10-Q 1 tm2111691d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

¨ 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

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

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

 

804-897-3900

(Registrant’s telephone number, including area code)

 

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

 

Title of each 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.

 

1,466,800 shares of common stock, $4.00 par value, outstanding as of April 30, 2021

 

 

 

 

 

 

Village Bank and Trust Financial Corp.

Form 10-Q

 

TABLE OF CONTENTS

 

Part I – Financial Information  
   
Item 1. Financial Statements  
   
Consolidated Balance Sheets March 31, 2021 (unaudited) and December 31, 2020 3
   
Consolidated Statements of Income For the Three Months Ended March 31, 2021 and 2020 (unaudited) 4
   
Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2021 and 2020 (unaudited) 5
   
Consolidated Statements of Shareholders’ Equity For the Three Months Ended March 31, 2021 and 2020 (unaudited) 6
   
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2021 and 2020 (unaudited) 7
   
Notes to Consolidated Financial Statements (unaudited) 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 53
   
Item 4. Controls and Procedures 53
   
Part II – Other Information  
   
Item 1. Legal Proceedings 54
   
Item 1A. Risk Factors 54
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
   
Item 3. Defaults Upon Senior Securities 54
   
Item 4. Mine Safety Disclosures 54
   
Item 5. Other Information 54
   
Item 6. Exhibits 55
   
Signatures 56

 

2

 

 

Part I – Financial Information  

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
March 31, 2021 (Unaudited) and December 31, 2020*
(in thousands, except share and per share data)

 

   March 31,   December 31, 
   2021   2020 
Assets          
Cash and due from banks  $24,252   $12,709 
Federal funds sold   10,670    30,742 
Total cash and cash equivalents   34,922    43,451 
Investment securities available for sale, at fair value   42,371    40,844 
Restricted stock, at cost   694    825 
Loans held for sale   17,031    34,421 
Loans          
Outstandings   592,177    561,003 
Allowance for loan losses   (3,992)   (3,970)
Deferred fees and costs, net   (3,311)   (2,048)
Total loans, net   584,874    554,985 
Other real estate owned, net of valuation allowance   336    336 
Premises and equipment, net   11,898    11,779 
Bank owned life insurance   12,260    7,806 
Accrued interest receivable   4,793    4,943 
Other assets   6,442    6,846 
Total Assets  $715,621   $706,236 
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $245,582   $222,305 
Interest bearing   374,474    366,077 
Total deposits   620,056    588,382 
Long-term debt - trust preferred securities   8,764    8,764 
Subordinated debt, net   5,636    5,628 
Other borrowings   17,136    41,529 
Accrued interest payable   134    194 
Other liabilities   8,357    9,743 
Total liabilities   660,083    654,240 
Shareholders' equity          
Common stock, $4 par value, 10,000,000 shares authorized; 1,466,800 shares issued and outstanding at March 31, 2021 and 1,466,516 shares issued and outstanding at December 31, 2020   5,796    5,794 
Additional paid-in capital   54,593    54,510 
Accumulated deficit   (4,841)   (8,738)
Stock in directors rabbi trust   (730)   (771)
Directors deferred fees obligation   730    771 
Accumulated other comprehensive income (loss)   (10)   430 
Total shareholders' equity   55,538    51,996 
           
Total liabilities and shareholders' equity  $715,621   $706,236 

 

* 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 Months Ended March 31, 2021 and 2020
(Unaudited)
(in thousands, except per share data)

 

   Three Months Ended
March 31,
 
   2021   2020 
Interest income          
Loans  $6,778   $5,369 
Investment securities   250    270 
Federal funds sold   3    45 
Total interest income   7,031    5,684 
           
Interest expense          
Deposits   493    900 
Borrowed funds   162    357 
Total interest expense   655    1,257 
           
Net interest income   6,376    4,427 
Provision for loan losses   -    400 
Net interest income after provision for loan losses   6,376    4,027 
           
Noninterest income          
Service charges and fees   536    518 
Mortgage banking income, net   3,491    1,370 
Gain on sale of investment securities, net   -    12 
Gain on sale of Small Business Administration loans   -    86 
Other   143    74 
Total noninterest income   4,170    2,060 
           
Noninterest expense          
Salaries and benefits   3,421    3,022 
Occupancy   352    326 
Equipment   256    200 
Supplies   41    38 
Professional and outside services   691    716 
Advertising and marketing   118    78 
FDIC insurance premium   66    60 
Other operating expense   568    510 
Total noninterest expense   5,513    4,950 
           
Income before income tax expense   5,033    1,137 
Income tax expense   1,136    239 
           
Net income  $3,897   $898 
           
Earnings per share, basic  $2.66   $0.62 
Earnings per share, diluted  $2.66   $0.62 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
Three Months ended March 31, 2021 and 2020
(Unaudited)
(in thousands)

 

   Three Months Ended 
   March 31, 
   2021   2020 
Net income  $3,897   $898 
Other comprehensive income (loss)          
Unrealized holding gains (losses) arising during the period   (560)   384 
Tax effect   118    (81)
Net change in unrealized holding gains (losses) on securities available for sale, net of tax   (442)   303 
           
Reclassification adjustment          
Reclassification adjustment for gains realized in income   -    (12)
Tax effect   -    3 
Reclassification for gains included in net income, net of tax   -    (9)
           
Minimum pension adjustment   3    3 
Tax effect   (1)   (1)
Minimum pension adjustment, net of tax   2    2 
           
           
Total other comprehensive income (loss)   (440)   296 
Total comprehensive income  $3,457   $1,194 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Shareholders' Equity
Three Months Ended March 31, 2021 and 2020
(Unaudited)
(In thousands)
                             
                   Directors   Accumulated     
       Additional       Stock in   Deferred   Other     
   Common   Paid-in   Accumulated   Directors   Fees   Comprehensive     
   Stock   Capital   Deficit   Rabbi Trust   Obligation   Income (loss)   Total 
Balance, December 31, 2020  $5,794   $54,510   $(8,738)  $(771)  $771   $430   $51,996 
                                    
Restricted stock redemption   -    -    -    41    (41)   -    - 
Vesting of restricted stock   2    (2)   -    -    -    -    - 
Stock based compensation   -    85    -    -    -    -    85 
Net income   -    -    3,897    -    -    -    3,897 
Other comprehensive income (loss)   -    -    -    -    -    (440)   (440)
Balance, March 31, 2021   5,796    54,593    (4,841)   (730)   730    (10)   55,538 
                                    
Balance, December 31, 2019  $5,779   $54,285   $(17,292)  $(856)  $856   $142   $42,914 
                                    
Restricted stock redemption   -    -    -    85    (85)   -    - 
Vesting of restricted stock   -    -    -    -    -    -    - 
Stock based compensation   -    54    -    -    -    -    54 
Net income   -    -    898    -    -    -    898 
Other comprehensive income   -    -    -    -    -    296    296 
Balance, March 31, 2020  $5,779   $54,339   $(16,394)  $(771)  $771   $438   $44,162 

 

See accompanying notes to consolidated financial statements.          

 

6

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2021 and 2020
(Unaudited)
(in thousands)
     
   Three Months Ended 
   March 31, 
   2021   2020 
Cash Flows from Operating Activities          
Net income  $3,897   $898 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   142    149 
Amortization of debt issuance costs   8    9 
Deferred income taxes   (83)   239 
Provision for loan losses   -    400 
Gain on sale of investment securities   -    (12)
Gain on sale of Small Business Administration loans   -    (86)
Gain on sales of loans held for sale   (4,175)   (2,084)
Loss on sale and disposal of premises and equipment   10    - 
Stock compensation expense   85    54 
Proceeds from sale of mortgage loans   112,769    51,959 
Origination of mortgage loans held for sale   (91,204)   (54,372)
Amortization of premiums and accretion of discounts on securities, net   43    67 
Increase in bank owned life insurance   (46)   (45)
Net change in:          
Interest receivable   150    19 
Other assets   607    307 
Interest payable   (60)   (7)
Other liabilities   (1,386)   1,324 
Net cash provided by (used in) operating activities   20,757    (1,181)
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   (6,378)   (1,013)
Proceeds from the sale of available for sale securities   -    7,936 
Proceeds from maturities, calls and paydowns of available for sale securities   4,248    1,248 
Net increase in loans   (29,889)   (5,935)
Purchases of premises and equipment, net   (271)   (42)
Purchase of bank owned life insurance   (4,408)   - 
Redemptions (purchase) of restricted stock, net   131    (320)
Net cash (used in) provided by investing activities   (36,567)   1,874 
           
Cash Flows from Financing Activities          
Net increase in deposits   31,674    25,635 
Repayments of Federal Home Loan Bank advances   -    7,000 
Net decrease in other borrowings   (24,393)   (5,317)
Net cash provided by financing activities   7,281    27,318 
           
Net (decrease) increase in cash and cash equivalents   (8,529)   28,011 
Cash and cash equivalents, beginning of period   43,451    19,967 
           
Cash and cash equivalents, end of period  $34,922   $47,978 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $715   $1,264 
Supplemental Schedule of Non-Cash Activities          
Unrealized gains (losses) on securities available for sale  $(560)  $372 
Right of use assets obtained in exchange for new operating lease liabilities  $243   $- 
Minimum pension adjustment  $3   $3 

 

See accompanying notes to consolidated financial statements.

 

7

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(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 month period ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021. 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, 2020 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 per share data):

 

   Three Months Ended March 31, 
   2021   2020 
Numerator          
Net income - basic and diluted  $3,897   $898 
           
Denominator          
Weighted average shares outstanding - basic   1,467    1,454 
Dilutive effect of common stock options   -    - 
           
Weighted average shares outstanding - diluted  $1,467   $1,454 
           
Earnings per share – basic  $2.66   $0.62 
Earnings per share – diluted  $2.66   $0.62 

 

8

 

 

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.

 

The vesting of 6,238 and 4,155 at March 31, 2021 and 2020, respectively, of the unvested restricted units included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of March 31, 2021 and 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.

