3,644    2,841    9,278    9,478 
Occupancy   326    338    965    1,010 
Equipment   225    208    640    644 
Supplies   50    73    141    156 
Professional and outside services   835    735    2,276    2,298 
Advertising and marketing   90    82    261    204 
Foreclosed assets, net   4    6    (152)   13 
FDIC insurance premium   47    -    167    158 
Other operating expense   534    605    1,588    1,609 
Total noninterest expense   5,755    4,888    15,164    15,570 
                     
Income before income tax expense   2,947    2,190    7,084    3,992 
Income tax expense   678    463    1,582    819 
                     
Net income  $2,269   $1,727   $5,502   $3,173 
                     
Earnings per share, basic  $1.55   $1.19   $3.78   $2.20 
Earnings per share, diluted  $1.55   $1.19   $3.78   $2.20 

 

See accompanying notes to consolidated financial statements.

  

4

 

 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
Three and Nine Months ended September 30, 2020 and 2019
(Unaudited)
(in thousands)
                 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Net income  $2,269   $1,727   $5,502   $3,173 
Other comprehensive income (loss)                    
Unrealized holding gains (losses) arising during the period   (52)   109    386    1,124 
Tax effect   (11)   23    81    236 
Net change in unrealized holding gains (losses) on securities available for sale, net of tax        (41 )        86           305           888   
                     
Reclassification adjustment                    
Reclassification adjustment for gains realized in income        -           -           (12 )        (101 )
Tax effect   -    -    3    21 
Reclassification for gains included in net income, net of tax   -    -    (9)   (80)
                     
Minimum pension adjustment   3    3    9    9 
Tax effect   1    1    3    3 
Minimum pension adjustment, net of tax   2    2    6    6 
                     
Total other comprehensive income (loss)   (39)   88    302    814 
                     
        Total comprehensive income  $2,230   $1,815   $5,804   $3,987 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three and Nine Months Ended September 30, 2020 and 2019 

 

(Unaudited)

(In thousands)

 

   Three Months Ended September 30, 2020 
                       Directors   Accumulated     
       Additional       Common   Stock in   Deferred   Other     
   Common   Paid-in   Accumulated   Stock   Directors   Fees   Comprehensive     
   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Income   Total 
Balance, June 30, 2020  $5,779   $54,414   $(14,059)  $-   $(771)  $771   $483   $46,617 
                                         
Vesting of restricted stock   11    (11)   -    -    -    -    -    - 
Stock based compensation   -    28    -    -    -    -    -    28 
Net income   -    -    2,269    -    -    -    -    2,269 
Other comprehensive loss   -    -    -    -    -    -    (39)   (39)
Balance, September 30, 2020  $5,790   $54,431   $(11,790)  $-   $(771)  $771   $444   $48,875 

 

   Nine Months Ended September 30, 2020 
                       Directors   Accumulated     
       Additional       Common   Stock in   Deferred   Other     
   Common   Paid-in   Accumulated   Stock   Directors   Fees   Comprehensive     
   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Income   Total 
Balance, December 31, 2019  $5,779   $54,285   $(17,292)  $       -   $(856)  $856   $            142   $42,914 
                                         
Vesting of restricted stock   11    (11)   -    -    85    (85)   -    - 
Stock based compensation   -    157    -    -    -    -    -    157 
Net income   -    -    5,502    -    -    -    -    5,502 
Other comprehensive income   -    -    -    -    -    -    302    302 
Balance, September 30, 2020  $5,790   $54,431   $(11,790)  $-   $(771)  $771   $444   $48,875 

 

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

 

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

 

See accompanying notes to consolidated financial statements. 

 

6

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(in thousands)
 
    2020    2019 
Cash Flows from Operating Activities          
Net income  $5,502   $3,173 
Adjustments to reconcile net income to net cash used in operating activities:                        
Depreciation and amortization   442    491 
Amortization of debt issuance costs   25    24 
Deferred income taxes   905    819 
Provision for loan losses   950    - 
Write-down of other real estate owned   16    - 
Gain on sale of investment securities   (12)   (101)
Gain on sales of loans held for sale   (6,517)   (4,605)
Gain on sale of assets held for sale   (1)   - 
Gain on sale of other real estate owned   (175)   - 
Stock compensation expense   157    396 
Proceeds from sale of mortgage loans   247,205    149,905 
Origination of mortgage loans held for sale   (255,491)   (153,675)
Amortization of premiums and accretion of discounts on securities, net   159    137 
Increase in bank owned life insurance   (144)   (126)
Net change in:          
Interest receivable   (2,283)   32 
Other assets   1,669    (945)
Interest payable   10    2 
Other liabilities   608    2,262 
Net cash used in operating activities   (6,975)   (2,211)
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   (3,387)   (10,875)
Proceeds from the sale of available for sale securities   7,936    6,491 
Proceeds from the sale of assets held for sale   515    - 
Proceeds from maturities, calls and paydowns of available for sale securities   6,309    3,593 
Net increase in loans   (166,510)   (8,308)
Proceeds from sale of other real estate owned   349    - 
Purchases of premises and equipment, net   (117)   (133)
Purchase of restricted stock   (447)   (34)
Net cash used in investing activities   (155,352)   (9,266)
           
