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VBFC > SEC Filings for VBFC > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for VILLAGE BANK & TRUST FINANCIAL CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for VILLAGE BANK & TRUST FINANCIAL CORP.


14-Nov-2011

Quarterly Report


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 inability of the Bank to comply with the requirements of agreements with its regulators;

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;

changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions we do business with;

risks inherent in making loans such as repayment risks and fluctuating collateral values;

changes in operations of Village Bank Mortgage Corporation as a result of the activity in the residential real estate market;

legislative and regulatory changes, including the Financial Reform Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;

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;

the effects of future economic, business and market conditions;

governmental monetary and fiscal policies;

changes in accounting policies, rules and practices;

maintaining capital levels adequate to remain well capitalized;

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;

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 was organized under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiary, the Bank. The Bank is engaged in commercial and retail banking. We opened to the public on December 13, 1999. We place special emphasis on serving the financial needs of individuals, small and medium sized businesses, entrepreneurs, and professional concerns.

The Bank has one subsidiary, Village Bank Mortgage Corporation. We offer a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, and commercial, real estate and consumer loans. In addition we provide investment services through a separate division of the Bank, Village Investment Services. We are a community-oriented and locally owned and managed financial institution focusing on providing a high level of responsive and personalized services to our customers, delivered in the context of a strong direct relationship with the customer. We conduct our operations from our main office/corporate headquarters location and fourteen branch offices.

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 management endeavors to minimize the credit risk inherent in the Company's loan portfolio, it must necessarily make various assumptions and judgments about the collectability of the loan portfolio based on its experience and evaluation of economic conditions as well as the current financial condition of its borrowers and their ability to repay loans. 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. During the third quarter of 2011, based on our continuing efforts to evaluate such assumptions and judgments, we determined that continuing depressed market conditions as well as some financial difficulties experienced by some of our more significant borrowers warranted the addition of a significant provision for loan losses of $9.5 million, resulting in a provision for loan losses of $11.4 million for the nine months ended September 30, 2011. Although we believe that the allowance for loan losses of $14,962,000 at September 30, 2011, which represents 3.43% of loans outstanding, is adequate to absorb potential losses in the Company's loan portfolio at that date, we can make no assurance that significant provisions for loan losses will not be necessary in the future. The continuation of depressed economic conditions, especially in our primary market area, will have a negative effect on the collectability of our loan portfolio.


There is intense competition in all areas in which the Company conducts its business. The Company competes with banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions. Many of these competitors have substantially greater resources and lending limits and provide a wider array of banking services. To a limited extent, the Company also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. Competition is based on a number of factors, including prices, interest rates, services, availability of products and geographic location.

For the three months ended September 30, 2011, the Company had a net loss totaling $(5,245,000) and a net loss available to common shareholders of $(5,467,000), or $(1.29) per fully diluted share, compared to net income of $334,000 and net income available to common shareholders of $112,000, or $0.03 per fully diluted share, for the same period in 2010. The most significant factor in our decline in earnings was the provision for loan losses of $9,508,000 in the third quarter of 2011 compared to a provision for loan losses of $1,410,000 for the same period in 2010.

Our total assets increased to $605,841,000 at September 30, 2011 from $591,779,000 at December 31, 2010, an increase of $14,062,000, or 2.4%. Liquid assets (cash and due from banks, federal funds sold, and investment securities available for sale) increased by $44,833,000, loans held for sale decreased by $(6,086,000), and net portfolio loans decreased by $(24,724,000). The net increase in assets of $20,882,000 was funded primarily by increases in deposits of $5,159,000 and borrowings of $9,942,000.