 

Note 4 – Investment securities available for sale

 

The amortized cost and fair value of investment securities available for sale as of March 31, 2021 and December 31, 2020 are as follows (in thousands):

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized     
   Cost   Gains   Losses   Fair Value 
March 31, 2021                    
U.S. Government agency obligations  $5,840   $66   $-   $5,906 
Mortgage-backed securities   26,931    482    (428)   26,985 
Municipals   1,283    -    (83)   1,200 
Subordinated debt   8,286    79    (85)   8,280 
                     
   $42,340   $627   $(596)  $42,371 
                     
December 31, 2020                    
U.S. Government agency obligations  $8,048   $94   $-   $8,142 
Mortgage-backed securities   23,412    645    (51)   24,006 
Subordinated debt   8,795    37    (136)   8,696 
                     
   $40,255   $776   $(187)  $40,844 

 

At March 31, 2021 and December 31, 2020, the Company had no investment securities pledged to secure borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”).

 

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

 

   Three Months 
   Ended March 31, 
   2021   2020 
Gross realized gains  $-   $39 
Gross realized losses   -    (27)
           
   $-   $12 

 

The Company sold approximately $7,900,000 of investment securities available for sale at a net gain of $12,000 in 2020. 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.

 

9

 

 

Investment securities available for sale that have an unrealized loss position at March 31, 2021 and December 31, 2020 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 
March 31, 2021                              
Mortgage-backed securities  $14,218   $(428)  $-   $-   $14,218   $(428)
Municipals   1,200    (83)   -    -    1,200    (83)
Subordinated debt   1,294    (10)   1,434    (75)   2,728    (85)
                               
   $16,712   $(521)  $1,434   $(75)  $18,146   $(596)
                               
December 31, 2020                              
Mortgage-backed securities  $5,475   $(51)  $-   $-   $5,475   $(51)
Subordinated debt   1,747    (11)   2,807    (125)   4,554    (136)
                               
   $7,222   $(62)  $2,807   $(125)  $10,029   $(187)

 

As of March 31, 2021, there were ten investments available for sale totaling $16,712,000 that were in a continuous loss position for less than 12 months and had an unrealized loss of $521,000. There were four investments available for sale totaling $1,434,000 that had been in a continuous loss position for more than 12 months and had an unrealized loss of $75,000.

 

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 March 31, 2021.

 

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2021, by contractual maturity, are as follows (in thousands):

 

   Amortized     
   Cost   Fair Value 
Less than one year  $4,007   $4,025 
One to five years   263    266 
Five to ten years   9,808    9,848 
More than ten years   28,262    28,232 
           
Total  $42,340   $42,371 

 

10

 

 

Note 5 – Loans and allowance for loan losses

 

Loans classified by type as of March 31, 2021 and December 31, 2020 are as follows (dollars in thousands):

 

   March 31, 2021   December 31, 2020 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $7,164    1.21%  $8,103    1.44%
Commercial   22,436    3.79%   21,466    3.82%
    29,600    5.00%   29,569    5.26%
Commercial real estate                    
Owner occupied   99,677    16.83%   99,784    17.79%
Non-owner occupied   125,202    21.14%   121,184    21.60%
Multifamily   9,086    1.53%   9,889    1.75%
Farmland   358    0.06%   367    0.07%
    234,323    39.56%   231,224    41.21%
Consumer real estate                    
Home equity lines   18,128    3.06%   18,394    3.28%
Secured by 1-4 family residential,                    
First deed of trust   58,028    9.80%   57,089    10.18%
Second deed of trust   10,661    1.80%   11,097    1.98%
    86,817    14.66%   86,580    15.44%
Commercial and industrial loans (except those secured by real estate)   209,381    35.36%   181,088    32.28%
Guaranteed student loans   29,062    4.91%   29,657    5.29%
Consumer and other   2,994    0.51%   2,885    0.52%
                     
Total loans   592,177    100.0%   561,003    100.0%
Deferred fees and costs, net   (3,311)        (2,048)     
Less: allowance for loan losses   (3,992)        (3,970)     
   $584,874        $554,985      

 

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.

 

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans were $159,769,000 as of March 31, 2021, which was the result of the origination of $68,852,000 in second round PPP loans offset by the forgiveness of $45,872,000 in first round PPP loans, during the quarter. PPP loans have provided essential funds to over 2,200 businesses and nonprofits and protected more than 28,000 jobs in our community. Below is a breakdown by loan size as of March 31, 2021 (dollars in thousands):

 

   Round 1   Round 2   Total 
Loan Size  # of Loans   $ of Loans   # of Loans   $ of Loans   # of Loans   $ of Loans 
< $350,000   1,484   $41,939    644   $42,685    2,128   $84,624 
$350,000 - $2 million   36    25,876    40    26,167    76    52,043 
> $2 million   6    23,102    -    -    6    23,102 
      Total   1,526   $90,917    684   $68,852    2,210   $159,769 

 

11

 

 

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $44,419,000 and $65,587,000 as of March 31, 2021 and December 31, 2020, 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):

 

   March 31,   December 31, 
   2021   2020 
Commercial real estate          
Non-owner occupied  $300   $303 
    300    303 
Consumer real estate          
Home equity lines   300    300 
Secured by 1-4 family residential          
First deed of trust   627    630 
Second deed of trust   303    317 
    1,228    1,247 
Commercial and industrial loans (except those secured by real estate)   25    27 
Total loans  $1,555   $1,577 

 

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 
March 31, 2021                         
Construction and land development                         
Residential  $7,164   $-   $-   $-   $7,164 
Commercial   22,343    93    -    -    22,436 
    29,507    93    -    -    29,600 
Commercial real estate                         
Owner occupied   88,027    7,999    3,651    -    99,677 
Non-owner occupied   120,271    4,244    687    -    125,202 
Multifamily   9,086    -    -    -    9,086 
Farmland   358    -    -    -    358 
    217,742    12,243    4,338    -    234,323 
Consumer real estate                         
Home equity lines   17,203    625    300    -    18,128 
Secured by 1-4 family residential                         
First deed of trust   54,764    2,132    1,132    -    58,028 
Second deed of trust   9,045    1,199    417    -    10,661 
    81,012    3,956    1,849    -    86,817 
Commercial and industrial loans (except those secured by real estate)   205,611    3,459    311    -    209,381 
Guaranteed student loans   29,062    -    -    -    29,062 
Consumer and other   2,955    39    -    -    2,994 
Total loans  $565,889   $19,790   $6,498   $-   $592,177 

 

   Risk Rated   Risk Rated   Risk Rated   Risk Rated   Total 
   1-4   5   6   7   Loans 
December 31, 2020                         
Construction and land development                         
Residential  $8,103   $-   $-   $-   $8,103 
Commercial   21,370    96    -    -    21,466 
    29,473    96    -    -    29,569 
Commercial real estate                         
Owner occupied   88,066    9,405    2,313    -    99,784 
Non-owner occupied   116,161    4,244    779    -    121,184 
Multifamily   9,889    -    -    -    9,889 
Farmland   367    -    -    -    367 
    214,483    13,649    3,092    -    231,224 
Consumer real estate                         
Home equity lines   17,298    796    300    -    18,394 
Secured by 1-4 family residential                         
First deed of trust   53,731    2,212    1,146    -    57,089 
Second deed of trust   9,425    1,236    436    -    11,097 
    80,454    4,244    1,882    -    86,580 
Commercial and industrial loans (except those secured by real estate)   178,217    2,602    269    -    181,088 
Guaranteed student loans   29,657    -    -    -    29,657 
Consumer and other   2,844    41    -    -    2,885 
Total loans  $536,336   $20,632   $5,243   $-   $561,003 

 

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 
March 31, 2021                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $7,164   $7,164   $- 
Commercial   -    -    -    -    22,436    22,436    - 
    -    -    -    -    29,600    29,600    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    99,677    99,677    - 
Non-owner occupied   -    -    -    -    125,202    125,202    - 
Multifamily   -    -    -    -    9,086    9,086    - 
Farmland   -    -    -    -    358    358    - 
    -    -    -    -    234,323    234,323    - 
Consumer real estate                                   
Home equity lines   559    -    -    559    17,569    18,128    - 
Secured by 1-4 family residential                                   
First deed of trust   375         -    375    57,653    58,028    - 
Second deed of trust   -    -    -    -    10,661    10,661    - 
    934    -    -    934    85,883    86,817    - 
Commercial and industrial loans (except those secured by real estate)   -    -    -    -    209,381    209,381    - 
Guaranteed student loans   712    673    2,504    3,889    25,173    29,062    2,504 
Consumer and other   -    -    -    -    2,994    2,994    - 
Total loans  $1,646   $673   $2,504   $4,823   $587,354   $592,177   $2,504 

 

                           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, 2020                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $8,103   $8,103   $- 
Commercial   -    -    -    -    21,466    21,466    - 
    -    -    -    -    29,569    29,569    - 
Commercial real estate                                   
Owner occupied   86    -    -    86    99,698    99,784    - 
Non-owner occupied   -    -    -    -    121,184    121,184    - 
Multifamily   -    -    -    -    9,889    9,889    - 
Farmland   -    -    -    -    367    367    - 
    86    -    -    86    231,138    231,224    - 
Consumer real estate                                   
Home equity lines   -    -    -    -    18,394    18,394    - 
Secured by 1-4 family residential                                   
First deed of trust   133         -    133    56,956    57,089    - 
Second deed of trust   -    57    -    57    11,040    11,097    - 
    133    57    -    190    86,390    86,580    - 
Commercial and industrial loans (except those secured by real estate)   25    -    -    25    181,063    181,088    - 
Guaranteed student loans   1,428    1,009    2,193    4,630    25,027    29,657    2,193 
Consumer and other   1    -    -    1    2,884    2,885    - 
Total loans  $1,673   $1,066   $2,193   $4,932   $556,071   $561,003   $2,193 

 

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, non-guaranteed 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):

 

