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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 0-50765

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Virginia

16-1694602

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

13319 Midlothian Turnpike, Midlothian, Virginia

23113

(Address of principal executive offices)

(Zip code)

804-897-3900

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $4.00 per share

VBFC

Nasdaq Capital Market

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 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  

Smaller Reporting Company

Emerging growth company

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

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

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

1,495,251 shares of common stock, $4.00 par value, outstanding as of April 16, 2024

Table of Contents

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, 2024 (unaudited) and December 31, 2023

3

 

 

Consolidated Statements of Income For the Three Months Ended March 31, 2024 and 2023 (unaudited)

4

 

 

Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2024 and 2023 (unaudited)

5

 

 

Consolidated Statements of Shareholders’ Equity For the Three Months and Ended March 31, 2024 and 2023 (unaudited)

6

 

 

Consolidated Statements of Cash Flows For Three Months Ended March 31, 2024 and 2023 (unaudited)

7

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

 

 

Item 4. Controls and Procedures

46

 

 

Part II – Other Information

 

 

Item 1. Legal Proceedings

47

 

 

Item 1A. Risk Factors

47

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

Item 3. Defaults Upon Senior Securities

47

 

 

Item 4. Mine Safety Disclosures

47

 

 

Item 5. Other Information

47

 

 

Item 6. Exhibits

48

 

 

Signatures

49

2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

March 31, 2024 (Unaudited) and December 31, 2023*

(in thousands, except share and per share data)

    

March 31, 

    

December 31, 

    

2024

    

2023

Assets

 

  

 

  

Cash and due from banks

$

13,073

$

10,383

Federal funds sold

 

19,323

 

7,331

Total cash and cash equivalents

 

32,396

 

17,714

Investment securities available for sale, at fair value

 

82,784

 

105,585

Restricted stock, at cost

 

2,755

 

2,985

Loans held for sale

 

7,019

 

4,983

Loans

 

 

Outstandings

 

591,338

 

575,008

Allowance for credit losses

 

(3,574)

 

(3,423)

Deferred costs, net

 

750

 

803

Total loans, net

 

588,514

 

572,388

Premises and equipment, net

 

11,773

 

11,760

Bank owned life insurance

 

13,198

 

13,120

Accrued interest receivable

 

3,531

 

3,827

Other assets

 

4,902

 

4,254

Total Assets

$

746,872

$

736,616

Liabilities and Shareholders’ Equity

 

 

Liabilities

 

  

 

  

Deposits

 

  

 

  

Noninterest bearing demand

$

230,118

$

247,624

Interest bearing

 

390,151

 

357,721

Total deposits

 

620,269

 

605,345

Long-term debt - trust preferred securities

 

8,764

 

8,764

Subordinated debt, net

 

5,700

 

5,700

Federal Home Loan Bank advances

 

40,000

 

45,000

Accrued interest payable

 

406

 

210

Other liabilities

 

3,375

 

4,041

Total liabilities

 

678,514

 

669,060

Shareholders’ equity

 

  

 

  

Common stock, $4 par value, 10,000,000 shares authorized; 1,495,251 shares issued and outstanding at March 31, 2024 and 1,492,879 shares issued and outstanding at December 31, 2023

 

5,918

 

5,908

Additional paid-in capital

 

55,557

 

55,486

Retained earnings

 

13,278

 

11,775

Stock in directors rabbi trust

 

(439)

 

(467)

Directors deferred fees obligation

 

439

 

467

Accumulated other comprehensive loss

 

(6,395)

 

(5,613)

Total shareholders’ equity

 

68,358

 

67,556

Total liabilities and shareholders' equity

$

746,872

$

736,616

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

3

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three Months Ended March 31, 2024 and 2023

(Unaudited)

(in thousands, except per share data)

    

Three Months Ended

March 31, 

    

2024

    

2023

Interest income

 

  

 

  

Loans

$

8,201

$

6,762

Investment securities

 

932

 

727

Federal funds sold

 

202

 

94

Total interest income

 

9,335

 

7,583

Interest expense

 

  

 

  

Deposits

 

2,096

 

624

Borrowed funds

 

843

 

594

Total interest expense

 

2,939

 

1,218

Net interest income

 

6,396

 

6,365

Provision for credit losses

 

150

 

Net interest income after provision for credit losses

 

6,246

 

6,365

Noninterest income

 

  

 

  

Service charges and fees

 

641

 

669

Mortgage banking income, net

 

850

 

478

Other

 

113

 

109

Total noninterest income

 

1,604

 

1,256

Noninterest expense

 

  

 

  

Salaries and benefits

 

3,464

 

3,448

Occupancy

 

332

 

311

Equipment

 

278

 

285

Supplies

 

49

 

49

Data processing

439

440

Professional and outside services

 

418

 

372

Advertising and marketing

 

83

 

111

FDIC insurance premium

 

92

 

50

Other operating expense

 

474

 

690

Total noninterest expense

 

5,629

 

5,756

Income before income tax expense

 

2,221

 

1,865

Income tax expense

 

449

 

325

Net income

$

1,772

$

1,540

Earnings per share, basic

$

1.19

$

1.04

Earnings per share, diluted

$

1.19

$

1.04

See accompanying notes to consolidated financial statements.

4

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

Three Months ended March 31, 2024 and 2023

(Unaudited)

(in thousands)

Three Months Ended

March 31, 

2024

    

2023

Net income

$

1,772

$

1,540

Other comprehensive (loss) income

 

  

 

  

Unrealized holding (losses) gains arising during the period

 

(990)

 

1,876

Tax effect

 

208

 

(394)

Net change in unrealized holding (losses) gains on securities available for sale, net of tax

 

(782)

 

1,482

Minimum pension adjustment

 

 

3

Tax effect

 

 

(1)

Minimum pension adjustment, net of tax

 

 

2

Total other comprehensive (loss) income

 

(782)

 

1,484

Total comprehensive income

$

990

$

3,024

See accompanying notes to consolidated financial statements.