As a result of an examination performed by the FDIC in the first quarter of 2011, the Bank expects to enter into a Consent Order with the FDIC in the fourth quarter of 2011. We are currently in discussions with the FDIC concerning the content of the Consent Order and do not know its exact requirements at this time. We believe, however, that those requirements, once finalized, will be more restrictive than those currently contained in the Bank's Memorandum of Understanding with the FDIC. In particular, we expect that, among other things, the Consent Order could require an evaluation of management, new capital requirements, restrictions on asset growth, limitations on our ability to use brokered deposits and the interest rates we offer on deposits, and various actions to improve our asset quality and reduce the risk inherent in the Bank's loan portfolio. In addition, we could be required to develop and implement various written plans to improve oversight functions, capital, credit risk management, strategic planning and budgeting, interest rate risk, and liquidity and funds management. As with our Memorandums of Understanding, we expect that our management and board of directors will be required to focus considerable time and attention on taking corrective actions to comply with the Consent Order's terms.

The following presents management's discussion and analysis of the financial condition of the Company at September 30, 2011 and December 31, 2010, and results of operations for the Company for the three and nine month periods ended September 30, 2011 and 2010. This discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission as well as the third quarter 2011 financial statements and notes thereto appearing elsewhere in this report.

Results of operations

For the three months ended September 30, 2011, the Company had a net loss of $(5,245,000) and a net loss available to common shareholders of $(5,467,000), or $(1.29) per fully diluted share, compared to net income of $334,000 and net income available to common shareholders of $112,000, or $0.03 per fully diluted share, for the same period in 2010. For the nine months ended September 30, 2011, the Company had a net loss of $(4,905,000) and a net loss available to common shareholders of $(5,566,000), or $(1.31) per fully diluted share, compared to net income totaling $1,282,000 and net income available to common shareholders of $622,000, or $0.15 per share on a fully diluted share, for the same period in 2010.


The components of these decreases in net income before payment of dividends are presented following:

                                                 Three Months        Nine Months
                                                    Ended               Ended
                                                September 30,       September 30,
                                                     2011               2011

   Increase (decrease) in net interest income   $      (77,000 )   $       780,000
   Increase in provision for loan losses            (8,098,000 )        (8,261,000 )
   Decrease in noninterest income                      (65,000 )          (799,000 )
   Increase in noninterest expense                    (183,000 )          (997,000 )
   Decrease in tax expense                           2,844,000           3,090,000

                                                $   (5,579,000 )   $    (6,187,000 )

Our profitability continues to be negatively affected by the continued stress on our borrowers and real estate values from the recessionary economy. To obtain an accurate picture of our earnings, it is important to understand what our "core earnings" is, defined as pretax earnings adjusted for gains and losses on sales of assets other than loan sales by the mortgage company as well as the effect of problem assets. Core earnings is not a measurement under accounting principles generally accepted in the United States. The following table presents our core earnings as defined for the indicated periods:

                                                Three Months Ended               Nine Months Ended
                                                  September 30,                    September 30,
                                               2011            2010             2011            2010

Pretax income (loss) per generally
accepted accounting principles             $ (7,916,280 )   $   506,229     $ (7,335,023 )   $ 1,942,016
Less gain (loss) on sale of
Securities                                      108,473               -          171,617         597,375
Assets                                                -               -                -         242,936
                                                108,473               -          171,617         840,311
Add
Provision for loan losses                     9,507,884       1,410,000       11,410,884       3,150,000
Other real estate owned expenses                387,666         327,261        1,211,878       1,008,597
                                              9,895,550       1,737,261       12,622,762       4,158,597

Pretax core earnings                          1,870,797       2,243,490        5,116,122       5,260,302
Income tax expense                              636,071         762,787        1,739,481       1,788,503

Net core earnings                          $  1,234,726     $ 1,480,703     $  3,376,641     $ 3,471,799


Net interest income

Net interest income is our primary source of earnings and represents the difference between interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. The level of net interest income is affected primarily by variations in the volume and mix of those assets and liabilities, as well as changes in interest rates when compared to previous periods of operation.