   March 31, 2021   December 31, 2020 
       Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded                              
Commercial real estate                              
Owner occupied  $5,224   $5,239   $-   $2,780   $2,795   $- 
Non-owner occupied   1,895    1,895    -    1,991    1,991    - 
    7,119    7,134    -    4,771    4,786    - 
Consumer real estate                              
Home equity lines   300    300    -    300    300    - 
Secured by 1-4 family residential                              
First deed of trust   2,106    2,110    -    1,937    1,940    - 
Second deed of trust   742    1,035    -    699    992    - 
    3,148    3,445    -    2,936    3,232    - 
Commercial and industrial loans (except those secured by real estate)   202    202    -    141    141    - 
    10,469    10,781    -    7,848    8,159    - 
With an allowance recorded                              
Commercial real estate                              
Owner occupied   -    -    -    1,125    1,125    9 
    -    -    -    1,125    1,125    9 
Consumer real estate                              
Secured by 1-4 family residential                              
First deed of trust   152    152    8    74    74    8 
    152    152    8    74    74    8 
Commercial and industrial loans (except those secured by real estate)   -    -    -    -    -    - 
    152    152    8    1,199    1,199    17 
Total                              
Commercial real estate                              
Owner occupied   5,224    5,239    -    3,905    3,920    9 
Non-owner occupied   1,895    1,895    -    1,991    1,991    - 
    7,119    7,134    -    5,896    5,911    9 
Consumer real estate                              
Home equity lines   300    300    -    300    300    - 
Secured by 1-4 family residential,                              
First deed of trust   2,258    2,262    8    2,011    2,014    8 
Second deed of trust   742    1,035    -    699    992    - 
    3,300    3,597    8    3,010    3,306    8 
Commercial and industrial loans (except those secured by real estate)   202    202    -    141    141    - 
   $10,621   $10,933   $8   $9,047   $9,358   $17 

 

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 Ended March 31, 
   2021   2020 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development Commercial  $146   $-   $315   $- 
    146    -    315    - 
Commercial real estate                    
Owner occupied   3,849    58    2,696    29 
Non-owner occupied   1,921    30    2,324    32 
    5,770    88    5,020    61 
Consumer real estate                    
Home equity lines   300    8    363    4 
Secured by 1-4 family residential                    
First deed of trust   2,064    23    2,072    19 
Second deed of trust   762    11    740    14 
    3,126    42    3,175    37 
Commercial and industrial loans (except those secured by real estate)   162    -    646    - 
Consumer and other   -    -    1    - 
    9,204    130    9,157    98 
With an allowance recorded                    
Commercial real estate                    
Owner occupied   562    -    1,420    15 
Non-Owner occupied   -    -    -    - 
    562    -    1,420    15 
Consumer real estate                    
Secured by 1-4 family residential                    
First deed of trust   94    3    136    1 
Second deed of trust   26    -    78    - 
    120    3    214    1 
Commercial and industrial loans (except those secured by real estate)   84    -    162    6 
Consumer and other   -    -    4    - 
    766    3    1,800    22 
Total                    
Construction and land development Commercial  $146   $-   $315   $- 
    146    -    315    - 
Commercial real estate                    
Owner occupied   4,411    58    4,116    44 
Non-owner occupied   1,921    30    2,324    32 
    6,332    88    6,440    76 
Consumer real estate                    
Home equity lines   300    8    363    4 
Secured by 1-4 family residential,                    
First deed of trust   2,158    26    2,208    20 
Second deed of trust   788    11    818    14 
    3,246    45    3,389    38 
Commercial and industrial loans (except those secured by real estate)   246    -    808    6 
Consumer and other   -    -    5    - 
   $9,970   $133   $10,957   $120 

 

16

 

 

 

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

 

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

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
March 31, 2021                              
Commercial real estate                    
Owner occupied  $3,367   $3,367   $-   $- 
Non-owner occupied   1,895    1,595    300    - 
    5,262    4,962    300    - 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   1,717    1,171    546    8 
Second deeds of trust   606    545    61    - 
    2,323    1,716    607    8 
Commercial and industrial loans (except those secured by real estate)   25    -    25    - 
   $7,610   $6,678   $932   $8 
                     
Number of loans   35    28    7    2 

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2020                    
Commercial real estate                    
Owner occupied  $3,396   $3,396   $-   $9 
Non-owner occupied   1,991    1,688    303    - 
    5,387    5,084    303    9 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   1,460    910    550    8 
Second deeds of trust   617    556    61    - 
    2,077    1,466    611    8 
Commercial and industrial loans (except those secured by real estate)   27    -    27    - 
   $7,491   $6,550   $941   $17 
                     
Number of loans   34    27    7    2 

 

17

 

 

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

 

   Three Months Ended   Three Months Ended 
   March 31, 2021   March 31, 2020 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
   Number of   Recorded   Recorded   Number of   Recorded   Recorded 
   Loans   Balance   Balance   Loans   Balance   Balance 
Secured by 1-4 family residential                              
First deed of trust   1   $267   $267    -   $     -   $      - 
                               
    1   $267   $267    -   $-   $- 

 

There were no defaults on TDR’s that were modified as TDRs during the prior 12 month period ended March 31, 2021 and 2020.

 

The CARES Act, as amended by the Consolidated Appropriations Act 2021 (“CAA”), permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. As of March 31, 2021 and December 31, 2020, the Company had approximately $19.0 million and $38.0 million in loans still under their modified terms, respectively. The Company’s modification program primarily included payment deferrals and interest only modifications.

 

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 March 31, 2021                         
Construction and land development                         
Residential  $214   $(114)  $-   $-   $100 
Commercial   285    (117)   -    -    168 
    499    (231)   -    -    268 
Commercial real estate                         
Owner occupied   1,047    (148)   -    -    899 
Non-owner occupied   1,421    (135)   -    -    1,286 
Multifamily   47    (9)   -    -    38 
Farmland   2    (1)   -    -    1 
    2,517    (293)   -    -    2,224 
Consumer real estate                         
Home equity lines   24    (9)   -    -    15 
Secured by 1-4 family residential                         
First deed of trust   166    (21)   -    1    146 
Second deed of trust   79    (26)   -    14    67 
    269    (56)   -    15    228 
Commercial and industrial loans (except those secured by real estate)   408    (13)   -    15    410 
Student loans   87    (3)   (8)   -    76 
Consumer and other   36    2    -    -    38 
Unallocated   154    594    -    -    748 
                          
   $3,970   $-   $(8)  $30   $3,992 

 

18

 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
Three Months Ended March 31, 2020                         
Construction and land development                         
Residential  $48   $170   $-   $1   $219 
Commercial   137    133    -    -    270 
    185    303    -    1    489 
Commercial real estate                         
Owner occupied   671    188    -    -    859 
Non-owner occupied   831    227    -    -    1,058 
Multifamily   85    (17)   -    -    68 
Farmland   2    (1)   -    -    1 
    1,589    397    -    -    1,986 
Consumer real estate                         
Home equity lines   271    (231)   -    -    40 
Secured by 1-4 family residential                         
First deed of trust   343    (189)   -    3    157 
Second deed of trust   64    8    -    4    76 
    678    (412)   -    7    273 
Commercial and industrial loans (except those secured by real estate)   572    (31)   (135)   3    409 
Student loans   108    16    (20)   -    104 
Consumer and other   30    9    (1)   3    41 
Unallocated   24    118    -    -    142 
                          
   $3,186   $400   $(156)  $14   $3,444 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
Year Ended December 31, 2020                         
Construction and land development                         
Residential  $48   $141   $-   $25   $214 
Commercial   137    148    -    -    285 
    185    289    -    25    499 
Commercial real estate                         
Owner occupied   671    376    -    -    1,047 
Non-owner occupied   831    590    -    -    1,421 
Multifamily   85    (38)   -    -    47 
Farmland   2    -    -    -    2 
    1,589    928    -    -    2,517 
Consumer real estate                         
Home equity lines   271    (247)   -    -    24 
Secured by 1-4 family residential                         
First deed of trust   343    (190)   -    13    166 
Second deed of trust   64    45    (85)   55    79 
    678    (392)   (85)   68    269 
Commercial and industrial loans (except those secured by real estate)   572    (58)   (135)   29    408 
Student loans   108    27    (48)   -    87 
Consumer and other   30    26    (24)   4    36 
Unallocated   24    130    -    -    154 
                          
   $3,186   $950   $(292)  $126   $3,970 

 

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. Loans originated under PPP are not considered in the evaluation of the allowance for loan losses because these loans carry a 100% guarantee from the SBA; however, if the collectability on the guarantee on a loan is at risk that loan will be included in the evaluation of the allowance for loan losses.

 

19

 

 

 

The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management’s continuing evaluation of industry concentrations, specific credit risk, loan loss experience, current loan portfolio quality, and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgement, should be charged off. While management utilizes its best judgement and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

 

The Company did not record a provision for the three months ended March 31, 2021. The lack of a provision expense for the three months ended March 31, 2021 was because of a reduction in the qualitative factors which was driven by improving economic factors as the vaccine rollout continues, improved credit metrics, and reductions in loan deferrals. The Company recorded a provision for loan losses of $400,000 for the three month period ended March 31, 2020 as a result of growth in the loan portfolio, an increase in the historical loan loss experience and an increase in the qualitative factors due to the anticipated economic impact of COVID-19. The increase in the qualitative factors due to COVID-19 were a result of deterioration in local economic factors such as the higher levels of unemployment and the increased credit risk due to loan payment deferrals under the CARES Act. The Company believes the current level of allowance for loan loss reserves are adequate to cover inherent losses in the portfolio. However, the full economic impact of the COVID-19 pandemic is currently unknown and the Company will continue to monitor our loan portfolio for loss indicators which may have the potential for further provisions for loan losses through 2021 and beyond.

 

The allowance for loan losses at each of the periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and the variability related to the factors used in calculation of the allowance. The allowance for loan losses included an unallocated portion of approximately $748,000, $154,000, and $142,000 at March 31, 2021, December 31, 2020, and March 31, 2020, respectively.