Cash Flows from Financing Activities          
Net increase in deposits   130,644    38,392 
Net increase in Federal Home Loan Bank advances   10,000    - 
Net increase in other borrowings   39,803    - 
Net cash provided by financing activities   180,447    38,392 
           
Net increase in cash and cash equivalents   18,120    26,915 
Cash and cash equivalents, beginning of period   19,967    19,543 
           
Cash and cash equivalents, end of period  $38,087   $46,458 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $3,565   $3,958 
Supplemental Schedule of Non-Cash Activities          
Unrealized gains on securities available for sale  $373   $1,023 
Right of use assets obtained in exchange for new operating lease liabilities  $-   $1,405 
Minimum pension adjustment  $9   $9 

 

See accompanying notes to consolidated financial statements. 

 

7

 

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

 

Note 1 - Principles of presentation

 

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

 

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (“SEC”).

 

Note 2 - Use of estimates

 

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

 

Note 3 - Earnings per common share

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Numerator                
Net income - basic and diluted  $2,269   $1,727   $5,502   $3,173 
                     
Denominator                    
Weighted average shares outstanding - basic   1,462    1,451    1,456    1,442 
Dilutive effect of common stock options   -    -    -    - 
                     
Weighted average shares outstanding - diluted  $1,462   $1,451   $1,456   $1,442 
                     
Earnings per share - basic  $1.55   $1.19   $3.78   $2.20 
Earnings per share - diluted  $1.55   $1.19   $3.78   $2.20 

 

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

 

8

 

 

At September 30, 2020 the vesting of 6,573 of the unvested restricted units included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of September 30, 2020, it was indeterminable whether these unvested restricted units would vest and as such the underlying shares were excluded from common shares issued and outstanding at such date and were not included in the computation of earnings per share for such period.

 

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

 

Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings per share for the periods presented. Stock options for 629 and 593 shares were not included in computing diluted earnings per share for the three and nine months ended September 30, 2020, respectively, and stock options for 550 and 563 shares were not included in computing diluted earnings per share for the three and nine months ended September 30, 2019, respectively, because their effects were anti-dilutive. Additionally, the impact of the warrant to acquire shares of the Company’s common stock in connection with the Company’s participation in the Troubled Asset Relief Program is not included for the period ended September 30, 2019, as the warrant expired on May 1, 2019.

 

Note 4 – Investment securities available for sale

 

The amortized cost and fair value of investment securities available for sale as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized     
   Cost   Gains   Losses   Fair Value 
September 30, 2020                    
U.S. Government agency obligations  $10,354   $125   $-   $10,479 
Mortgage-backed securities   17,338    670    (28)   17,980 
Subordinated debt   8,003    29    (186)   7,846 
                     
   $35,695   $824   $(214)  $36,305 
                     
December 31, 2019                    
U.S. Government agency obligations  $14,797   $57   $(9)  $14,845 
Mortgage-backed securities   25,124    204    (26)   25,302 
Subordinated debt   6,779    91    (80)   6,790 
                     
   $46,700   $352   $(115)  $46,937 

 

At September 30, 2020 and December 31, 2019, the Company had no investment securities pledged to secure borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”).

 

9

 

 

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

 

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

 

The Company sold approximately $7,900,000 and $6,500,000 in the nine months ended September 30, 2020 and 2019, respectively, of investment securities available for sale at a net gain of $12,000 in 2020 and $101,000 in 2019. The sales of these securities, which had fixed interest rates, allowed the Company to decrease its exposure to upward movement in interest rates that would result in unrealized losses being recognized in shareholders’ equity.