Net interest income for the third quarter of $4,964,000 represents a decrease of $(77,000), or 2%, compared to the third quarter of 2010, and an increase of $26,000, or 1%, compared to the second quarter of 2011. While these changes in net interest income are not material, changes in the components of net interest income are worthy of note. Yields on assets have declined from 5.69% for the third quarter of 2010, to 5.28% for the second quarter of 2011 and 5.09% for the third quarter of 2011. This decline in yields on interest earning assets is a result of a strategic shift by management in the makeup of our interest-earning assets, from loans to investment securities and federal funds sold, primarily to increase liquidity. Yields on loans are generally higher than yields on more liquid assets such as investment securities and federal funds sold. Additionally, an increase in nonaccrual loans has had a negative effect on asset yields.

Our cost of funds has also declined from 2.06% for the third quarter of 2010, to 1.73% for the second quarter of 2011 and 1.59% for the third quarter of 2011. The decline in our cost of funds is a result of the repricing of higher cost certificates of deposit during the low interest rate environment that has existed for the last two years as well as an effort to change our deposit mix so that we are not so dependent on higher cost deposits. Additionally, we have been able to reprice borrowings at lower rates as they matured.

The Company's net interest margin is not a measurement under accounting principles generally accepted in the United States, but it is a common measure used by the financial services industry to determine how profitably earning assets are funded. Net interest margin is calculated by dividing net interest income by average earning assets. Our net interest margin over the last several quarters is provided in the following table:

                                                 Net
                                               Interest
                           Quarter Ended        Margin

                         September 30, 2010         3.74 %
                         December 31, 2010          3.84 %
                         March 31, 2011             3.79 %
                         June 30, 2011              3.65 %
                         September 30, 2011         3.63 %

As interest rates were reduced by the Federal Reserve during 2007 and 2008 in reaction to the declining economy, our margin was compressed as our deposits generally do not reprice as quickly as our loans. As our deposits repriced downward and the yield on interest earning assets stabilized, our net interest margin reflected an upward trend through the end of 2010. The small decline in the net interest margin in the first nine months of 2011 is a result of the strategic shift in our interest-earning assets from loans to investment securities and federal funds sold and the increase in nonaccrual loans discussed previously. Given the difficult economy and the potential impact on interest income from new nonaccrual loans, no assurance can be provided that the net interest margin will not continue to decline.


Average interest-earning assets for the first nine months of 2011 decreased by $1,374,000, or 0.3% compared to the first nine months of 2010. The decrease in interest-earning assets was due primarily to decreases in loans of $21,874,000 and loans held for sale of $3,982,000 offset by increases in investment securities of $14,812,000 and federal funds sold of $9,670,000. The average yield on interest-earning assets decreased to 5.29% for the first nine months of 2011 compared to 5.57% for the same period in 2010. Many of our loans are indexed to short-term rates affected by the Federal Reserve's decisions about short-term interest rates, and, accordingly, as the Federal Reserve increases or decreases short-term rates, the yield on interest-earning assets is affected. Additionally, while many of our indexed rate loans have interest rate floors included in their terms, we have decreased rates to loan customers to better reflect the current interest rate environment and, in some limited cases, to facilitate workouts on nonperforming loans.

Our average interest-bearing liabilities decreased by $10,130,000, or 2.0%, for the first nine months of 2011 compared to the first nine months of 2010. The decrease in interest-bearing liabilities was due to declines in average deposits of $8,263,000 and other borrowings of $1,867,000. The average cost of interest-bearing liabilities decreased to 1.73% for the first nine months of 2011 from 2.21% for the first nine months of 2010. The principal reason for the decrease in liability costs was the continuation of historic low short-term interest rates by the Federal Reserve. See our discussion of interest rate sensitivity below for more information.

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. The average balances used in these tables and other statistical data were calculated using daily average balances. We had no tax exempt assets for the periods presented.