 

20

 

 

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

 

   Recorded Investment in Loans 
   Allowance   Loans 
   Ending           Ending         
   Balance   Individually   Collectively   Balance   Individually   Collectively 
Three Months March 31, 2021                              
Construction and land development                              
Residential  $100   $-   $100   $7,164   $-   $7,164 
Commercial   168    -    168    22,436    -    22,436 
    268    -    268    29,600    -    29,600 
Commercial real estate                              
Owner occupied   899    -    899    99,677    5,224    94,453 
Non-owner occupied   1,286    -    1,286    125,202    1,895    123,307 
Multifamily   38    -    38    9,086    -    9,086 
Farmland   1    -    1    358    -    358 
    2,224    -    2,224    234,323    7,119    227,204 
Consumer real estate                              
Home equity lines   15    -    15    18,128    300    17,828 
Secured by 1-4 family residential                              
First deed of trust   146    8    138    58,028    2,258    55,770 
Second deed of trust   67    -    67    10,661    742    9,919 
    228    8    220    86,817    3,300    83,517 
                               
Commercial and industrial loans (except those secured by real estate)   410    -    410    209,381    202    209,179 
Student loans   76    -    76    29,062    -    29,062 
Consumer and other   786    -    786    2,994    -    2,994 
                               
   $3,992   $8   $3,984   $592,177   $10,621   $581,556 
                               
Year Ended December 31, 2020                              
Construction and land development                              
Residential  $214   $-   $214   $8,103   $-   $8,103 
Commercial   285    -    285    21,466    -    21,466 
    499    -    499    29,569    -    29,569 
Commercial real estate                              
Owner occupied   1,047    9    1,038    99,784    3,905    95,879 
Non-owner occupied   1,421    -    1,421    121,184    1,991    119,193 
Multifamily   47    -    47    9,889    -    9,889 
Farmland   2    -    2    367    -    367 
    2,517    9    2,508    231,224    5,896    225,328 
Consumer real estate                              
Home equity lines   24    -    24    18,394    300    18,094 
Secured by 1-4 family residential                              
First deed of trust   166    8    158    57,089    2,011    55,078 
Second deed of trust   79    -    79    11,097    699    10,398 
    269    8    261    86,580    3,010    83,570 
                               
Commercial and industrial loans (except those secured by real estate)   408    -    408    181,088    141    180,947 
Student loans   87    -    87    29,657    -    29,657 
Consumer and other   190    -    190    2,885    -    2,885 
                               
   $3,970   $17   $3,953   $561,003   $9,047   $551,956 

 

21

 

 

Note 6 – Deposits

 

Deposits as of March 31, 2021 and December 31, 2020 were as follows (dollars in thousands):

 

   March 31, 2021   December 31, 2020 
   Amount   %   Amount   % 
Demand accounts  $245,582    39.6%  $222,305    37.8%
Interest checking accounts   71,949    11.5%   70,342    11.9%
Money market accounts   164,689    26.6%   152,726    26.0%
Savings accounts   44,638    7.2%   38,083    6.5%
Time deposits of $250,000 and over   15,238    2.5%   16,014    2.7%
Other time deposits   77,960    12.6%   88,912    15.1%
                     
Total  $620,056    100.0%  $588,382    100.0%

 

Note 7 – Borrowings

 

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

 

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $353,000 in FHLB stock at March 31, 2021 and $484,000 at December 31, 2020, which is held at cost. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings are secured by the pledge of commercial, 1-4 family residential loans. The Company had no outstanding FHLB advances at March 31, 2021 or December 31, 2020.

 

Through the Federal Reserve Bank of Richmond, the Company can borrow funds through the Paycheck Protection Program Liquidity Fund (“PPPLF”), which are secured by the Company’s PPP loans. The Company had $17.1 million and $41.5 million in outstanding advances under the PPPLF at March 31, 2021 and December 31, 2020, respectively. The Company’s available borrowing capacity under the PPPLF was $142.6 million and $95.2 million as of March 31, 2021 and December 31, 2020, respectively.

 

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. There were no borrowings against the lines at March 31, 2021.

 

The Company’s unused lines of credit for future borrowings total approximately $75.5 million at March 31, 2021, which consists of $32.7 million available from the FHLB, $10 million on revolving bank line of credit, $7.8 million under secured federal funds agreements with third party financial institutions, and $25 million in repurchase lines of credit with third party financial institutions. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank of Richmond or the FHLB above the current lendable collateral value.

 

22

 

 

Note 8 – Trust preferred securities

 

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a floating rate of interest indexed to the London InterBank Offered Rate (“LIBOR”) (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at March 31, 2021 was 2.34%. 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 March 31, 2021 and there are no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

 

During the third quarter of 2007, Village Financial Statutory Trust II, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at March 31, 2021 was 1.59%. 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 March 31, 2021 and there are no plans to do so. The principal asset of the Trust is $3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

 

The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the Trust Preferred Capital Notes not considered as Tier 1 capital may be included in Tier 2 capital.

 

The obligations of the Company with respect to the issuance of the Trust Preferred Capital Notes constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the Trust Preferred Capital Notes. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related Trust Preferred Capital Notes and require a deferral of common dividends. The Company is current on these interest payments.

 

Note 9 – Subordinated Debt

 

On March 21, 2018, the Company issued $5,700,000 of fixed-to-floating rate subordinated notes due March 31, 2028 in a private placement. The Company received $5,539,000 in net proceeds after deducting issuance costs. The subordinated notes accrue interest at a fixed rate of 6.50% for the first five years until March 31, 2023; thereafter, the subordinated notes will accrue interest at an annual floating rate equal to three-month LIBOR plus a spread of 3.73% until maturity or early redemption. The Company may redeem the subordinated notes in whole or in part, on or after March 31, 2023. The subordinated notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior indebtedness, whether secured or unsecured, including claims of depositors and general creditors, and rank equally in right of payment with any unsecured, subordinated indebtedness that the Company may incur in the future. The carrying value of the notes totaled $5,636,000 and $5,628,000 at March 31, 2021 and December 31, 2020, respectively.

 

23

 

 

Note 10 – Stock incentive plan

 

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

 

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

 

   Three Months Ended March 31, 
   2021   2020 
       Weighted               Weighted         
       Average               Average         
       Exercise   Fair Value   Intrinsic       Exercise   Fair Value   Intrinsic 
   Options   Price   Per Share   Value   Options   Price   Per Share   Value 
Options outstanding, beginning of period   734   $25.63   $9.76         734   $25.63   $9.76      
Granted   -    -    -         -    -    -      
Forfeited   -    -    -         -    -    -      
Exercised   -    -    -         -    -    -      
Options outstanding, end of period   734   $25.63   $9.76   $         -    734   $25.63   $9.76   $         - 
Options exercisable, end of period   734                   734                

 

During 2020, we granted certain officers time-based restricted shares of common stock and performance-based restricted stock units. The time-based restricted shares vest ratably over a three year period provided the officer is employed with the Company on the applicable vesting date. The performance-based units, which have a two-year performance period that began on January 2, 2021, vest based on the Company’s achievement of performance targets related to return on tangible common equity and the adversely classified items ratio over the performance period with possible payouts ranging from 0% to 150% of the target awards.

 

The total number of shares underlying non-vested restricted stock was 24,244 and 13,060 at March 31, 2021 and 2020, 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 non-vested share-based compensation arrangements granted under the stock incentive plan as of March 31, 2021 and 2020 was $500,000 and $347,000, respectively. The time-based unrecognized compensation of $402,600 is expected to be recognized over a weighted average period of 2.05 years. For the periods ended March 31, 2021 and 2020, there were no forfeitures of restricted stock and restricted stock units.

 

A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the three months ended March 31, 2021 follows:

 

   Shares   Weighted-
Average
Grant-Date
Fair-Value
   Aggregate
Intrinsic Value
 
December 31, 2020   24,829   $30.85   $993,160 
Granted   -    -    - 
Vested   (754)   36.86    (30,160)
Forfeited   -    -    - 
Other   169    33.82    6,760 
                
March 31, 2021   24,244   $30.68   $969,760 

 

24

 

 

 

Stock-based compensation expense was approximately $85,000 and $54,000 for the three months ended March 31, 2021 and 2020, respectively.

 

Note 11 — Fair value

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Impaired loans: The Company does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered impaired and an allowance for loan losses is established. The Company measures impairment either based on the fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. The Company maintains a valuation allowance to the extent that this measure of the impaired loan is less than the recorded investment in the loan. When an impaired loan is measured at fair value based solely on observable market prices or a current appraisal without further adjustment for unobservable inputs, the Company records the impaired loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to observed market prices or appraisals are required or if observable inputs are not available, the Company records the impaired loan as a nonrecurring fair value measurement classified as Level 3. Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest, are not recorded at fair value and are therefore excluded from fair value disclosure requirements

 

25

 

 

Loans held for sale: Fair value of the Company's loans held for sale is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company's portfolio of loans held for sale is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

 

Derivative asset – IRLCs: The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company's IRLCs are classified as Level 2.

 

Derivative asset/liability – forward sale commitments: Best efforts sale commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All of the Company’s forward sale commitments are classified as Level 2.

 

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

 

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

 

26

 

 

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

 

   Fair Value Measurement 
   at March 31, 2021 Using 
       Quoted Prices         
       in Active   Other   Significant 
       Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets - Recurring                    
US Government Agencies  $5,906   $-   $5,906   $- 
Mortgage-backed securities   26,985    -    26,985    - 
Municipals   1,200                
Subordinated debt   8,280    -    8,030    250 
Loans held for sale   17,031                  -    17,031                       - 
IRLC   357    -    357    - 
                     
Financial Liabilities - Recurring                    
Forward sales commitment   1,309    -    1,309    - 
                     
Financial Assets - Non-Recurring                    
Other real estate owned   336    -    -    336 

 

   Fair Value Measurement 
   at December 31, 2020 Using 
       Quoted Prices         
       in Active   Other   Significant 
       Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets – Recurring                    
US Government Agencies  $8,142   $                 -   $8,142   $                              - 
Mortgage-backed securities   24,006    -    24,006    - 
Subordinated debt   8,696    -    8,446    250 
Loans held for sale   34,421    -    34,421    - 
IRLC   1,552    -    1,552    - 
                     
Financial Liabilities - Recurring                    
Forward sales commitment   3,105    -    3,105    - 
                     
Financial Assets - Non-Recurring                    
Other real estate owned   336    -    -    336 

 

27

 

 

The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at March 31, 2021 and December 31, 2020 (dollars in thousands):

 

   March 31, 2021 
             Range 
   Fair Value   Valuation  Unobservable  (Weighted 
   Estimate   Techniques  Input  Average) 
Other real estate owned  $336   Appraisal (1) or
Internal Valuation (2)
  Selling costs   6%-10% (7%) 

 

 

 

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not identifiable
(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances.

 

   December 31, 2020 
             Range 
   Fair Value   Valuation  Unobservable  (Weighted 
   Estimate   Techniques  Input  Average) 
Other real estate owned  $          336   Appraisal (1) or
Internal Valuation (2)
  Selling costs   6%-10% (7%) 

 

 

 

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not identifiable.
(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances.

