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VBFC > SEC Filings for VBFC > Form 10-Q on 13-Nov-2012All 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.


13-Nov-2012

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:

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

the inability to reduce nonperforming assets consisting of nonaccrual loans and foreclosed real estate;

our inability to improve our regulatory capital position;

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 assumptions underlying the establishment of allowances for loan losses, and other estimates;

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 Dodd-Frank Act Wall Street Reform and Consumer Protection Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;

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.


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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. Over the last three years, the Company has recorded record provisions for loan losses due primarily to deteriorating quality of loans collateralized by real estate located in its principal market area.

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.

Given current economic uncertainty as well as stress on our capital ratios resulting from operating losses, the Company has adopted a balance sheet reduction plan that focuses on the reduction of nonperforming assets and higher risk-weighted assets that will help increase capital ratios in three ways. First, the lower overall asset size affords the Company's capital reserves to support a smaller balance sheet. Second, the reduced risk profile of the Company's ensuing loan portfolio requires less capital support during times of economic stress. Third, a reduced infrastructure reduces general and administrative expenses, which in turn reduces the need for additional capital.

In light of the asset growth restriction in the Consent Order and the Company's current weakened financial position, the Company does not anticipate undertaking growth via acquisition or de novo branching during the foreseeable future.

The Company's short-term objective is to continue decreasing its balance sheet by loan and deposit attrition.

Results of operations

The following represents management's discussion and analysis of the financial condition of the Company at September 30, 2012 and December 31, 2011 and the results of operations for the Company for the three and nine months ended September 30, 2012 and 2011. This discussion should be read in conjunction with the Company's condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.


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Statement of Operations Analysis

Summary

For the three months ended September 30, 2012, the Company had a net loss of $(367,000) and net loss available to common shareholders of $(588,000), or $(0.14) per fully diluted share, compared to 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, for the same period in 2011. For the nine months ended September 30, 2012, the Company had a net loss totaling $(11,504,000) and a net loss available to common shareholders of $(12,131,000), or $(2.85) per fully diluted share, compared to a net loss of $(4,905,000) and a net loss available to common shareholders of $(5,566,000), or $(1.31) per share on a fully diluted share, for the same period in 2011.

The components of the changes in net income before payment of dividends are presented following:

                                               Three Months        Nine Months
                                                  Ended               Ended
                                              September 30,       September 30,
                                                   2012               2012

      Decrease in net interest income         $     (748,000 )   $    (1,950,000 )
      Decrease in provision for loan losses        8,808,000           2,316,000
      Increase in noninterest income               1,431,000           2,805,000
      Increase in noninterest expense             (1,781,000 )        (3,296,000 )
      Increase in tax expense                     (2,832,000 )        (6,474,000 )

                                              $    4,878,000     $    (6,599,000 )

Our profitability continues to be negatively affected by the continued stress on our borrowers and real estate values from the recessionary economy. As a result, asset quality continues to be a concern and management is devoting substantial resources to problem asset resolution. While the provision for loan losses decreased in 2012 from 2011 levels, it remains significant at $9,095,000 for the nine months ended September 30, 2012. Additionally, expenses related to foreclosed property, which are included in noninterest expense, increased significantly from $1,211,878 in 2011 to $3,520,971 in 2012. The provision for loan losses is discussed further under Asset quality and Provision for loan losses.

The decline in our net interest income is attributable to our plan to reduce our balance sheet and nonaccrual loans. Changes in our net interest income are more fully discussed under Net interest income.

Our mortgage company's pretax profit increased in the first nine months of 2012 compared to the same period of 2011 by $1,074,000 due to the mortgage company closing $224,722,000 in mortgage loans for the first three quarters of 2012 compared to $164,680,000 for the same period in 2011.

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 shareholder's 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


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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.

Net interest income for the third quarter of $4,216,000 represents a decrease of $(748,000), or 15%, compared to the third quarter of 2011, and a decrease of $(135,000), or 3%, compared to the second quarter of 2012. Comparing the first nine months of 2012 to the same period in 2011, there was a decline in net interest income of $(1,950,000), or 13%. The continued decline in our net interest income is a result of our asset reduction plan and loans placed on nonaccrual status.