5

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three Months Ended March 31, 2024 and 2023

(Unaudited)

(In thousands)

Three Months Ended March 31, 2024

Directors

Accumulated

Additional

Stock in

Deferred

Other

Common

Paid-in

Retained

Directors

Fees

Comprehensive

Stock

    

Capital

    

Earnings

    

Rabbi Trust

    

Obligation

    

Loss

    

Total

Balance, December 31, 2023

$

5,908

55,486

$

11,775

$

(467)

$

467

$

(5,613)

$

67,556

Restricted stock redemption

28

(28)

Vesting of restricted stock

10

(10)

 

 

Stock based compensation

 

 

81

 

 

 

 

 

81

Cash dividend declared ($0.18 per share)

 

 

(269)

 

 

 

 

(269)

Net income

 

 

 

1,772

 

 

 

 

1,772

Other comprehensive loss

 

 

 

 

 

 

(782)

 

(782)

Balance, March 31, 2024

$

5,918

$

55,557

$

13,278

$

(439)

$

439

$

(6,395)

$

68,358

Three Months Ended March 31, 2023

Directors

Accumulated

Additional

Stock in

Deferred

Other

Common

Paid-in

Retained

Directors

Fees

Comprehensive

Stock

    

Capital

    

Earnings

    

Rabbi Trust

    

Obligation

    

Income (Loss)

    

Total

Balance, December 31, 2022

$

5,868

$

55,167

$

10,957

$

(689)

$

689

$

(10,881)

$

61,111

Restricted stock redemption

94

(94)

Vesting of restricted stock

13

(13)

Stock based compensation

 

 

102

 

 

 

 

 

102

Cash dividend declared ($0.16 per share)

(237)

(237)

Impact of adoption of ASC 326

(119)

(119)

Net income

 

 

 

1,540

 

 

 

 

1,540

Other comprehensive income

 

 

 

 

 

 

1,484

 

1,484

Balance, March 31, 2023

$

5,881

$

55,256

$

12,141

$

(595)

$

595

$

(9,397)

$

63,881

See accompanying notes to consolidated financial statements.

6

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2024 and 2023

(Unaudited)

(in thousands)

    

Three Months Ended

March 31, 

    

2024

    

2023

Cash Flows from Operating Activities

 

  

 

  

Net income

$

1,772

$

1,540

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

  

 

  

Depreciation and amortization

 

163

 

140

Amortization of debt issuance costs

8

Deferred income taxes

 

(32)

 

59

Provision for credit losses

 

150

 

Gain on sales of loans held for sale

(514)

(611)

Stock compensation expense

 

81

 

102

Proceeds from sale of mortgage loans

 

19,954

 

25,187

Origination of mortgage loans held for sale

 

(21,476)

 

(24,160)

Amortization of premiums and accretion of discounts on securities, net

 

(69)

 

(39)

Increase in bank owned life insurance

 

(78)

 

(68)

Net change in:

 

 

Interest receivable

 

296

 

77

Other assets

 

(408)

 

(615)

Interest payable

 

196

 

142

Other liabilities

 

(679)

 

334

Net cash (used in) provided by operating activities

 

(644)

 

2,096

Cash Flows from Investing Activities

 

  

 

  

Purchases of available for sale securities

 

 

(2,652)

Proceeds from maturities, calls and paydowns of available for sale securities

 

21,880

 

2,467

Net increase in loans

 

(16,263)

 

(1,667)

Purchases of premises and equipment, net

 

(176)

 

(198)

Purchase of restricted stock, net

 

230

 

(626)

Net cash provided by (used in) investing activities

 

5,671

 

(2,676)

Cash Flows from Financing Activities

 

  

 

  

Cash dividends paid

(269)

(237)

Net increase (decrease) in deposits

 

14,924

 

(6,727)

Net (decrease) increase in other borrowings

 

(5,000)

 

15,000

Net cash provided by financing activities

 

9,655

 

8,036

Net increase in cash and cash equivalents

 

14,682

 

7,456

Cash and cash equivalents, beginning of period

 

17,714

 

16,678

Cash and cash equivalents, end of period

$

32,396

$

24,134

Supplemental Disclosure of Cash Flow Information

 

  

 

  

Cash payments for interest

$

2,743

$

1,076

Cash payments for taxes

$

$

168

Supplemental Schedule of Non-Cash Activities

 

  

 

  

Unrealized (losses) gains on securities available for sale

$

(990)

$

1,876

Minimum pension adjustment

$

$

3

See accompanying notes to consolidated financial statements.

7

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2024 and 2023

(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, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024. 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, 2023 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 credit losses and its related provision including collateral dependent loans.

Note 3 – Earnings per common share

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

Three Months Ended March 31, 

2024

    

2023

Numerator

  

 

  

Net income - basic and diluted

$

1,772

$

1,540

Denominator

 

  

 

  

Weighted average shares outstanding - basic

 

1,493

 

1,484

Dilutive effect of common stock options

 

 

Weighted average shares outstanding - diluted

 

1,493

 

1,484

Earnings per share - basic

$

1.19

$

1.04

Earnings per share - diluted

$

1.19

$

1.04

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 10,252 and 10,658 of the unvested restricted units at March 31, 2024 and 2023, respectively, included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of March 31, 2024 and 2023, 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.

8

Table of Contents

Note 4 – Investment securities available for sale

The amortized cost and fair value of investment securities available for sale as of March 31, 2024 and December 31, 2023 are as follows (in thousands):

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Cost

Gains

Losses

Fair Value

March 31, 2024

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

695

$

$

(17)

$

678

Mortgage-backed securities

 

75,706

 

261

 

(6,060)

 

69,907

Municipals

2,263

(611)

1,652

Subordinated debt

 

12,202

 

29

 

(1,684)

 

10,547

$

90,866

$

290

$

(8,372)

$

82,784

December 31, 2023

 

  

 

  

 

 

  

U.S. Government agency obligations

$

20,690

$

$

(75)

$

20,615

Mortgage-backed securities

 

77,275

 

643

 

(5,381)

 

72,537

Municipals

2,264

(608)

1,656

Subordinated debt

 

12,449

 

30

 

(1,702)

 

10,777

$

112,678

$

673

$

(7,766)

$

105,585

The Company had investment securities with a fair value of $575,000 and $24,926,000 pledged to secure borrowings from the Federal Home Loan Bank of Atlanta ("FHLB") at March 31, 2024 and December 31, 2023, respectively.

There were no sales of available for sale securities for the three months ended March 31, 2024 and 2023.

Investment securities available for sale that have an unrealized loss position at March 31, 2024 and December 31, 2023 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, 2024

 

  

 

 

  

 

  

U.S. Government agency obligations

$

322

$

(1)

$

356

(16)

$

678

$

(17)

Mortgage-backed securities

10,224

(100)

31,221

(5,960)

41,445

(6,060)

Municipals

1,652

(611)

1,652

(611)

Subordinated debt

 

2,789

 

(443)

 

7,060

 

(1,241)

 

9,849

 

(1,684)

$

13,335

$

(544)

$

40,289

$

(7,828)

$

53,624

$

(8,372)

December 31, 2023

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

$

$

20,289

$

(75)

$

20,289

$

(75)

Mortgage-backed securities

 

4,631

 

(24)

 

30,311

 

(5,357)

 

34,942

 

(5,381)

Municipals

1,656

(608)

1,656

(608)

Subordinated debt

 

4,145

 

(587)

 

5,937

 

(1,115)

 

10,082

 

(1,702)

$

8,776

$

(611)

$

58,193

$

(7,155)

$

66,969

$

(7,766)

9

Table of Contents

As of March 31, 2024, there were 60 investments available for sale totaling $53.6 million that were in a loss position and had an unrealized loss of $8.4 million.