 

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

 

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

 

      March 31,   December 31, 
      2021   2020 
   Level in Fair                
   Value  Carrying   Estimated   Carrying   Estimated 
   Hierarchy  Value   Fair Value   Value   Fair Value 
                    
   (In thousands)
Financial assets                       
Cash  Level 1  $24,252   $24,252   $12,709   $12,709 
Cash equivalents  Level 2   10,670    10,670    30,742    30,742 
Investment securities available for sale  Level 1   -    -    1,193    1,193 
Investment securities available for sale  Level 2   42,121    42,121    39,401    39,401 
Investment securities available for sale  Level 3   250    250    250    250 
Federal Home Loan Bank stock  Level 2   484    484    484    484 
Loans held for sale  Level 2   17,031    17,031    34,421    34,421 
Loans  Level 3   592,178    592,997    561,003    562,362 
Other real estate owned  Level 3   336    336    336    336 
Bank owned life insurance  Level 3   12,260    12,260    7,806    7,806 
Accrued interest receivable  Level 2   4,793    4,793    4,943    4,943 
Interest rate lock commitments  Level 2   357    357    1,552    1,552 
                        
Financial liabilities                       
Deposits  Level 2   620,056    620,559    588,382    589,017 
Trust preferred securities  Level 2   8,764    9,697    8,764    9,697 
Other borrowings  Level 2   22,772    22,772    47,157    47,157 
Accrued interest payable  Level 2   134    134    194    194 
Forward sales commitment  Level 2   1,309    1,309    3,105    3,105 

 

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Note 12 – Segment Reporting

 

The Company has two reportable segments: traditional commercial banking and mortgage banking. Revenues from commercial banking operations consist primarily of interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income.

 

The commercial banking segment provides the mortgage banking segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the commercial banking segment’s cost of funds. Additionally, the mortgage banking segment leases premises from the commercial banking segment. These transactions are eliminated in the consolidation process.

 

The following table presents segment information as of and for the three months ended March 31, 2021 and 2020 (in thousands):

 

   Commercial   Mortgage       Consolidated 
   Banking   Banking   Eliminations   Totals 
Three Months Ended March 31, 2021                    
                     
Revenues                    
Interest income  $6,918   $135   $(22)  $7,031 
Gain on sale of loans   -    4,174    -    4,174 
Other revenues   724    228    (45)   907 
Total revenues   7,642    4,537    (67)   12,112 
                     
Expenses                    
Interest expense   655    22    (22)   655 
Salaries and benefits   2,146    1,275    -    3,421 
Commissions   -    890    -    890 
Other expenses   1,843    315    (45)   2,113 
Total operating expenses   4,644    2,502    (67)   7,079 
                     
Income before income taxes   2,998    2,035    -    5,033 
Income tax expense   709    427    -    1,136 
Net income  $2,289   $1,608   $-   $3,897 
                     
Total assets  $715,837   $18,019   $(18,235)  $715,621 

 

   Commercial   Mortgage       Consolidated 
   Banking   Banking   Eliminations   Totals 
Three Months Ended March 31, 2020                    
                     
Revenues                    
Interest income  $5,590   $109   $(15)  $5,684 
Gain on sale of loans   -    1,624    -    1,624 
Other revenues   733    197    (57)   873 
Total revenues   6,323    1,930    (72)   8,181 
                     
Expenses                    
Provision for loan losses   400    -    -    400 
Interest expense   1,257    15    (15)   1,257 
Salaries and benefits   2,208    814    -    3,022 
Commissions   -    437    -    437 
Other expenses   1,709    276    (57)   1,928 
Total operating expenses   5,574    1,542    (72)   7,044 
                     
Income before income taxes                    
Income tax expense   749    388    -    1,137 
Net income   158    81    -    239 
   $591   $307   $-   $898 
Total assets  $570,751   $12,433   $(12,979)  $570,205 

 

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Note 13 – Shareholders’ Equity and Regulatory Matters

 

Accumulated Other Comprehensive Income

 

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of $(3,000) and $14,000 as of March 31, 2021 and December 31, 2020, respectively (in thousands):

 

   March 31,   December 31, 
   2021   2020 
Net unrealized gains on securities  $24   $466 
Net unrecognized losses on defined benefit plan   (34)   (36)
Total accumulated other comprehensive (loss) income  $(10)  $430 

 

Regulatory Matters

 

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

 

The Basel III Capital Rules require banks to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress.  Banking organizations with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of March 31, 2021, the Bank exceeded the minimum ratios under the Basel III Capital Rules.

 

The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act of 1950. To be well capitalized under these regulations, a bank must have the following minimum capital ratios: (1) a common equity Tier 1 capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least 8.0%; (3) a total risk-based capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%. As of March 31, 2021, the Bank exceeded the minimum ratios to be classified as well capitalized.

 

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On September 17, 2019, the federal bank regulators issued a final rule required by the EGRRCPA that permits qualifying banks and bank holding companies that have less than $10 billion of assets, like the Company and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or “CBLR”). Under the rule, which became effective January 1, 2020, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework. In April 2020, as required by the Coronavirus Aid, Relief, and Economic Security Act, which was passed in response to the COVID-19 pandemic, federal bank regulators issued two interim final rules related to the CBLR framework. One interim final rule provides that, as of the second quarter of 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. The Bank elected not to opt into the CBLR framework as of March 31, 2021 and December 31, 2020.

 

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The capital amounts and ratios at March 31, 2021 and December 31, 2020 for the Bank are presented in the table below (dollars in thousands):

 

           For Capital         
   Actual   Adequacy Purposes   To be Well Capitalized 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
March 31, 2021                              
Total capital (to risk- weighted assets) Village Bank  $69,616    14.85%  $37,515    8.00%  $46,894    10.00%
                               
Tier 1 capital (to risk- weighted assets) Village Bank   65,624    13.99%   28,136    6.00%   37,515    8.00%
                               
Leverage ratio (Tier 1 capital to average assets) Village Bank   65,624    9.68%   27,124    4.00%   33,905    5.00%
                               
Common equity tier 1 (to risk- weighted assets) Village Bank   65,624    13.99%   21,102    4.50%   30,481    6.50%
                               
December 31, 2020                              
Total capital (to risk- weighted assets) Village Bank  $65,723    14.20%  $37,015    8.00%  $46,269    10.00%
                               
Tier 1 capital (to risk- weighted assets) Village Bank   61,753    13.35%   27,761    6.00%   37,015    8.00%
                               
Leverage ratio (Tier 1 capital to average assets) Village Bank   61,753    9.28%   26,607    4.00%   33,259    5.00%
                               
Common equity tier 1 (to risk- weighted assets) Village Bank   61,753    13.35%   20,821    4.50%   30,075    6.50%

 

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Note 14 – Commitments and contingencies

 

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

 

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

 

At March 31, 2021 and December 31, 2020, the Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

 

   March 31,   December 31, 
   2021   2020 
Undisbursed credit lines  $111,349   $107,130 
Commitments to extend or originate credit   32,275    38,910 
Standby letters of credit   4,771    4,934 
           
Total commitments to extend credit  $148,395   $150,974 

 

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

 

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

 

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

 

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Note 15 – Mortgage Banking and Derivatives

 

Loans held for sale. The Company, through the Bank’s mortgage banking subsidiary, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. During the first quarter of 2020, the Company elected to begin using fair value accounting for its entire portfolio of loans held for sale (“LHFS”) in accordance with ASC 820 - Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business and totaled $17.0 million as of March 31, 2021, of which $16.8 million is related to unpaid principal and totaled $34.4 million as of December 31, 2020, of which $32.9 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

 

Interest Rate Lock Commitments and Forward Sales Commitments. The Company, through the Bank’s mortgage banking subsidiary, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments (“IRLCs”). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment). The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation.  The Company determines the fair value of IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at March 31, 2021, and totaled $981,000, with a notional amount of $32.3 million and total positions of 141 and was reported in “Other Assets” at December 31, 2020, and totaled $1.6 million, with a notional amount of $38.9 million and total positions of 150.. Changes in fair value are recorded as a component of mortgage banking income, net in the Consolidated Income Statement for the period ended March 31, 2021. The Company’s IRLCs are classified as Level 2. At March 31, 2021 and December 31, 2020, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

 

The Company has elected to begin using fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales commitments is reported in “Other Liabilities” in the Consolidated Balance Sheet at March 31, 2021, and totaled $1.3 million, with a notional amount of $47.8 million and total positions of 219 and was reported in “Other Liabilities” at December 31, 2020, and totaled $3.1 million, with a notional amount of $71.7 million and total positions of 289.

 

Note 16 – Recent accounting pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. While the Company is currently evaluating the provisions of ASU 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. The Company is currently assessing the impact that ASU 2016-13 will have on the Company’s consolidated financial statements.

 

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

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. ASU 2019-12 was effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements.

 

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2020-01 amends ASU 2016-01, which made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments in ASU 2020-01 clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. ASU 2020-01 was effective for the Company on January 1, 2021. The adoption of ASU 2020-01 did not have a material impact on the Company’s consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 20201, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has a team to assess ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

 

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In August 2020, the FASB issued ASU 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, including the Company, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

 

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. ASU 2020-08 was effective for the Company on January 1, 2021. The adoption of ASU 2020-08 did not have a material impact on the Company’s consolidated financial statements.

 

In December 2020, the CAA was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. As of March 31, 2021, the Company had approximately $19.0 million in loans still under their CAA modified terms. The Company’s modification program primarily included payment deferrals and interest only modifications. For more financial data and other information about loan deferrals refer to Note 5 “Loans and allowance for loan losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

 

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

 

Caution about forward-looking statements

 

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

 

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

 

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

 

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·adverse effects due to COVID-19 on the Company and its customers, counterparties, employees, and third-party service providers, and the adverse impacts to our business, financial position, results of operations, and prospects;
·changing trends in customer profiles and behavior; and
·other factors described from time to time in our reports filed with the SEC.

 

These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.  In addition, past results of operations are not necessarily indicative of future results.

 

General

 

The Company’s primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Company is not able to predict market interest rate fluctuations and its asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on the Company’s results of operations and financial condition.

 

Although we endeavor to minimize the credit risk inherent in the Company’s loan portfolio, we must necessarily make various assumptions and judgments about the collectability of the loan portfolio based on our experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for loan losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income.

 

Continued Response to COVID-19

 

We are starting to see signs of hope and recovery in both the economy and our customers. Our level of loan deferrals has decreased considerably as the economy continues to strengthen and an increasing percentage of our community is vaccinated. We returned our branches to full lobby access on April 19, 2021. With the continued uncertainty around COVID-19, we continue to take the necessary measures to protect the health and wellbeing of our employees and customers as well as working with our borrowers who continue to be impacted by the COVID-19 pandemic. We believe that we are well positioned to weather the remnants of the economic storm created by the COVID-19 pandemic.