 

Investment securities available for sale that have an unrealized loss position at September 30, 2020 and December 31, 2019 are detailed below (in thousands):

 

   Securities in a loss   Securities in a loss         
   position for less than   position for more than         
   12 Months   12 Months   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
September 30, 2020    
Mortgage-backed securities   2,073    (28)   -    -    2,073    (28)
Subordinated debt   5,166    (81)   901    (105)   6,067    (186)
                               
   $7,239   $(109)  $901   $(105)  $8,140   $(214)
                               
December 31, 2019                              
U.S. Government agency obligations  $2,001   $(1)  $5,368   $(8)  $7,369   $(9)
Mortgage-backed securities   2,747    (26)   -    -    2,747    (26)
Subordinated debt   759    (6)   940    (74)   1,699    (80)
                               
   $5,507   $(33)  $6,308   $(82)  $11,815   $(115)

 

As of September 30, 2020, there were eleven investments available for sale totaling $7,239,000 that were in a continuous loss position for less than twelve months and had an unrealized loss of $109,000. There were two investments available for sale totaling $901,000 that had been in a continuous loss position for more than 12 months and had an unrealized loss of $105,000.

 

All of the unrealized losses are attributable to movements in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at September 30, 2020.

 

10

 

 

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

 

   Amortized
Cost
   Fair Value 
Less than one year  $8,213   $8,277 
One to five years   359    365 
Five to ten years   9,925    9,822 
More than ten years   17,198    17,841 
           
Total  $35,695   $36,305 

 

Note 5 – Loans and allowance for loan losses

 

Loans classified by type as of September 30, 2020 and December 31, 2019 are as follows (dollars in thousands):

 

   September 30, 2020   December 31, 2019 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $7,723    1.29%  $7,887    1.84%
Commercial   25,614    4.27%   24,063    5.60%
    33,337    5.56%   31,950    7.44%
Commercial real estate                    
Owner occupied   97,467    16.24%   98,353    22.91%
Non-owner occupied   116,863    19.47%   116,508    27.14%
Multifamily   10,155    1.69%   13,332    3.10%
Farmland   378    0.06%   156    0.04%
    224,863    37.46%   228,349    53.19%
Consumer real estate                    
Home equity lines   19,307    3.22%   21,509    5.01%
Secured by 1-4 family residential,                    
First deed of trust   55,070    9.18%   55,856    13.01%
Second deed of trust   11,389    1.90%   10,411    2.43%
    85,766    14.30%   87,776    20.45%
Commercial and industrial loans (except those secured by real estate)        222,469           37.07  %        45,074           10.50  %
Guaranteed student loans   30,656    5.11%   33,525    7.81%
Consumer and other   2,998    0.50%   2,621    0.61%
                     
Total loans   600,089    100.0%   429,295    100.0%
Deferred fees and costs, net   (3,606)        764      
Less: allowance for loan losses   (4,050)        (3,186)     
                     
   $592,433        $426,873      

 

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

 

11

 

 

The Bank had originated $185,137,000 in loans through the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) as of September 30, 2020, which have provided essential funds to approximately 1,500 businesses and nonprofits and protected more than 20,000 jobs in our community. The processing fees earned on the PPP loans will help to support the Bank’s loan deferral program and potential credit losses associated with the COVID-19 pandemic. Below is a breakdown of PPP loans by loan size including SBA fees expected to be earned as of September 30, 2020 (dollars in thousands):

 

Loan Size  # of Loans   $ of
Loans
   $
SBA Fee
 
< $350,000   1,426   $94,240   $4,547 
$350,000 - $2 million   94    67,795    1,853 
> $2 million   6    23,102    184 
Total   1,526   $185,137   $6,584 

 

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $57,423,000 and $49,736,000 as of September 30, 2020 and December 31, 2019, respectively.

 

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

 

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

 

   September 30,   December 31, 
   2020   2019 
Commercial real estate          
Owner occupied  $307   $497 
    307    497 
Consumer real estate          
Home equity lines   300    300 
Secured by 1-4 family residential          
First deed of trust   949    842 
Second deed of trust   473    63 
    1,722    1,205 
Commercial and industrial loans (except those secured by real estate)        197           166   
           
Total loans  $2,226   $1,868 

 

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

 

  ·Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;

 

  ·Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close attention;

 

  ·Risk rated 6 loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; and

 

  ·Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

12

 

 

 

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

 

   Risk Rated   Risk Rated   Risk Rated   Risk Rated   Total 
    1-4    5    6    7    Loans 
September 30, 2020                         
Construction and land development                         
Residential  $7,723   $-   $-   $-   $7,723 
Commercial   25,226    99    289    -    25,614 
    32,949    99    289    -    33,337 
Commercial real estate                         
Owner occupied   85,290    9,535    2,642    -    97,467 
Non-owner occupied   116,157    226    480    -    116,863 
Multifamily   10,155    -    -    -    10,155 
Farmland   378    -    -    -    378 
    211,980    9,761    3,122    -    224,863 
Consumer real estate                         
Home equity lines   17,546    1,461    300    -    19,307 
Secured by 1-4 family residential                         
First deed of trust   52,878    874    1,318    -    55,070 
Second deed of trust   10,310    893    186    -    11,389 
    80,734    3,228    1,804    -    85,766 
Commercial and industrial loans                         
(except those secured by real estate)   221,207    799    463    -    222,469 
Guaranteed student loans   30,656    -    -    -    30,656 
Consumer and other   2,955    43    -    -    2,998 
                          