Compared to the third quarter of 2011, average interest-earning assets for the third quarter of 2012 decreased by $89,937,000, or 17%. This decrease in average interest-earning assets was due to decreases in average portfolio loans of $55,131,000, average investment securities of $24,135,000 and average federal funds sold of $16,778,000, offset by an increase in average loans held for sale of $6,107,000. Comparing average interest-earning assets for the nine months ended September 30, 2012 to the same period in 2011, there was a decline of $64,676,000, or 12%. This decrease in average interest-earning assets was due to decreases in average portfolio loans of $39,497,000, average investment securities of $21,155,000 and average federal funds sold of $9,723,000, offset by an increase in average loans held for sale of $5,698,000. The primary reasons for the decline in our portfolio loans that are interest-earning were our strategic plan to reduce our balance sheet, loan charge-offs, and loans placed on nonaccrual status. The declines in investment securities and federal funds sold were part of our asset reduction plan. In addition to the decline in interest-earning assets, the average yield on interest-earning assets decreased to 4.97% for the third quarter of 2012 from 5.09% for the third quarter of 2011, and to 4.92% for the nine months of 2012 from 5.29% for the same period in 2011. These declines resulted in a decline in interest income from the third quarter of 2011 to the third quarter of 2012 of $1,296,000, or 19%, and $3,885,000, or 18%, for the comparative nine month periods.

Average interest-bearing liabilities for the third quarter of 2012 decreased by $75,921,000, or 15%, compared to the third quarter of 2011, and by $64,532,000, or 13%, for the comparative nine month periods. The decrease in interest-bearing liabilities was due primarily to declines in average deposits of $64,894,000 and 59,791,000, respectively. The decrease in deposits was consistent with our balance sheet reduction plan as we repriced maturing time deposits at rates below market for noncore depositors. The average cost of interest-bearing liabilities for the three months ended September 30, 2012 decreased to 1.36% from 1.59% for the same period in 2011, and to 1.40% from 1.73% the comparative nine month periods. The principal reason for the decrease in liability costs was the maintenance of short-term interest rates by the Federal Reserve. The continuing low interest rates have allowed us to reduce our cost of funds as certificates of deposit and borrowings mature. See our discussion of interest rate sensitivity below for more information.

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. Our net interest margin over the last several quarters is provided in the following table:


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                       Quarter Ended      Net Interest Margin
                     September 30, 2011          3.63%
                     December 31, 2011           3.38%
                     March 31, 2012              3.53%
                     June 30, 2012               3.65%
                     September 30, 2012          3.70%

The net interest margin declined during the fourth quarter of 2011 primarily as a result of increasing nonaccrual loans. Additionally our margin was compressed as our deposits generally do not reprice as quickly as our loans. The improvement in net interest margin during 2012 is a result of utilizing lower interest-earning assets, primarily federal funds sold, to fund a decrease in average interest-bearing liabilities of $57,123,000, from $480,888,000 for the fourth quarter of 2011 to $423,765,000 for the third quarter of 2012. As a result, higher yielding average loans represented 89% of total average interest-bearing assets for the third quarter of 2012 as compared to 80% for the fourth quarter of 2011. However, given the continued depressed economy and the potential impact on interest income from new nonaccrual loans, no assurance can be provided that increases in the net interest margin will continue to occur.

The following tables illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders' equity and related income, expense and corresponding weighted-average yields and rates. 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.


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                                                      Average Balance Sheets
                                                          (in thousands)

                               Three Months Ended September 30, 2012                   Three Months Ended September 30, 2011
                                                Interest        Annualized                              Interest        Annualized
                            Average             Income/            Yield            Average             Income/            Yield
                            Balance             Expense            Rate             Balance             Expense            Rate


Loans net of deferred
fees                    $       386,330       $      5,344             5.49 %   $       441,461       $      6,469             5.81 %
Loans held for sale              16,375                145             3.51 %            10,268                117             4.52 %
Investment securities            30,740                167             2.16 %            54,875                357             2.58 %
Federal funds and
other                            18,847                 11             0.23 %            35,625                 20             0.22 %
Total interest
earning assets                  452,292              5,667             4.97 %           542,229              6,963             5.09 %

Allowance for loan
losses and deferred
fees                            (14,094 )                                                (7,423 )
Cash and due from
banks                            13,540                                                  13,589
Premises and
equipment, net                   26,183                                                  27,245
Other assets                     36,769                                                  31,304

Total assets            $       514,690                                         $       606,944

Interest bearing
deposits
Interest checking       $        43,779       $         36             0.33 %   $        38,226       $         52             0.54 %
Money market                     64,693                 59             0.36 %            85,361                116             0.54 %
Savings                          18,652                 22             0.47 %            13,199                 22             0.66 %
Certificates                    254,045              1,070             1.67 %           309,277              1,504             1.93 %
Total                           381,169              1,187             1.24 %           446,063              1,694             1.51 %
Borrowings                       42,595                264             2.46 %            53,622                305             2.26 %
Total interest
bearing liabilities             423,764              1,451             1.36 %           499,685              1,999             1.59 %
Noninterest bearing
deposits                         56,983                                                  53,139
Other liabilities                 6,087                                                   4,210
Total liabilities               486,834                                                 557,034
Equity capital                   27,856                                                  49,910
Total liabilities and
capital                 $       514,690                                         $       606,944

Net interest income before provision
for loan losses                               $      4,216                                            $      4,964