 

Small Business Administration Paycheck Protection Program

 

PPP loans were $159,769,000 as of March 31, 2021 which was the result of the origination of $68,852,000 in second round PPP loans offset by the forgiveness of $45,872,000 in first round PPP loans. PPP loans have provided essential funds to over 2,200 businesses and nonprofits and protected more than 28,000 jobs in our community. Below is a breakdown by loan size as of March 31, 2021 (dollars in thousands):

 

PPP loans as of March 31, 2021
   Round 1   Round 2 
Dollars Approved  $185,137   $68,852 
Number Approved   1,526    684 
Average Loan Size  $122,768   $100,661 
% of Loans < $50,000   55%   57%
First Draw Round-2          
Amount of Loans   N/A   $3,105 
Number of Loans   N/A    101 
Forgiveness          
SBA Approved  $12,730    N/A 
Payment Received  $93,731    N/A 

 

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As of April 18, 2021, approximately $133,528,000, or 72%, in PPP round one loans had received SBA approval for forgiveness and the Bank had originated 790 PPP round two loans for a total of approximately $76,390,000.

 

Supporting customers through payment deferrals

 

Deferred loan balances continued to decrease during the three month period ended March 31, 2021, and are down significantly since their peak as of September 30, 2020. We continue to work with our customers that have been severely impacted by the COVID-19 pandemic and when necessary have moved forward on additional payment modifications, as permitted under the CARES Act.

 

Below is a breakdown of the loan portfolio showing the percentage of loans whose deferral periods have not ended or have been extended at the dates indicated (dollars in thousands):

 

   Balance   March 31, 2021   December 31, 2020 
   March 31,   Deferred Loans(2)   Deferred Loans(2) 
Loan Type  2021(1)   $ Def   % Def   $ Def   % Def 
C&I + Owner occupied commercial real estate  $149,289   $14,334    9.60%  $8,988    6.02%
Nonowner occupied commercial real estate   134,646    3,651    2.71%   26,835    19.93%
Acquisition, development and construction   29,600    -    0.00%   -    0.00%
Total commercial loans   313,535    17,984    5.74%   35,823    11.43%
Consumer/Residential   86,817    1,050    1.21%   2,205    2.54%
Student   29,062    -    0.00%   -    0.00%
Other   2,994    -    0.00%   -    0.00%
Total loans  $432,408   $19,034    4.40%  $38,028    8.79%

           
(1) The table excludes PPP Loans of $159,769 as the inclusion of these loans dilutes the impact of the deferral program.
(2) Effective January 19, 2021, the SBA provided guidance on the implementation of the extension of the Section 1112 Debt Relief Program for the 7(a) loan program as authorized by Section 325 of the Economic Aid to Hard-Hit Small Business, Nonprofits, and Venues Act. The SBA will pay the principal, interest, and fees on current 7(a) loans for a period of up to eight months. These loans have been excluded from the March 31, 2021 metrics; however, as of December 31, 2020, six loans with a total outstanding balance of $3,407,000 went into a deferred payment status and were included in the deferred loan amount above.

 

The hotel segment, which represents approximately 67% of total deferrals, has a weighted average loan to value of approximately 45%. The low loan to value on the hotel segment supports a lower breakeven point on occupancy which will allow these borrowers to return to amortizing terms. Early indicators suggest that occupancy rates are starting to improve and we anticipate all of our hotels will return to contractual debt service payments without an in-place modification or support from their sponsors by the end of the second quarter.

 

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Below is a breakdown of the loan portfolio showing the percentage of loans in deferral within select industry categories at the dates indicated (dollars in thousands):

 

   Balance   March 31, 2021   December 31, 2020 
   March 31,   Deferred Loans(1)   Deferred Loans(1) 
Select Industries  2021   $ Def   Amount   $ Def   Amount 
Hotels  $29,718   $12,702    42.74%  $24,979    84.05%
Food Service   20,300    654    3.22%   606    2.99%
Retail(2)   20,273    3,235    15.96%   3,782    18.66%
Medical and Child Care   12,149    -    0.00%   -    0.00%
Real Estate and Leasing   147,103    -    0.00%   2,833    1.93%
Arts and Entertainment   7,602    1,944    25.57%   2,024    26.62%
Total  $237,145   $18,535    7.82%  $34,224    14.43%

 

(1)Effective January 19, 2021, the SBA provided guidance on the implementation of the extension of the Section 1112 Debt Relief Program for the 7(a) loan program as authorized by Section 325 of the Economic Aid to Hard-Hit Small Business, Nonprofits, and Venues Act. The SBA will pay the principal, interest, and fees on current 7(a) loans for a period of up to eight months. These loans have been excluded from the March 31, 2021 metrics; however, as of December 31, 2020, six loans with a total outstanding balance of $3,407,000 went into a deferred payment status and were included in the deferred loan amount above.
(2) Loans within this group include business such as grocery, convenience stores, drug stores, consumer durables, apparel, and personal services.

 

Liquidity Risk Management

 

The Company funds the balance sheet with core deposits and reserves wholesale funding capacity for short periods of rapid loan growth or for crises such as the current economic environment.

 

During the three month period ended March 31, 2020, the Company took aggressive measures to bolster its liquidity to ensure it could meet customer demands in the event customers made significant deposit withdrawals and fully drew on lines of credit. The Company increased liquid assets by $20,155,000, or 30.12% from $66,904,000 at December 31, 2019 to $87,059,000 at March 31, 2020 which was partially accomplished by raising an additional $3,733,000 in internet listing service time deposits, $15,000,000 in FHLB advances and $6,136,000 in brokered time deposits.

 

From March 31, 2020 through March 31, 2021, the Company did not experience excessive demand for deposit withdrawals or advances under lines of credit; however, the Company did experience significant growth in low cost relationship deposits (i.e. noninterest bearing, NOW, money market and savings). This growth in low cost relationship deposits was the result of the Company converting a significant portion of non-customer round one and round two PPP loan applicants into customers and the migration of customer funds from time deposits into money market deposits during the periods. During this period, the Company strategically acquired funds through the Federal Reserve’s PPPLF to support the origination of PPP loans in a way to minimize the negative arbitrage of carrying excess liquidity.

 

As of March 31, 2021, the Company had on balance sheet liquid assets of $77,293,000 which the Company believes are sufficient to cover its current liquidity needs. However, if the need were to arise the Company could access liquidity of approximately $142,633,000 in the PPPLF through June 30, 2021, it could pledge additional collateral to the FHLB in order to increase its available borrowing capacity up to 25% of assets, it could access the two federal funds lines of credit with correspondent banks totaling $15,000,000 for which there were no borrowings against the lines at March 31, 2021 and it could add additional funding through raising internet listing service and brokered time deposits.

 

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Capital Risk Management

 

The Bank maintains a strong, well-capitalized position with a common equity Tier 1 capital ratio of 13.99%, a Tier 1 risk-based capital ratio of 13.99%, a total risk-based capital ratio of 14.85% and a leverage ratio of 9.68% as of March 31, 2021. The most significant risk to capital as a result of the COVID-19 pandemic is the risk of default within our loan portfolio and the potential loan losses as a result of those defaults. The Company has taken several steps to mitigate this risk to our capital by building a diversified loan portfolio over the years to be capable of sustaining through a crisis, working with our customers during this time to defer loan payments, as permitted under the CARES Act, to allow time for economic stabilization and participating in the SBA PPP round one and round two loan programs to help provide much needed funds to our borrowers and the community. While there will be pressure on capital levels as a result of the COVID-19 pandemic, the Company believes the actions we are taking will protect our capital levels and allow the Company to support all stakeholders through this difficult time.

 

We believe that our culture of disciplined and conservative risk taking across the balance sheet has the Company well positioned to not only carry through the current crisis but to be a pillar of support for our employees, our customers, and our communities.

 

Results of operations

 

The following presents management’s discussion and analysis of the financial condition of the Company at March 31, 2021 and December 31, 2020 and the results of operations for the Company for the three months ended March 31, 2021 and 2020. The first three months of 2020 results of operations were negatively impacted by the deteriorating economic environment as a result of the COVID-19 pandemic, which resulted in the Company recognizing $400,000 in provision for loan losses. For more financial data and other information about the provision for loan losses refer to section, “Provision for Loan Losses” under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

 

Summary

 

For the three months ended March 31, 2021, the Company had net income of $3,897,000, or $2.66 per fully diluted share, compared to net income of $898,000 or $0.62 per fully diluted share, for the same period in 2020. This represents an increase in profitability of $2,999,000 or 334.0%.

 

Net interest income

 

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders’ equity. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets (“net interest margin”) is calculated by dividing tax equivalent net interest income by average interest-earning assets. Generally, the net interest margin will exceed the net interest spread because a portion of interest earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders’ equity.

 

   For the Three Months Ended March 31, 
   2021   2020   Change 
             
   (dollars in thousands) 
Average interest-earning assets  $659,870   $502,033   $157,837 
Interest income  $7,031   $5,684   $1,347 
Yield on interest-earning assets   4.32%   4.55%   (0.23)%
Average interest-bearing liabilities  $409,608   $357,989   $51,619 
Interest expense  $655   $1,257   $(602)
Cost of interest-bearing liabilities   0.65%   1.41%   (0.76)%
Net interest income  $6,376   $4,427   $1,949 
Net interest margin   3.92%   3.55%   0.38%

 

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The following are variances of note for the three months ended March 31, 2021 compared to the three months ended March 31, 2020:

 

·NIM expanded by 37 basis points to 3.92% for three months ended March 31, 2021 compared to 3.55% for three months ended March 31, 2020. The expansion was driven by the following:

 

oThe yield on average earning assets contracted by 23 basis points, 4.32% for three months ended March 31, 2021 vs. 4.55% for three months ended March 31, 2020, primarily because of the impact of the 150 basis points Federal Reserve rate cut in March 2020 which was partially offset by the recognition of income associated with the origination of $253,989,000 in PPP loans during 2020 and the first quarter of 2021.