                                                      Average Balance Sheets
                                                          (in thousands)

                               Three Months Ended September 30, 2011                   Three Months Ended September 30, 2010
                                                Interest        Annualized                              Interest        Annualized
                            Average             Income/            Yield            Average             Income/            Yield
                            Balance             Expense            Rate             Balance             Expense            Rate

Loans                   $       441,461       $      6,469             5.81 %   $       461,442       $      7,190             6.18 %
Investment securities            54,875                357             2.58 %            29,844                237             3.15 %
Loans held for sale              10,268                117             4.52 %            18,752                219             4.63 %
Federal funds and
other                            35,625                 20             0.22 %            24,297                 14             0.23 %
Total interest
earning assets                  542,229              6,963             5.09 %           534,335              7,660             5.69 %

Allowance for loan
losses and deferred
fees                             (7,423 )                                                (9,384 )
Cash and due from
banks                            13,589                                                  14,751
Premises and
equipment, net                   27,245                                                  27,665
Other assets                     31,303                                                  34,235
Total assets            $       606,943                                         $       601,602

Interest bearing
deposits
Interest checking       $        38,226       $         52             0.54 %   $        32,705       $         58             0.70 %
Money market                     85,361                116             0.54 %            97,384                236             0.96 %
Savings                          13,199                 22             0.66 %            10,323                 18             0.69 %
Certificates                    309,277              1,504             1.93 %           312,706              1,857             2.36 %
Total deposits                  446,063              1,694             1.51 %           453,118              2,169             1.90 %
Borrowings                       53,622                305             2.26 %            51,412                450             3.47 %
Total interest
bearing liabilities             499,685              1,999             1.59 %           504,530              2,619             2.06 %
Noninterest bearing
deposits                         53,139                                                  44,189
Other liabilities                 4,210                                                   2,910
Total liabilities               557,034                                                 551,629
Equity capital                   49,910                                                  49,973
Total liabilities and
capital                 $       606,944                                         $       601,602

Net interest income
before
 provision for loan
losses                                        $      4,964                                            $      5,041

Interest spread - average yield on
interest
earning assets, less
average rate on
interest bearing
liabilities                                                            3.51 %                                                  3.63 %

Annualized net
interest margin (net
interest income
expressed as
percentage of average
earning assets)                                                        3.63 %                                                  3.74 %


                                                     Average Balance Sheets
                                                         (in thousands)

                               Nine Months Ended September 30, 2011                   Nine Months Ended September 30, 2010
                                               Interest        Annualized                             Interest        Annualized
                           Average             Income/            Yield           Average             Income/            Yield
                           Balance             Expense            Rate            Balance             Expense            Rate

Loans                   $      443,212       $     20,037             6.04 %   $      465,087       $     21,225             6.10 %
Investment securities           53,911              1,010             2.50 %           39,099                880             3.01 %
Loans held for sale              9,509                358             5.03 %           13,491                488             4.84 %
Federal funds and
other                           35,552                 58             0.22 %           25,881                 44             0.23 %
Total interest
earning assets                 542,184             21,463             5.29 %          543,558             22,637             5.57 %

Allowance for loan
losses and deferred
fees                            (7,480 )                                               (9,665 )
Cash and due from
banks                            9,102                                                 12,565
Premises and
equipment, net                  27,361                                                 27,718
Other assets                    32,256                                                 33,953
Total assets            $      603,423                                         $      608,129

Interest bearing
deposits
Interest checking       $       36,479       $        184             0.67 %   $       35,512       $        274             1.03 %
Money market                    89,342                487             0.73 %          104,034                863             1.11 %
Savings                         12,176                 63             0.69 %           10,018                 62             0.83 %
Certificates                   315,547              4,905             2.08 %          312,244              5,760             2.47 %
Total deposits                 453,544              5,639             1.66 %          461,808              6,959             2.01 %
Borrowings                      50,381                885             2.35 %           52,247              1,520             3.89 %
Total interest
bearing liabilities            503,925              6,524             1.73 %          514,055              8,479             2.21 %
Noninterest bearing
deposits                        47,884                                                 41,332
Other liabilities                3,334                                                  2,760
Total liabilities              555,143                                                558,147
Equity capital                  48,280                                                 49,982
Total liabilities and
capital                 $      603,423                                         $      608,129

Net interest income
before
. . .
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