All of the unrealized losses are attributable to increases in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the declines in fair value are 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 has not recorded an allowance for credit losses on these investments at March 31, 2024.

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2024, by contractual maturity, are as follows (in thousands):

    

Amortized

    

Cost

Fair Value

Less than one year

$

$

One to five years

10,834

10,823

Five to ten years

 

17,098

 

15,485

More than ten years

 

62,934

56,476

Total

$

90,866

$

82,784

10

Table of Contents

Note 5 – Loans and allowance for credit losses

Loans classified by type as of March 31, 2024 and December 31, 2023 are as follows (dollars in thousands):

March 31, 2024

December 31, 2023

 

    

Amount

    

%  

    

Amount

    

%

Construction and land development

 

  

 

  

 

  

 

  

Residential

$

9,077

 

1.53

%  

$

10,471

 

1.82

%

Commercial

 

34,437

 

5.83

%  

 

37,024

 

6.44

%

 

43,514

 

7.36

%  

 

47,495

 

8.26

%

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

121,429

 

20.53

%  

 

122,666

 

21.33

%

Non-owner occupied

 

165,508

 

27.99

%  

 

154,855

 

26.93

%

Multifamily

 

18,254

 

3.09

%  

 

12,743

 

2.22

%

Farmland

 

24

 

0.00

%  

 

326

 

0.06

%

 

305,215

 

51.61

%  

 

290,590

 

50.54

%

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

21,682

 

3.67

%  

 

21,557

 

3.75

%

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

First deed of trust

 

95,994

 

16.23

%  

 

95,638

 

16.63

%

Second deed of trust

 

11,955

 

2.02

%  

 

11,337

 

1.97

%

 

129,631

 

21.92

%  

 

128,532

 

22.35

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

92,600

 

15.66

%  

 

86,203

 

14.99

%

Guaranteed student loans

 

15,782

 

2.67

%  

 

17,923

 

3.12

%

Consumer and other

 

4,596

 

0.78

%  

 

4,265

 

0.74

%

Total loans

 

591,338

 

100.0

%  

 

575,008

 

100.0

%

Deferred and costs, net

 

750

 

 

803

 

Less: allowance for credit losses

 

(3,574)

 

 

(3,423)

 

$

588,514

$

572,388

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

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $54.8 million and $35.5 million as of March 31, 2024, and December 31, 2023, 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. 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.

11

Table of Contents

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

    

March 31, 

    

December 31, 

2024

2023

Consumer real estate

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

First deed of trust

$

159

$

160

Second deed of trust

 

100

 

105

 

259

 

265

Commercial and industrial loans

 

  

 

  

(except those secured by real estate)

 

22

 

26

Total loans

$

281

$

291

There were no individual allowances associated with the total nonaccrual loans of $281,000 and $291,000 at March 31, 2024 and December 31, 2023, respectively, that were considered collateral dependent.

The Company recognized $7,000 of interest on nonaccrual loans outstanding as of March 31, 2024.

Management considers the guidance in Accounting Standards Codification (“ASC”) 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination.  Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below.

12

Table of Contents

As of March 31, 2024, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows (in thousands):

    

    

    

    

Revolving-

    

Total

2024

2023

2022

2021

2020

Prior

Revolving

Term

Loans

March 31, 2024

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

Pass

$

876

$

5,656

$

2,206

$

339

$

$

$

$

$

9,077

Special Mention

Substandard

Total Residential

$

876

$

5,656

$

2,206

$

339

$

$

$

$

$

9,077

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Commercial

 

 

 

 

 

 

 

 

 

Pass

692

6,649

14,193

10,331

224

1,081

1,267

34,437

Special Mention

Substandard

Total Commercial

$

692

$

6,649

$

14,193

$

10,331

$

224

$

1,081

$

1,267

$

$

34,437

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Commercial real estate

 

 

  

 

  

 

  

 

 

 

 

 

  

Owner occupied

 

 

 

 

 

 

 

 

 

Pass

666

12,518

21,638

19,149

9,276

52,199

574

116,020

Special Mention

200

71

461

4,677

5,409

Substandard

Total Owner occupied

$

666

$

12,518

$

21,838

$

19,220

$

9,737

$

56,876

$

574

$

$

121,429

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Non-owner occupied

 

 

 

 

 

 

 

 

 

Pass

6,692

9,425

25,419

28,243

23,337

57,626

9,856

160,598

Special Mention

2,160

2,750

4,910

Substandard

Total Non-owner occupied

$

6,692

$

9,425

$

25,419

$

30,403

$

23,337

$

60,376

$

9,856

$

$

165,508

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Multifamily

 

 

 

 

 

 

 

 

 

Pass

5,250

1,300

2,434

542

6,857

1,871

18,254

Special Mention

Substandard

Total Multifamily

$

5,250

$

1,300

$

$

2,434

$

542

$

6,857

$

1,871

$

$

18,254

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Farmland

 

 

 

 

 

 

 

 

 

Pass

24

24

Special Mention

Substandard

Total Farmland

$

$

$

$

$

$

24

$

$

$

24

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Consumer real estate

 

 

  

 

  

 

  

 

 

 

 

 

  

Home equity lines

 

 

 

 

 

 

 

 

 

Pass

445

21,162

21,607

Special Mention

75

75

Substandard

Total Home equity lines

$

$

$

445

$

$

$

$

21,237

$

$

21,682

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Secured by 1-4 family residential

 

 

  

 

  

 

  

 

 

 

 

 

  

First deed of trust

Pass

4,330

32,416

14,608

14,152

8,006

19,985

2,124

95,621

Special Mention

214

214

Substandard

159

159

Total First deed of trust

$

4,330

$

32,416

$

14,608

$

14,152

$

8,006

$

20,358

$

2,124

$

$

95,994

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Second deed of trust

 

 

 

 

 

 

 

 

 

Pass

593

4,485

3,088

1,009

388

1,572

522

11,657

Special Mention

88

110

198

Substandard

100

100

Total Second deed of trust

$

681

$

4,485

$

3,088

$

1,009

$

388

$

1,782

$

522

$

$

11,955

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Commercial and industrial loans