 

oAs of March 31, 2021, the Commercial Banking Segment had originated $185,137,000 in first round PPP loans and $68,852,000 in second round PPP loans. These loans carry a stated interest rate of 1.00% and the Commercial Banking Segment earns a fee from the SBA of 1% to 5% depending on the size of the loan. The fee is amortized, based on the term of the loans, through net income, net of deferred costs associated with the origination of these loans. During the three months ended March 31, 2021, the Commercial Banking Segment recognized $1,504,000 in SBA fee income, net of deferred costs through interest income as a result of normal amortization and the receipt of $45,872,000 in funds from loans forgiven by the SBA. In addition, the Commercial Banking Segment recognized $390,000 in interest income associated with these loans during the first quarter of 2021. PPP income of $1,894,000, during the three month period ended March 31, 2021, had a 25 basis points impact on the yield of average earnings assets. Adjusting solely for the impact of PPP income recognized during the three month period ended March 31, 2021, our net interest margin would have been 3.55%, which is flat when compared to the three month period ended March 31, 2020.

 

oThe cost of interest bearing liabilities dropped by 76 basis points to 0.65% for three months ended March 31, 2021 compared to 1.41% for three months ended March 31, 2020, as a result of the Commercial Banking Segment’s continued efforts to build low cost relationship deposits and its disciplined approach to deposit pricing. Low cost relationship deposits (i.e. interest checking, money market, and savings) grew by $89,190,000, or 46.43%, from March 31, 2020, while higher cost time deposits decreased by $43,899,000, or 32.02%, from March 31, 2020. We were able to decrease the cost of money market deposit accounts by 47 basis points, to 0.34% for three months ended March 31, 2021 vs. 0.81% for three months ended March 31, 2020, and time deposits accounts by 67 basis points, to 1.24% for the three months ended March 31, 2021 vs. 1.91% for the three months ended March 31, 2020. We believe that there continues to be opportunities through our funding mix and pricing strategies to lower our cost of funds further.

 

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

 

Average Balance Sheets, Income and Expense, Yields and Rates
                         
   Three Months Ended March 31, 2021   Three Months Ended March 31, 2020 
       Interest   Annualized       Interest   Annualized 
   Average   Income/   Yield   Average   Income/   Yield 
   Balance   Expense   Rate   Balance   Expense   Rate 
Loans net of deferred fees  $580,927   $6,643    4.64%  $431,611   $5,261    4.90%
Loans held for sale   21,319    135    2.57%   11,117    108    3.91%
Investment securities   42,289    250    2.40%   44,763    270    2.43%
Federal funds and other   15,335    3    0.08%   14,542    45    1.24%
Total interest earning assets   659,870    7,031    4.32%   502,033    5,684    4.55%
                               
Allowance for loan losses and deferred fees   (3,978)             (3,185)          
Cash and due from banks   8,854              9,359           
Premises and equipment, net   11,874              11,997           
Other assets   25,017              20,523           
Total assets  $701,637             $540,727           
                               
Interest bearing deposits                              
Interest checking  $71,544   $24    0.14%  $50,060   $22    0.18%
Money market   161,546    137    0.34%   106,727    215    0.81%
Savings   37,910    15    0.16%   23,691    10    0.17%
Certificates   103,749    317    1.24%   137,709    653    1.91%
Total   374,749    493    0.53%   318,187    900    1.14%
Borrowings   34,859    162    1.88%   39,802    357    3.61%
Total interest bearing liabilities   409,608    655    0.65%   357,989    1,257    1.41%
Noninterest bearing deposits   228,275              134,280           
Other liabilities   9,394              4,595           
Total liabilities   647,277              496,864           
Equity capital   54,360              43,863           
Total liabilities and capital  $701,637             $540,727           
                               
Net interest income       $6,376             $4,427      
                               
Interest spread - average yield on interest earning assets,
   less average rate on interest bearing liabilities
             3.67%             3.14%
                               
Annualized net interest margin (net interest income
   expressed as percentage of average earning assets)
             3.92%             3.55%

 

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Provision for (recovery of) loan losses

 

The amount of the allowance for loan losses is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.

 

The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

 

The Company did not record a provision for the three months ended March 31, 2021. The lack of a provision expense for the three months ended March 31, 2021 was because of a reduction in the qualitative factors which was driven by improving economic factors as the vaccine rollout continues, improved credit metrics, and reductions in loan deferrals. The Company recorded a provision for loan losses of $400,000 for the three month period ended March 31, 2020 as a result of growth in the loan portfolio, an increase in the historical loan loss experience and an increase in the qualitative factors due to the anticipated economic impact of COVID-19. The increase in the qualitative factors due to COVID-19 were a result of deterioration in local economic factors such as the higher levels of unemployment and the increased credit risk due to loan payment deferrals under the CARES Act. The Company believes the current level of allowance for loan loss reserves are adequate to cover inherent losses in the portfolio. However, the full economic impact of the COVID-19 pandemic is currently unknown and the Company will continue to monitor our loan portfolio for loss indicators which may have the potential for further provisions for loan losses through 2021 and beyond.

 

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

 

Noninterest income

 

Noninterest income includes service charges and fees on deposit accounts, fee income related to loan origination, mortgage banking income, net, and gains and losses on securities available for sale. The most significant noninterest income item has been mortgage banking income, net, representing 84% and 67% for the three month periods ended March 31, 2021 and 2020, respectively.

 

   For the Three Months Ended         
   March 31,   Change 
   2021   2020   $   % 
                 
   (dollars in thousands) 
Service charges and fees  $536   $518   $18    3.5%
Mortgage banking income, net   3,491    1,370    2,121    154.8%
Gain on sale of investment securities   -    12    (12)   (100.0)%
Gain on sale of SBA loans   -    86    (86)   (100.0)%
Other   143    74    69    93.2%
Total noninterest income  $4,170   $2,060   $2,110    102.4%

 

44

 

 

 

The increase in noninterest income of $2,110,000 for the three months ended March 31, 2021, was the result of the following:

 

·The $2,121,000 increase in mortgage banking income, net is a result of increased loan originations and sales compared to the prior year due to the low rate environment.
·During the three months ended March 31, 2020, the Company executed the sale of a SBA loan guaranteed strip and recognized a gain of $86,000. The Company made the decision not to sell any SBA loan guarantee strips during the first quarter of 2021.

 

Noninterest expense

 

   For the Three Months Ended         
   March 31,   Change 
   2021   2020   $   % 
                 
   (dollars in thousands) 
Salaries and benefits  $3,421   $3,022   $399    13.2%
Occupancy   352    326    26    8.0%
Equipment   256    200    56    28.0%
Supplies   41    38    3    7.9%
Professional and outside services   691    716    (25)   (3.5)%
Advertising and marketing   118    78    40    51.3%
FDIC insurance premium   66    60    6    10.0%
Other operating expense   568    510    58    11.4%
Total noninterest expense  $5,513   $4,950   $563    11.4%

 

The increase in noninterest expense of $563,000 for the three months ended March 31, 2021, was the result of the following:

 

·Salaries and benefits expense increased by $399,000 primarily due an increase in expenses related to mortgage production.
·Equipment expense increased by $56,000 primarily due to increased investments in software to support the PPP loan forgiveness process.
·Advertising and marketing expense increased by $40,000 as a result of increased marketing efforts during the three months ended March 31, 2021, compared to a reduction in marketing efforts during the three months ended March 31, 2020 due to the COVID-19 pandemic.
·Other operating expense increased by $58,000 primarily due to an increase in loan underwriting costs associated with the increased mortgage banking segment loan originations.

 

Income taxes

 

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent difference and available tax credits. Income tax expense for the three months ended March 31, 2021 was $1,136,000, resulting in an effective tax rate of 22.6% compared to $239,000 or 21.0% for the same periods in 2020. The increase in the effective tax rate was primarily related to a reduction in the tax credit received related to state taxes attributed to the Company and the mortgage banking segment. The Bank is not subject Virginia income taxes, and instead is subject to a franchise tax based on bank capital.

 

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Balance Sheet Analysis

 

Investment securities

 

At March 31, 2021 and December 31, 2020, all of our investment securities were classified as available for sale.

 

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

 

Loans

 

The Company maintains rigorous underwriting standards coupled with regular evaluation of the creditworthiness of and the designation of lending limits for each borrower. The portfolio strategies include seeking industry, loan type and loan size diversification in order to minimize credit concentration risk. Management also focuses on originating loans in markets with which the Company is familiar. Additionally, as a significant amount of the loan losses we have experienced in the past is attributable to construction and land development loans, our strategy has shifted from reducing this type of lending to closely managing the quality and concentration in these loan types.

 

Approximately 59% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 5% of the loan portfolio consists of rehabilitated student loans purchased by the Bank from 2014 to 2017 (see discussion following). The Company’s commercial and industrial loan portfolio represents approximately 37% of all loans. Loans in this category are typically made to individuals and small and medium-sized businesses, and range between $250,000 and $2.5 million; however, the increase in the portfolio was the result of the Company originating $185,137,000 in first round of PPP loans and $68,852,000 in second round PPP loans for the three months ended March 31, 2021, which are 100% guaranteed by the SBA. Based on underwriting standards, commercial and industrial loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory, and real property. The collateral securing any loan may depend on the type of loan and may vary in value based on market conditions. The remainder of our loan portfolio is in consumer loans which represent less than 1% of the total.