Total loans  $580,481   $13,930   $5,678   $-   $600,089 

 

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

  

13

 

 

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

 

                           Recorded 
           Greater               Investment > 
   30-59 Days   60-89 Days   Than   Total Past       Total   90 Days and 
   Past Due   Past Due   90 Days   Due   Current   Loans   Accruing 
September 30, 2020                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $7,723   $7,723   $- 
Commercial   -    -    -    -    25,614    25,614    - 
    -    -    -    -    33,337    33,337    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    97,467    97,467    - 
Non-owner occupied   -    -    -    -    116,863    116,863    - 
Multifamily   -    -    -    -    10,155    10,155    - 
Farmland   -    -    -    -    378    378    - 
    -    -    -    -    224,863    224,863    - 
Consumer real estate                                   
Home equity lines   193    -    -    193    19,114    19,307    - 
Secured by 1-4 family residential                                   
First deed of trust   -    135    -    135    54,935    55,070    - 
Second deed of trust   57    -    -    57    11,332    11,389    - 
    250    135    -    385    85,381    85,766    - 
Commercial and industrial loans                                   
(except those secured by real estate)   -    -    -    -    222,469    222,469    - 
Guaranteed student loans   1,200    661    1,674    3,535    27,121    30,656    1,674 
Consumer and other   -    -    -    -    2,998    2,998    - 
                                    
Total loans  $1,450   $796   $1,674   $3,920   $596,169   $600,089   $1,674 

 

                           Recorded 
           Greater               Investment > 
   30-59 Days   60-89 Days   Than   Total Past       Total   90 Days and 
   Past Due   Past Due   90 Days   Due   Current   Loans   Accruing 
December 31, 2019                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $7,887   $7,887   $- 
Commercial   -    -    -    -    24,063    24,063    - 
    -    -    -    -    31,950    31,950    - 
Commercial real estate                                   
Owner occupied   701    -    -    701    97,652    98,353    - 
Non-owner occupied   -    -    -    -    116,508    116,508    - 
Multifamily   -    -    -    -    13,332    13,332    - 
Farmland   -    -    -    -    156    156    - 
    701    -    -    701    227,648    228,349    - 
Consumer real estate                                   
Home equity lines   52    -    -    52    21,457    21,509    - 
Secured by 1-4 family residential                                   
First deed of trust   290    -    -    290    55,566    55,856    - 
Second deed of trust   133    -    -    133    10,278    10,411    - 
    475    -    -    475    87,301    87,776    - 
Commercial and industrial loans                                   
(except those secured by real estate)   773    -    -    773    44,301    45,074    - 
Guaranteed student loans   1,694    1,309    2,567    5,570    27,955    33,525    2,567 
Consumer and other   4    -    -    4    2,617    2,621    - 
                                    
Total loans  $3,647   $1,309   $2,567   $7,523   $421,772   $429,295   $2,567 

  

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

 

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

 

14

 

 

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

 

   September 30, 2020   December 31, 2019 
       Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded                              
Construction and land development                              
Commercial  $289   $289   $-   $337   $337   $- 
    289    289    -    337    337    - 
Commercial real estate                              
Owner occupied   3,121    3,136    -    2,089    2,104    - 
Non-owner occupied   1,691    1,691    -    2,304    2,304    - 
    4,812    4,827    -    4,393    4,408    - 
Consumer real estate                              
Home equity lines   300    300    -    300    300    - 
Secured by 1-4 family residential                              
First deed of trust   2,096    2,118    -    1,752    1,774    - 
Second deed of trust   714    922    -    752    960    - 
    3,110    3,340    -    2,804    3,034    - 
Commercial and industrial loans                              
(except those secured by real estate)   148    148    -    211    373    - 
    8,359    8,604    -    7,745    8,152    - 
                               
With an allowance recorded                              
Commercial real estate                              
Owner occupied   1,125    1,125    3    1,414    1,414    15 
    1,125    1,125    3    1,414    1,414    15 
Consumer real estate                              
Secured by 1-4 family residential                              
First deed of trust   75    75    8    78    78    9 
Second deed of trust   103    103    77    -    -    - 
    178    178    85    78    78    9 
Commercial and industrial loans                              
(except those secured by real estate)   169    331    16    135    334    135 
    1,472    1,634    104    1,627    1,826    159 
                               