Interest spread -
average yield on
interest
earning assets, less
average rate on
interest bearing
liabilities                                                            3.61 %                                                  3.51 %

Annualized net
interest margin (net
interest income
expressed as
percentage of average
earning assets)                                                        3.70 %                                                  3.63 %


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                                                     Average Balance Sheets
                                                         (in thousands)

                               Nine Months Ended September 30, 2012                   Nine Months Ended September 30, 2011
                                               Interest        Annualized                             Interest        Annualized
                           Average             Income/            Yield           Average             Income/            Yield
                           Balance             Expense            Rate            Balance             Expense            Rate


Loans net of deferred
fees                    $      403,715       $     16,560             5.48 %   $      443,212       $     20,037             6.04 %
Loans held for sale             15,207                442             3.88 %            9,509                358             5.03 %
Investment securities           32,756                532             2.17 %           53,911              1,010             2.50 %
Federal funds and
other                           25,829                 44             0.23 %           35,552                 58             0.22 %
Total interest
earning assets                 477,507             17,578             4.92 %          542,184             21,463             5.29 %

Allowance for loan
losses and deferred
fees                           (13,381 )                                               (7,480 )
Cash and due from
banks                           14,199                                                  9,102
Premises and
equipment, net                  26,439                                                 27,361
Other assets                    35,825                                                 32,526

Total assets            $      540,589                                         $      603,693

Interest bearing
deposits
Interest checking       $       42,889       $        112             0.35 %   $       36,479       $        184             0.67 %
Money market                    68,976                205             0.40 %           89,342                487             0.73 %
Savings                         17,534                 65             0.50 %           12,176                 63             0.69 %
Certificates                   264,354              3,409             1.72 %          315,547              4,905             2.08 %
Total                          393,753              3,791             1.29 %          453,544              5,639             1.66 %
Borrowings                      45,640                799             2.34 %           50,381                885             2.35 %
Total interest
bearing liabilities            439,393              4,590             1.40 %          503,925              6,524             1.73 %
Noninterest bearing
deposits                        61,503                                                 47,884
Other liabilities                4,983                                                  3,334
Total liabilities              505,879                                                555,143
Equity capital                  34,711                                                 48,280
Total liabilities and
capital                 $      540,590                                         $      603,423

Net interest income
before provision for
loan losses                                  $     12,988                                           $     14,939

Interest spread -
average yield on
interest
earning assets, less
average rate on
interest bearing
liabilities                                                           3.52 %                                                 3.56 %

Annualized net
interest margin (net
interest income
expressed as
percentage of average
earning assets)                                                       3.63 %                                                 3.68 %

Provision for loan losses

The provision for loan losses for the three months ended September 30, 2012 amounted to $700,000 compared to $9,508,000 for the three months ended September 30, 2011. The provision for loan losses for the nine months ended September 30, 2012 was $9,095,000 compared to $11,411,000 for the nine months ended September 30, 2011. Continued depressed market conditions in 2012 as well as some financial difficulties experienced by some of our more significant borrowers warranted the continuation of significant provisions for loan losses in 2012. The decrease in the provision in the third quarter of 2012 reflects the significant provision in the second quarter of 2012 as well as improving asset quality as nonaccrual loans declined by $15,872,000 during the third quarter, from $56,632,000 at June 30, 2012 to $40,760,000 at September 30, 2012. Notwithstanding this improvement, asset quality remains a concern as there continues to be uncertainty in the economy.

Additionally, a significant portion of the provision for loan losses is based upon loan charge-off history over the last two years. As charge-offs increased significantly during this period, the provision for loan losses based upon this history has significantly increased.


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Noninterest income

Noninterest income increased from $2,597,000 for the three months ended September 30, 2011 to $4,029,000 for the three months ended September 30, 2012, an increase of $1,432,000, or 55%. The increase in noninterest income is primarily a result of increases in gain on sale of loans of $669,000 and a gain on sale of securities of $448,000. Noninterest income also increased from $7,060,000 for the first nine months of 2011 to $9,865,000 for the first nine months of 2012, an increase of $2,805,000, or 40%. The increase in noninterest income is primarily a result of higher gains on sale of loans of $1,602,000 and gain on sale of securities of $649,000. The increases in gains on sale of loans reflect increased profitability of our mortgage company in 2012.

Noninterest expense

Noninterest expense for the three months ended September 30, 2012 was $7,751,000 compared to $5,970,000 for the three months ended September 30, 2011, an increase of $1,781,000, or 30%. The more significant increases in noninterest expense occurred in expenses related to foreclosed real estate of $1,337,000 and salaries and benefits of $424,000. The increase in expenses related to foreclosed real estate is a result of our efforts to foreclose on troubled loans and the disposition of the collateral, and the increase in salaries and benefits is attributable to higher commissions to mortgage company loan officers from . . .

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