  

(except those secured by real estate)

Pass

6,036

18,185

15,095

13,837

5,313

5,903

27,757

92,126

Special Mention

34

49

369

452

Substandard

11

11

22

Total Commercial and industrial

$

6,036

$

18,219

$

15,095

$

13,837

$

5,324

$

5,963

$

28,126

$

$

92,600

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Guaranteed student loans

 

 

 

 

 

 

 

 

 

Pass

15,782

15,782

Special Mention

Substandard

Total Guaranteed student loans

$

$

$

$

$

$

15,782

$

$

$

15,782

Current period gross writeoff

$

6

$

$

$

$

$

$

$

$

Consumer and other

Pass

242

424

403

107

38

22

3,360

4,596

Special Mention

Substandard

Total Consumer and other

$

242

$

424

$

403

$

107

$

38

$

22

$

3,360

$

$

4,596

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Total Current period gross writeoff

$

6

$

$

$

$

$

$

$

$

Total loans

$

25,465

$

91,092

$

97,295

$

91,832

$

47,596

$

169,121

$

68,937

$

$

591,338

13

Table of Contents

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

Greater

Investment >

3059 Days

6089 Days

Than

Total Past

Total

90 Days and

Past Due

Past Due

90 Days

Due

Current

Loans

Accruing

March 31, 2024

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

$

$

$

$

9,077

$

9,077

$

Commercial

 

 

 

 

 

34,437

 

34,437

 

 

 

 

 

 

43,514

 

43,514

 

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

 

 

121,429

 

121,429

 

Non-owner occupied

 

 

 

 

 

165,508

 

165,508

 

Multifamily

 

 

 

 

 

18,254

 

18,254

 

Farmland

 

 

 

 

 

24

 

24

 

 

 

 

 

 

305,215

 

305,215

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

247

 

 

 

247

 

21,435

 

21,682

 

Secured by 1‑4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

174

 

 

 

174

 

95,820

 

95,994

 

Second deed of trust

 

 

 

 

 

11,955

 

11,955

 

 

421

 

 

 

421

 

129,210

 

129,631

 

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

719

 

49

 

375

 

1,143

 

91,457

 

92,600

 

375

Guaranteed student loans

 

588

 

342

 

2,200

 

3,130

 

12,652

 

15,782

 

2,200

Consumer and other

 

 

 

 

 

4,596

 

4,596

 

Total loans

$

1,728

$

391

$

2,575

$

4,694

$

586,644

$

591,338

$

2,575

14

Table of Contents

    

    

    

    

    

    

    

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, 2023

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

$

$

$

$

10,471

$

10,471

$

Commercial

 

 

 

 

 

37,024

 

37,024

 

 

 

 

 

 

47,495

 

47,495

 

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

 

 

122,666

 

122,666

 

Non-owner occupied

 

 

 

 

 

154,855

 

154,855

 

Multifamily

 

 

 

 

 

12,743

 

12,743

 

Farmland

 

 

 

 

 

326

 

326

 

 

 

 

 

 

290,590

 

290,590

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

83

 

25

 

 

108

 

21,449

 

21,557

 

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

 

 

 

 

95,638

 

95,638

 

Second deed of trust

 

33

 

 

 

33

 

11,304

 

11,337

 

 

116

 

25

 

 

141

 

128,391

 

128,532

 

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

 

 

 

 

86,203

 

86,203

 

Guaranteed student loans

 

690

 

493

 

2,228

 

3,411

 

14,512

 

17,923

 

2,228

Consumer and other

 

734

 

 

 

734

 

3,531

 

4,265

 

Total loans

$

1,540

$

518

$

2,228

$

4,286

$

570,722

$

575,008

$

2,228

Loans greater than 90 days past due consist of 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 that are individually evaluated for credit losses are limited to loans that have specific risk characteristics that are not shared by other loans and 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. The repayment of these loans is expected to be substantially through the operations or the sale of the collateral. The allowance for credit losses on loans that are individually evaluated will be measured based on the fair value of the collateral either through operations or the sale of the collateral. When repayment is expected through the sale of the collateral, the allowance will be based on the fair value of the collateral less estimated costs to sell. Collateral dependent loans, or portions thereof, are charged off when deemed uncollectible.

15

Table of Contents

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

March 31, 2024

December 31, 2023

    

    

Unpaid

    

    

    

Unpaid

    

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance

With no related allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

Secured by 1‑4 family residential

 

 

  

 

  

 

 

  

 

  

First deed of trust

$

159

$

159

$

$

160

$

160

$

Second deed of trust

 

100

 

100

 

 

105

 

105

 

 

259

 

259

 

 

265

 

265

 

Commercial and industrial loans

 

  

 

 

  

 

  

 

 

  

(except those secured by real estate)

 

22

 

22

 

 

26

 

26

 

 

281

 

281

 

 

291

 

291

 

Total

 

  

 

  

 

  

 

  

 

  

 

  

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

159

 

159

 

 

160

 

160

 

Second deed of trust

 

100

 

100

 

 

105

 

105

 

 

259

 

259

 

 

265

 

265

 

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

22

 

22

 

 

26

 

26

 

Consumer and other

$

281

$

281

$

$

291

$

291

$

16

Table of Contents

The following is a summary of average recorded investment in collateral dependent 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

For the Three Months Ended

March 31, 2024

March 31, 2023

Average

    

Interest

    

Average

    

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

With no related allowance recorded

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

$

$

$

3,468

$

16

Non-owner occupied

 

 

 

496

 

 

 

 

3,964

 

16

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

 

 

300

 

6

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deed of trust

 

160

 

2

 

1,394

 

2

Second deed of trust

 

103

 

5

 

186

 

1

 

263

 

7

 

1,880

 

9

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

23

 

 

54

 

1

 

286

 

7

 

5,898

 

26

With an allowance recorded

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

191

 

 

 

 

191

 

Consumer real estate

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deed of trust

 

 

 

86

 

Second deed of trust

 

 

 

8

 

 

 

 

94

 

Consumer and other

 

 

 

16

 

 

 

 

301

 

Total

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

3,659

 

16

Non-owner occupied

 

 

 

496

 

 

 

 

4,155

 

16

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

 

 

300

 

6

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

First deed of trust

 

160

 

2

 

1,480

 

2

Second deed of trust

 

103

 

5

 

194

 

1

 

263

 

7

 

1,974

 

9

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

23

 

 

54

 

1

Consumer and other

 

 

 

16

 

$

286

$

7

$

6,199

$

26

Loan Modifications to Borrowers in Financial Difficulty

As part of its credit risk management, the Company may modify a loan agreement with a borrower experiencing financial difficulties through a refinancing or restructuring of the borrower’s loan agreement. There were no modified loans identified during the three months ended March 31, 2024 and March 31, 2023.  