Total                              
Construction and land development                              
Commercial   289    289    -    337    337    - 
    289    289    -    337    337    - 
Commercial real estate                              
Owner occupied   4,246    4,261    3    3,503    3,518    15 
Non-owner occupied   1,691    1,691    -    2,304    2,304    - 
    5,937    5,952    3    5,807    5,822    15 
Consumer real estate                              
Home equity lines   300    300    -    300    300    - 
Secured by 1-4 family residential,                              
First deed of trust   2,171    2,193    8    1,830    1,852    9 
Second deed of trust   817    1,025    77    752    960    - 
    3,288    3,518    85    2,882    3,112    9 
Commercial and industrial loans                              
(except those secured by real estate)   317    479    16    346    707    135 
   $9,831   $10,238   $104   $9,372   $9,978   $159 

 

15

 

 

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

 

   For the Three Months   For the Nine Months 
   Ended September 30, 2020   Ended September 30, 2020 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Commercial  $294   $-   $305   $- 
    294    -    305    - 
Commercial real estate                    
Owner occupied   3,325    -    3,016    68 
Non-owner occupied   1,976    -    2,058    37 
    5,301    -    5,074    105 
Consumer real estate                    
Home equity lines   300    -    300    8 
Secured by 1-4 family residential                    
First deed of trust   2,113    -    2,023    33 
Second deed of trust   836    -    796    24 
    3,249    -    3,119    65 
Commercial and industrial loans                    
(except those secured by real estate)   155    -    168    - 
    8,999    -    8,666    170 
                     
With an allowance recorded                    
Commercial real estate                    
Owner occupied   843    14    985    14 
    843    14    985    14 
Consumer real estate                    
Secured by 1-4 family residential                    
First deed of trust   76    -    77    2 
Second deed of trust   103    -    45    - 
    179    -    122    2 
Commercial and industrial loans                    
(except those secured by real estate)   56    -    163    6 
Consumer and other   116    -    -    - 
    1,194    14    1,270    22 
                     
Total                    
Construction and land development                    
Commercial   294    -    305    - 
    294    -    305    - 
Commercial real estate                    
Owner occupied   4,168    14    4,001    82 
Non-owner occupied   1,976    -    2,058    37 
    6,144    14    6,059    119 
Consumer real estate                    
Home equity lines   300    -    300    8 
Secured by 1-4 family residential,                    
First deed of trust   2,189    -    2,100    35 
Second deed of trust   939    -    841    24 
    3,428    -    3,241    67 
Commercial and industrial loans                    
(except those secured by real estate)   211    -    331    6 
Consumer and other   116    -    -    - 
   $10,193   $14   $9,936   $192 

  

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

 

16

 

 

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

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
September 30, 2020                    
Commercial real estate                    
Owner occupied  $3,731   $3,424   $307   $4 
Non-owner occupied   1,691    1,691    -    - 
    5,422    5,115    307    4 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   1,613    901    712    8 
Second deeds of trust   630    568    62    - 
    2,243    1,469    774    8 
Commercial and industrial loans                    
(except those secured by real estate)   197    -    197    16 
   $7,862   $6,584   $1,278   $28 
                     
Number of loans   37    26    11    3 

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2019                    
Commercial real estate                    
Owner occupied  $3,502   $3,502   $-   $15 
Non-owner occupied   2,304    1,807    497    - 
    5,806    5,309    497    15 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   1,641    881    760    9 
Second deeds of trust   752    689    63    - 
    2,393    1,570    823    9 
Commercial and industrial loans                    
(except those secured by real estate)   211    180    31    - 
   $8,410   $7,059   $1,351   $24 
                     
Number of loans   38    29    9    3 

 

17

 

 

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

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2020   September 30, 2019 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification           Modification   Modification 
   Number of   Recorded   Recorded   Number of   Recorded   Recorded 
   Loans   Balance   Balance   Loans   Balance   Balance 
Commercial real estate                              
Owner occupied   1   $311   $311    -   $-   $- 
Non-owner occupied   -    -    -    1    515    515 
    1   $311   $311    1   $515   $515 

  

There were no TDR’s identified during the three months ended September 30, 2020 and 2019.

 

There were no defaults on TDRs that were modified as TDRs during the prior twelve month period ended September 30, 2020 and 2019.

 

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

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
Three Months Ended September 30, 2020                
Construction and land development                         
Residential  $213   $(23)  $-   $14   $204 
Commercial   295    23    -    -    318 
    508    -    -    14    522 
Commercial real estate