 

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Loans classified by type as of March 31, 2021 and December 31, 2020 are as follows (dollars in thousands):

 

   March 31, 2021   December 31, 2020 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $7,164    1.21%  $8,103    1.44%
Commercial   22,436    3.79%   21,466    3.82%
    29,600    5.00%   29,569    5.26%
Commercial real estate                    
Owner occupied   99,677    16.83%   99,784    17.79%
Non-owner occupied   125,202    21.14%   121,184    21.60%
Multifamily   9,086    1.53%   9,889    1.75%
Farmland   358    0.06%   367    0.07%
    234,323    39.56%   231,224    41.21%
Consumer real estate                    
Home equity lines   18,128    3.06%   18,394    3.28%
Secured by 1-4 family residential,                    
First deed of trust   58,028    9.80%   57,089    10.18%
Second deed of trust   10,661    1.80%   11,097    1.98%
    86,817    14.66%   86,580    15.44%
Commercial and industrial loans                    
(except those secured by real estate)   209,381    35.36%   181,088    32.28%
Guaranteed student loans   29,062    4.91%   29,657    5.29%
Consumer and other   2,994    0.51%   2,885    0.52%
                     
Total loans   592,177    100.0%   561,003    100.0%
Deferred fees and costs, net   (3,311)        (2,048)     
Less: allowance for loan losses   (3,992)        (3,970)     
                     
   $584,874        $554,985      

 

PPP loans were $159,769,000 as of March 31, 2021, which was the result of the origination of $68,852,000 in second round PPP loans offset by the forgiveness of $45,872,000 in first round PPP loans. PPP loans have provided essential funds to over 2,200 businesses and nonprofits and protected more than 28,000 jobs in our community. Below is a breakdown by loan size as of March 31, 2021 (dollars in thousands):

 

   Round 1   Round 2   Total 
Loan Size  # of Loans   $ of Loans   # of Loans   $ of Loans   # of Loans   $ of Loans 
< $350,000   1,484   $41,939    644   $42,685    2,128   $84,624 
$350,000 - $2 million   36    25,876    40    26,167    76    52,043 
> $2 million   6    23,102    -    -    6    23,102 
Total   1,526   $90,917    684   $68,852    2,210   $159,769 

 

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

 

Allowance for loan losses

 

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

 

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Asset quality

 

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

 

   March 31,   December 31,   March 31, 
   2021   2020   2020 
Nonaccrual loans  $1,555   $1,577   $1,317 
Foreclosed properties   336    336    526 
Total nonperforming assets  $1,891   $1,913   $1,843 
                
Restructured loans (not included in nonaccrual loans above)  $6,678   $6,550   $7,472 
                
Loans past due 90 days and still accruing (1)  $2,504   $2,193   $2,765 
                
Nonperforming assets to loans (2)   0.32%   0.34%   0.42%
                
Nonperforming assets to total assets   0.26%   0.27%   0.32%
                
Allowance for loan losses to nonaccrual loans   256.76%   251.75%   261.60%

 

 

(1) All loans 90 days past due and still accruing are rehabilitated student loans which have a 98% guarantee by the DOE.
(2) Loans are net of unearned income and deferred cost.

 

Nonperforming assets totaled $1,891,000 at March 31, 2021, compared to $1,913,000 at December 31, 2020. Nonperforming assets at March 31, 2021 consisted primarily of $1,555,000 in nonaccrual loans, compared to $1,577,000 at December 31, 2020.

 

The following table presents an analysis of the changes in nonperforming assets for the three months ended March 31, 2021 (in thousands):

 

   Nonaccrual   Foreclosed     
   Loans   Properties   Total 
Balance December 31, 2020  $1,577   $336   $1,913 
Loans placed back on accrual   57    -    57 
Repayments   (75)   -    (75)
Charge-offs   (4)   -    (4)
Balance March 31, 2021  $1,555   $336   $1,891 

 

Nonperforming restructured loans are included in nonaccrual loans. Until a nonperforming restructured loan has performed in accordance with its restructured terms for a minimum of six months, it will remain on nonaccrual status.

 

Interest is accrued on outstanding loan principal balances, unless the Company considers collection to be doubtful. Commercial and unsecured consumer loans are designated as non-accrual when the Company considers collection of expected principal and interest doubtful. Mortgage loans and most other types of consumer loans past due 90 days or more may remain on accrual status if management determines that concern over our ability to collect principal and interest is not significant. When loans are placed on non-accrual status, previously accrued and unpaid interest is reversed against interest income in the current period and interest is subsequently recognized only to the extent cash is received. Interest accruals are resumed on such loans only when in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

 

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There were no specific allowances associated with the total nonaccrual loans of $1,555,000 and $1,577,000 at March 31, 2021 and December 31, 2020, respectively that were considered impaired.

 

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $85,000 and $77,000 for the three months ended March 31, 2021 and 2020, respectively. Student loans totaling $2,504,000 and $2,193,000 at March 31, 2021 and December 31, 2020, 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.

 

Deposits

 

Deposits as of March 31, 2021 and December 31, 2020 were as follows (dollars in thousands):

 

   March 31, 2021   December 31, 2020 
   Amount   %   Amount   % 
Demand accounts  $245,582    39.6%  $222,305    37.8%
Interest checking accounts   71,949    11.5%   70,342    11.9%
Money market accounts   164,689    26.6%   152,726    26.0%
Savings accounts   44,638    7.2%   38,083    6.5%
Time deposits of $250,000 and over   15,238    2.5%   16,014    2.7%
Other time deposits   77,960    12.6%   88,912    15.1%
                     
Total  $620,056    100.0%  $588,382    100.0%

 

Total deposits increased by $31,674,000, or 5.38%, from December 31, 2020, and increased by $151,213,000, or 32.25%, from March 31, 2020. Variances of note are as follows:

 

·Noninterest bearing demand account balances increased $23,277,000 from December 31, 2020 and increased $105,922,000 from March 31, 2020, and represented 39.61% of total deposits compared to 37.78% as of December 31, 2020 and 29.79% as of March 31, 2020. The increase in noninterest bearing deposits from March 31, 2020 to March 31, 2021 is a result of unprecedented government stimulus, the Bank adding new core relationships and continued success at converting a significant portion of non-customer PPP loan applicants into customers.

 

·Low cost relationship deposits (i.e. interest checking, money market, and savings) balances increased $20,125,000, or 7.71%, from December 31, 2020 and increased $89,189,000, or 46.43%, from March 31, 2020. The increase in these accounts is a result of adding new core relationships, continued growth in accounts from non-customer PPP loan applicants and the migration of customer funds from time deposits.

 

·Time deposits decreased by $11,728,000, or 11.18%, from December 31, 2020 and $43,898,000, or 32.02%, from March 31, 2020. The decrease in time deposits was a result of the following:

 

oThe migration of customers from time deposits to lower cost deposit products.

 

oDuring the three month period ended March 31, 2021, $3,733,000 of internet listing service deposits which carried a 0.80% cost of funds matured and were not replaced.

 

The variety of deposit accounts that we offer has allowed us to be competitive in obtaining funds and has allowed us to respond with flexibility to, although not to eliminate, the threat of disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment vehicles such as government and corporate securities). Our ability to attract and retain deposits, and our cost of funds, has been, and is expected to continue to be, significantly affected by market conditions.

 

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Borrowings

 

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

 

Capital resources

 

Shareholders’ equity at March 31, 2021 was $55,538,000 compared to $51,996,000 at December 31, 2020. The $3.5 million increase in shareholders’ equity during the three months ended March 31, 2021 is primarily due to net income of $3,897,000.

 

The following table presents the composition of regulatory capital and the capital ratios for the Bank at the dates indicated (dollars in thousands):

 

   March 31,   December 31, 
   2021   2020 
Tier 1 capital          
Total bank equity capital  $65,614   $62,183 
Net unrealized gain on available-for-sale securities   (24)   (466)
Defined benefit postretirement plan   34    36 
Disallowed deferred tax asset   -    - 
Total Tier 1 capital   65,624    61,753 
           
Tier 2 capital          
Allowance for loan losses   3,992    3,970 
Tier 2 capital deduction   -    - 
Total Tier 2 capital   3,992    3,970 
           
Total risk-based capital   69,616    65,723 
           
Risk-weighted assets  $468,935   $462,690 
           
Average assets  $678,106   $665,172 
           
Capital ratios          
Leverage ratio (Tier 1 capital to average assets)   9.68%   9.28%
Common equity tier 1 capital ratio (CET 1)   13.99%   13.35%
Tier 1 capital to risk-weighted assets   13.99%   13.35%
Total capital to risk-weighted assets   14.85%   14.20%
Equity to total assets   9.16%   8.81%

 

For more financial data and other information about capital resources, refer to Note 13 “Shareholders’ Equity and Regulatory Matters” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

 

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.

 

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At March 31, 2021, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $77,293,000, or 10.8% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

 

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 March 31, 2021 and December 31, 2020.

 

We are also a member of the Federal Home Loan Bank of Atlanta, 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 March 31, 2021 was $32.7 million, based on the Bank's qualifying collateral available to secure any future borrowings. However, we are able to pledge additional collateral to the FHLB in order to increase our available borrowing capacity up to 25% of assets.

 

We also have access to the Federal Reserve’s PPPLF, from which applications for borrowings can be made. The Federal Reserve requires that PPP loans be pledged to secure any advances from the PPPLF. The Company currently has $17,136,000 in borrowings against the PPPLF and an unused borrowing capacity of $142,633,000 based on unpledged PPP loans available to secure any future borrowings. The Company has access to this facility until June 30, 2021 at which time the Federal Reserve will no longer take requests for borrowings.

 

Liquidity provides us with the ability to meet normal deposit withdrawals, while also providing for the credit needs of customers. We are committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.

 

At March 31, 2021, we had commitments to originate $148,395,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at March 31, 2021. Certificates of deposit scheduled to mature in the 12-month period ending March 31, 2022 totaled $69,494,000. 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.

 

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The sale of fixed rate loans is intended to protect us from precipitous changes in the general level of interest rates. The valuation of adjustable rate mortgage loans is not as directly dependent on the level of interest rates as is the value of fixed rate loans. As with other investments, we regularly monitor the appropriateness of the level of adjustable rate mortgage loans in our portfolio and may decide from time to time to sell such loans and reinvest the proceeds in other adjustable rate investments.

 

Impact of inflation and changing prices

 

The Company’s financial statements included herein have been prepared in accordance with GAAP, which require the Company to measure financial position and operating results primarily in terms of historical dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.

 

LIBOR and Other Benchmark Rates

 

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

 

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

 

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2021. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

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

 

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PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

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

 

ITEM 1A – RISK FACTORS

 

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 19, 2021.

 

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

 

Not applicable.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5 – OTHER INFORMATION

 

Not applicable.

 

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ITEM 6 – EXHIBITS

 

31.1Certification of Chief Executive Officer

 

31.2Certification of Chief Financial Officer

 

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

 

101The following materials from the Village Bank and Trust Financial Corp. Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

 

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SIGNATURES

 

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

 

    VILLAGE BANK AND TRUST FINANCIAL CORP.
   
Date:   May 13, 2021   By:    /s/ James E. Hendricks, Jr.
    James E. Hendricks, Jr.
    President and Chief Executive Officer
     
Date:   May 13, 2021   By:   /s/ Donald M. Kaloski, Jr.
    Donald M. Kaloski, Jr.
    Executive Vice President and Chief Financial Officer

 

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