17

Table of Contents

In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics by call report code. The Company’s forecast of estimated expected losses is based on a twelve-month forecast of the national rate of unemployment and external observations of historical loan losses. The Company uses the Federal Open Market Committee’s projection of unemployment for its reasonable and supportable forecasting of current expected credit losses. For the periods beyond the reasonable and supportable forecast period, projections of expected credit losses are based on a reversion to the long-run mean for the national unemployment rate. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes in lending policies and procedures including changes in underwriting standards, and collections, charge-offs, and recovery practices, changes in international, national, regional, and local conditions, changes in the nature and volume of the portfolio and terms of loans, changes in experience, depth, and ability of lending management, changes in the volume and severity of past due loans and other similar conditions, changes in the quality of the organization’s loan review system, changes in the value of underlying collateral for collateral dependent loans, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.

Activity in the allowance for credit losses on loans is as follows for the periods indicated (in thousands):

    

Provision for

    

    

    

Beginning

(Recovery of)

Ending

Balance

Credit Losses

Charge-offs

Recoveries

Balance

Three Months Ended March 31, 2024

 

  

  

 

  

 

  

 

  

Construction and land development

 

  

  

 

  

 

  

 

  

Residential

$

86

$

(29)

$

$

$

57

Commercial

 

228

 

(26)

 

 

 

202

 

314

 

(55)

 

 

 

259

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

409

 

28

 

 

 

437

Non-owner occupied

 

1,467

 

129

 

 

 

1,596

Multifamily

 

44

 

42

 

 

 

86

Farmland

 

3

 

(3)

 

 

 

 

1,923

 

196

 

 

 

2,119

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

40

 

(18)

 

 

10

 

32

Secured by 1-4 family residential

 

  

 

 

  

 

  

 

  

First deed of trust

 

293

 

4

 

 

1

 

298

Second deed of trust

 

99

 

(6)

 

 

5

 

98

 

432

 

(20)

 

 

16

 

428

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

640

 

22

 

 

4

 

666

Student loans

 

57

 

4

 

(6)

 

 

55

Consumer and other

 

36

 

 

 

 

36

Unallocated

 

21

 

(10)

 

 

 

11

$

3,423

$

137

$

(6)

$

20

$

3,574

18

Table of Contents

    

Impact of

Provision for

    

    

    

Beginning

adopting

(Recovery of)

Ending

Balance

ASC 326

Credit Losses

Charge-offs

Recoveries

Balance

Three Months Ended March 31, 2023

 

  

  

  

 

  

 

  

 

  

Construction and land development

 

  

  

  

 

  

 

  

 

  

Residential

$

79

$

3

$

(31)

$

$

$

51

Commercial

 

192

 

34

 

38

 

 

 

264

 

271

 

37

 

7

 

 

 

315

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

867

 

(475)

 

(1)

 

 

 

391

Non-owner occupied

 

1,289

 

192

 

(21)

 

 

 

1,460

Multifamily

 

33

 

7

 

 

 

 

40

Farmland

 

 

 

 

 

 

 

2,189

 

(276)

 

(22)

 

 

 

1,891

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

11

 

24

 

(2)

 

 

 

33

Secured by 1-4 family residential

 

  

 

  

 

 

  

 

  

 

  

First deed of trust

 

131

 

76

 

6

 

 

1

 

214

Second deed of trust

 

43

 

25

 

5

 

 

2

 

75

 

185

 

125

 

9

 

 

3

 

322

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

576

 

1

 

(34)

 

 

6

 

549

Student loans

 

52

 

 

63

 

(3)

 

 

112

Consumer and other

 

37

 

(5)

 

2

 

 

 

34

Unallocated

 

60

 

(9)

 

(2)

 

 

 

49

$

3,370

$

(127)

$

23

$

(3)

$

9

$

3,272

    

    

Impact of

Provision for

    

    

    

Beginning

adopting

(Recovery of)

Ending

Balance

ASC 326

Loan Losses

Charge-offs

Recoveries

Balance

Year Ended December 31, 2023

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

79

$

3

$

4

$

$

$

86

Commercial

 

192

 

34

 

2

 

 

 

228

 

271

 

37

 

6

 

 

 

314

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

867

 

(475)

 

17

 

 

 

409

Non-owner occupied

 

1,289

 

192

 

(14)

 

 

 

1,467

Multifamily

 

33

 

7

 

4

 

 

 

44

Farmland

 

 

 

3

 

 

 

3

 

2,189

 

(276)

 

10

 

 

 

1,923

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

11

 

24

 

5

 

 

 

40

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

131

 

76

 

83

 

 

3

 

293

Second deed of trust

 

43

 

25

 

15

 

 

16

 

99

 

185

 

125

 

103

 

 

19

 

432

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

576

 

1

 

(110)

 

 

173

 

640

Student loans

 

52

 

 

35

 

(30)

 

 

57

Consumer and other

 

37

 

(5)

 

7

 

(3)

 

 

36

Unallocated

 

60

 

(9)

 

(30)

 

 

 

21

$

3,370

$

(127)

$

21

$

(33)

$

192

$

3,423

19

Table of Contents

Loans are required to be measured at amortized costs and to be presented at the net amount expected to be collected. Off balance sheet credit exposures, including loan commitments, are not recorded on balance sheet, but expected credit losses arising from off balance sheet credit exposures are recorded as a reserve for unfunded commitments and reported in Other Liabilities. Credit losses on available for sale debt securities are accounted for as an allowance for credit losses, which is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value and the amount expected to be collected on the financial assets. The allowance for credit losses on loans, available for sale debt securities and the reserve for unfunded commitments are established through a provision for credit losses charged against earnings.

The following table presents a breakdown of the provision for credit losses for the periods indicated (in thousands):

Three Months Ended March 31,

2024

2023

Provision for credit losses:

  

  

Provision for loans

$

137

$

23

Provision (recovery) for unfunded commitments

13

(23)

Total

$

150

$

As of March 31, 2024, the allowance for credit losses was $3.89 million and included an allowance for credit losses on loans of $3.57 million and a reserve for unfunded commitments of $320,000.

The Company recorded a provision for credit losses for loans of $136,700 for the three months ended March 31, 2024, which was the result of loan growth as all credit metrics remained strong compared to year-end 2023. Non-performing loans as a percentage of loans decreased from 0.12% at March 31, 2023 to 0.05% at March 31, 2024.

The Company recorded a provision for credit losses for unfunded commitments of $13,300 for the three months ended March 31, 2024, which was driven by an increase in the total commitments outstanding at March 31, 2024.

The allowance for credit losses on loans to total loans ratio at the Company is 0.60% compared to the peer average of 1.11%, management considers this level of allowance sufficient and appropriate based on the current asset quality and assessment of the Company’s loan portfolio.

As of March 31, 2023, the allowance for credit losses was $3.53 million and included an allowance for credit losses on loans of $3.27 million and a reserve for unfunded commitments of $254,000.

The provision for credit for loans was driven by the increase in loan balances at March 31, 2023, while the recovery of credit losses for unfunded commitments was a result of the reduction in the total balance outstanding at March 31, 2023. The lack of an overall provision for credit losses was driven by stable local economic conditions and credit quality remaining strong. While higher inflation and the speed at which interest rates have been rising remain a risk to credit quality, we believe our current level of allowance for credit losses is sufficient.

20

Table of Contents

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

Recorded Investment in Loans

Allowance

Loans

    

Ending

    

    

    

Ending

    

    

 

Balance

 

Individually

 

Collectively

 

Balance

 

Individually

 

Collectively

Three Months Ended March 31, 2024

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

57

$

$

57

$

9,077

$

$

9,077

Commercial

 

202

 

 

202

 

34,437

 

 

34,437

 

259

 

 

259

 

43,514

 

 

43,514

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

437

 

 

437

 

121,429

 

 

121,429

Non-owner occupied

 

1,596

 

 

1,596

 

165,508

 

 

165,508

Multifamily

 

86

 

 

86

 

18,254

 

 

18,254

Farmland

 

 

 

 

24

 

 

24

 

2,119

 

 

2,119

 

305,215

 

 

305,215

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

32

 

 

32

 

21,682

 

 

21,682

Secured by 1-4 family residential

 

  

 

  

 

 

 

  

 

  

First deed of trust

 

298

 

 

298

 

95,994

 

159

 

95,835

Second deed of trust

 

98

 

 

98

 

11,955

 

100

 

11,855

 

428

 

 

428

 

129,631

 

259

 

129,372

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

(except those secured by real estate)

 

666

 

 

666

 

92,600

 

22

 

92,578

Student loans

 

55

 

 

55

 

15,782

 

 

15,782

Consumer and other

 

47

 

 

47

 

4,596

 

 

4,596

$

3,574

$

$

3,574

$

591,338

$

281

$

591,057

Year Ended December 31, 2023

 

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

86

$

$

86

$

10,471

$

$

10,471

Commercial

 

228

 

 

228

 

37,024

 

 

37,024

 

314

 

 

314

 

47,495

 

 

47,495

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

409

 

 

409

 

122,666

 

 

122,666

Non-owner occupied

 

1,467

 

 

1,467

 

154,855

 

 

154,855

Multifamily

 

44

 

 

44

 

12,743

 

 

12,743

Farmland

 

3

 

 

3

 

326

 

 

326

 

1,923

 

 

1,923

 

290,590

 

 

290,590

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

40

 

 

40

 

21,557

 

 

21,557

Secured by 1-4 family residential

 

  

 

  

 

 

  

 

  

 

  

First deed of trust

 

293

 

 

293

 

95,638

 

160

 

95,478

Second deed of trust

 

99

 

 

99

 

11,337

 

105

 

11,232

 

432

 

 

432

 

128,532

 

265

 

128,267

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

640

 

 

640

 

86,203

 

26

 

86,177

Student loans

 

57

 

 

57

 

17,923

 

 

17,923

Consumer and other

 

57

 

 

57

 

4,265

 

 

4,265

$

3,423

$

$

3,423

$

575,008

$

291

$

574,717

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Table of Contents

Note 6 – Deposits

Deposits as of March 31, 2024 and December 31, 2023 were as follows (dollars in thousands):

March 31, 2024

December 31, 2023

 

    

Amount

    

%  

    

Amount

    

%

Demand accounts

$

230,118

 

37.1

%  

$

247,624

 

40.9

%

Interest checking accounts

 

78,739

 

12.7

%  

 

76,289

 

12.6

%

Money market accounts

 

207,640

 

33.5

%  

 

195,249

 

32.3

%

Savings accounts

 

35,238

 

5.7

%  

 

39,633

 

6.5

%

Time deposits of $250,000 and over

 

31,355

 

5.0

%  

 

9,145

 

1.5

%

Other time deposits

 

37,179

 

6.0

%  

 

37,405

 

6.2

%

Total

$

620,269

 

100.0

%  

$

605,345

 

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 $2,414,000 in FHLB stock at March 31, 2024 and $2,644,000 at December 31, 2023, 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 and 1-4 family residential loans and investment securities. The Company had FHLB advances of $40,000,000 at March 31, 2024 and $45,000,000 at December 31, 2023.  

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, 2024 or December 31, 2023.

The Company’s unused lines of credit for future borrowings total approximately $26.1 million at March 31, 2024, which consists of $3.3 million available from the FHLB based on current pledged assets, $20 million on revolving bank line of credit, and $2.8 million under secured federal funds agreements 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.

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, 2024 was 7.71%. As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term Secured Overnight Funding Rate (“SOFR”) plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. 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, 2024 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.

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Table of Contents

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, 2024 was 6.96%.  As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. 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, 2024 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 accrued interest at a fixed rate of 6.50% for the first five years until March 21, 2023. The subordinated notes have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 3.73%) which adjusts and is also payable quarterly. The interest rate at March 31, 2024 was 9.05%. As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company is replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. 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 $5,700,000 at March 31, 2024 and December 31, 2023, respectively.

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.

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Table of Contents

The following table summarizes option activity under the Company's stock incentive plans during the indicated periods:

Three Months Ended March 31, 

2024

2023

    

    

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

 

$

$

 

14

$

25.63

$

9.76

 

Granted

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Exercised

 

 

$

 

 

 

 

Options outstanding, end of period

 

$

$

$

14

$

25.28

$

9.76

$

Options exercisable, end of period

 

 

  

 

  

14

 

  

 

  

During the three months ended March 31, 2023, we granted certain officers time-based restricted shares of common stock. 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 total number of shares underlying non-vested restricted stock was 26,111 and 26,152 at March 31, 2024 and 2023, 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, 2024 and 2023 was $782,000 and $883,400, respectively. The time-based unrecognized compensation of $558,200 is expected to be recognized over a weighted average period of 2.01 years. For the period ended March 31, 2024, there were no forfeitures of restricted stock.

A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the three months ended March 31, 2024 follows:

    

    

Weighted-

    

Average

Aggregate

Grant-Date

Intrinsic

Shares

Fair-Value

Value

December 31, 2023

 

31,077

$

45.93

$

1,320,773

Granted

 

 

 

Vested

 

(4,179)

 

52.32

 

(177,608)

Forfeited

Other (1)

 

(787)

 

58.95

 

(33,448)

March 31, 2024

 

26,111

$

44.52

$

1,109,718

(1)Represents the incremental decrease in shares that vested based on the restricted stock units vesting at a lower value as opposed to the targeted value of the award.

Stock-based compensation expense was approximately $81,000 and $102,000 for the three months ended March 31, 2024 and 2023, respectively.

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Table of Contents

Note 11 – Fair value

The Company determines the fair value of its financial instruments based on the requirements established in 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).

Collateral dependent: 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 collateral dependent and an allowance for credit losses is established. The Company measures expected credit losses based on the fair value of the collateral either through the operation of the collateral or the sale of the collateral to include estimated cost to sell. The Company maintains a valuation allowance to the extent that this measure of the collateral dependent loan is less than the recorded investment in the loan. The Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to appraisals are required or if observable inputs are not available, the Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 3.

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 – interest rate lock commitments (“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.

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 Company has elected the fair value option on their firm commitments under ASC 825.  

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Table of Contents

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.

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

Fair Value Measurement

at March 31, 2024 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

U.S. Government Agencies

$

678

$

$

678

$

Mortgage-backed securities

 

69,907

 

69,907

 

Municipals

1,652

1,652

Subordinated debt

 

10,547

 

 

10,047

 

500

Loans held for sale

7,019

7,019

IRLC

293

293

Financial Liabilities - Recurring

Forward sales commitment

42

42

Fair Value Measurement

at December 31, 2023 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

U.S. Government Agencies

$

20,615

$

$

20,615

$

Mortgage-backed securities

 

72,537

 

 

72,537

 

Municipals

1,656

1,656

Subordinated debt

 

10,777

 

 

10,277

500

Loans held for sale

4,983

4,983

IRLC

271

271

Financial Liabilities - Recurring

Forward sales commitment

506

506

There were no Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at March 31, 2024 and December 31, 2023.

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.

26

Table of Contents

The following table reflects 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 (in thousands).

March 31, 

December 31, 

2024

2023

    

Level in Fair

    

    

    

    

Value

Carrying

Estimated

Carrying

Estimated

Hierarchy

Value

Fair Value

Value

Fair Value

Financial assets

 

  

 

  

 

  

 

  

 

  

Cash

 

Level 1

$

13,073

$

13,073

$

10,383

$

10,383

Cash equivalents

 

Level 2

 

19,323

 

19,323

 

7,331

 

7,331

Investment securities available for sale

 

Level 2

 

82,284

 

82,284

 

105,085

 

105,085

Investment securities available for sale

 

Level 3

 

500

 

500

 

500

 

500

Federal Home Loan Bank stock

 

Level 2

 

2,644

 

2,644

 

2,644

 

2,644

Loans held for sale

 

Level 2

 

7,019

 

7,019

 

4,983

 

4,983

Loans

 

Level 3

 

591,338

 

567,741

 

575,008

 

547,935

Bank owned life insurance

 

Level 2

 

13,198

 

13,198

 

13,120

 

13,120

Accrued interest receivable

 

Level 2

 

3,531

 

3,531

 

3,827

 

3,827

Interest rate lock commitments

Level 2

293

293

271

271

Financial liabilities

 

  

 

  

 

  

 

  

 

  

Deposits

 

Level 2

 

620,269

 

620,673

 

605,345

 

605,226

FHLB borrowings

 

Level 2

 

40,000

 

39,886

 

45,000

 

44,999

Trust preferred securities

 

Level 2

 

8,764

 

8,969

 

8,764

 

8,848

Other borrowings

 

Level 2

 

5,700

 

5,700

 

5,700

 

5,700

Accrued interest payable

 

Level 2

 

406

 

406

 

210

 

210

Forward sales commitment

Level 2

42

42

506

506

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.

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The following table presents segment information as of and for the three months ended March 31, 2024 and 2023 (in thousands):

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Three Months Ended March 31, 2024

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

9,243

$

92

$

$

9,335

Mortgage banking income, net

 

 

909

 

(59)

 

850

Other revenues

 

795

 

 

(41)

 

754

Total revenues

 

10,038

 

1,001

 

(100)

 

10,939

Expenses

 

  

 

  

 

  

 

  

Provision for credit losses

150

150

Interest expense

 

2,939

 

 

 

2,939

Salaries and benefits

 

2,785

 

679

 

 

3,464

Other expenses

 

2,030

 

235

 

(100)

 

2,165

Total operating expenses

 

7,904

 

914

 

(100)

 

8,718

Income before income taxes

2,134

87

2,221

Income tax expense

431

18

449

Net income

$

1,703

$

69

$

$

1,772

Total assets

$

756,005

$

16,777

$

(25,910)

$

746,872

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Three Months Ended March 31, 2023

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

7,543

$

40

$

$

7,583

Mortgage banking income, net

 

 

538

 

(60)

 

478

Other revenues

 

821

 

 

 

821

Total revenues

 

8,364

 

578

 

(60)

 

8,882

Expenses

 

  

 

  

 

  

 

  

Interest expense

 

1,218

 

 

 

1,218

Salaries and benefits

 

2,742

 

706

 

 

3,448

Other expenses

 

2,137

 

274

 

(60)

 

2,351

Total operating expenses

 

6,097

 

980

 

(60)

 

7,017

Income (loss) before income taxes

2,267

(402)

1,865

Income tax expense (benefit)

409

(84)

325

Net income (loss)

$

1,858

$

(318)

$

$

1,540

Total assets

$

749,402

$

17,878

$

(32,483)

$

734,797

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Note 13 – Shareholders’ Equity and Regulatory Matters

Accumulated Other Comprehensive Loss

The following table presents the change in accumulated other comprehensive loss for the three months ended March 31, 2024 and year ended December 31, 2023 and is summarized as follows, net of tax (dollars in thousands):

Unrealized

Defined

Losses on AFS

Benefit

Securities

Plan

Total

Accumulated other comprehensive loss December 31, 2023

$

(5,604)

$

(9)

$

(5,613)

Other comprehensive loss

Other comprehensive loss before reclassification

-

-

Amounts reclassified from AOCI into earnings

(782)

-

(782)

Net current period other comprehensive loss

(782)

-

(782)

Accumulated other comprehensive loss March 31, 2024

$

(6,386)

$

(9)

$

(6,395)

Unrealized

Defined

Losses on AFS

Benefit

Securities

Plan

Total

Accumulated other comprehensive loss December 31, 2022

$

(10,863)

$

(18)

$

(10,881)

Other comprehensive income

Other comprehensive income before reclassification

1,320

9

1,329

Amounts reclassified from AOCI into earnings

3,939

-

3,939

Net current period other comprehensive income

5,259

9

5,268

Accumulated other comprehensive loss December 31, 2023

$

(5,604)

$

(9)

$

(5,613)

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”).  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 Bank is required to comply with the capital adequacy standards established by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC has adopted rules to implement the Basel III Capital Rules. The Basel III Capital Rules establish minimum capital ratios and risk weightings that are applied to many classes of assets held by community banks, including applying higher risk weightings to certain commercial real estate loans.

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 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, 2024, 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

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risk-based capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%.  As of March 31, 2024, the Bank exceeded the minimum ratios to be classified as well capitalized.

The capital amounts and ratios at March 31, 2024 and December 31, 2023 for the Bank are presented in the table below (dollars in thousands):

Minimum Capital

 

Requirements

Actual

Including Conservation Buffer (1)

To be Well Capitalized

    

Amount

    

Ratio

Amount

    

Ratio

Amount

    

Ratio

March 31, 2024

 

  

 

  

 

  

 

  

 

  

 

  

Total capital (to risk- weighted assets) Village Bank

$

88,249

 

14.13

%  

$

65,568

 

10.50

%  

$

62,446

 

10.00

%

Tier 1 capital (to risk- weighted assets) Village Bank

 

84,355

 

13.51

%  

 

53,079

 

8.50

%  

 

49,957

 

8.00

%

Leverage ratio (Tier 1 capital to average assets) Village Bank

 

84,355

 

11.36

%  

 

29,698

 

4.00

%  

 

37,122

 

5.00

%

Common equity tier 1 (to risk- weighted assets) Village Bank

 

84,355

 

13.51

%  

 

43,712

 

7.00

%  

 

40,590

 

6.50

%

December 31, 2023

 

  

 

  

 

  

 

  

 

  

 

  

Total capital (to risk- weighted assets) Village Bank

$

86,493

 

14.49

%  

$

62,679

 

10.50

%  

$

59,695

 

10.00

%

Tier 1 capital (to risk- weighted assets) Village Bank

 

82,764

 

13.86

%  

 

50,740

 

8.50

%  

 

47,756

 

8.00

%

Leverage ratio (Tier 1 capital to average assets) Village Bank

 

82,764

 

11.14

%  

 

29,706

 

4.00

%  

 

37,133

 

5.00

%

Common equity tier 1 (to risk- weighted assets) Village Bank

 

82,764

 

13.86

%  

 

41,786

 

7.00

%  

 

38,801

 

6.50

%

(1) Basel III Capital Rules require banking organizations to maintain a minimum CETI ratio of 4.5%, plus a 2.5% capital conservation buffer; a minimum Tier 1 capital ratio of 6.0%, plus a 2.5% capital conservation buffer; a minimum, total risk-based capital ratio of 8.0%, plus a 2.5% conservation buffer; and a minimum Tier leverage ratio of 4.0%.

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, 2024 and December 31, 2023, the Company had the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

    

March 31, 

    

December 31, 

2024

2023

Undisbursed credit lines

$

137,230

$

127,918

Commitments to extend or originate credit

 

11,298

 

7,463

Standby letters of credit

 

1,246

 

1,202

Total commitments to extend credit

$

149,774

$

136,583

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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.

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. The Company’s portfolio of loans held for sale (“LHFS”) is accounted for 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 $7.0 million as of March 31, 2024, of which $6.9 million is related to unpaid principal, and totaled $5.0 million as of December 31, 2023, of which $4.8 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. 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, 2024, and totaled $293,000, with a notional amount of $11.3 million and total positions of 36, and was reported in “Other Assets” at December 31, 2023, and totaled $271,000 with a notional amount of $7.5 million and total positions of 27. 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, 2024 and 2023. The Company’s IRLCs are classified as Level 2. At March 31, 2024 and December 31, 2023, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

The Company uses 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, 2024, and totaled $42,000 with a notional amount of $18.2 million and total positions of 58 and was reported in “Other Liabilities” at December 31, 2023, and totaled $506,000, with a notional amount of $12.3 million and total positions of 47.

Note 16 Recent Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five

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percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (“CODM”), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain U.S. Securities and Exchange Commission (“SEC”) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

In July 2023, the FASB issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB ASC pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

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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 credit 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 credit 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 ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged;
the effects of future economic, business and market conditions;
legislative and regulatory changes, including the Dodd-Frank Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;
our inability to maintain our regulatory capital position;
the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions despite security measures implemented by the Company;
changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions with which we do business;
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;
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;
geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;
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;
the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events;
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 credit losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income.

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at March 31, 2024 and December 31, 2023 and the results of operations for the Company for the three months ended March 31, 2024 and 2023. 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, 2024, the Company had a net income of $1.77 million, or $1.19 per fully diluted share, compared to net income of $1.54 million, or $1.04 per fully diluted share, for the same period in 2023.

On January 1, 2023, the Commercial Banking Segment adopted the Current Expected Credit Loss (“CECL”) methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023 to $3.52 million. The allowance for credit losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.

As of March 31, 2024, the allowance for credit losses was $3.89 million and included an allowance for credit losses on loans of $3.57 million and a reserve for unfunded commitments of $320,000.

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” or “NIM”) is calculated by dividing tax equivalent net interest income by average interest-earning assets.

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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, 

 

    

2024

    

2023

    

Change

 

 

(dollars in thousands)

Average interest-earning assets

$

692,089

$

681,553

 

$

10,536

Interest income

$

9,335

$

7,583

 

$

1,752

Yield on interest-earning assets

 

5.42

%

 

4.51

%

0.91

%

Average interest-bearing liabilities

$

429,394

$

406,015

 

$

23,379

Interest expense

$

2,939

$

1,218

 

$

1,721

Cost of interest-bearing liabilities

 

2.75

%

 

1.22

%

1.53

%

Net interest income

$

6,396

$

6,365

 

$

31

Net interest margin

 

3.72

%

 

3.79

%

(0.07)

%

The following are variances of note for the three months ended March 31, 2024 compared to the three months ended March 31, 2023:

NIM compressed by seven basis points to 3.72% for the three months ended March 31, 2024 compared to 3.79% for the three months ended March 31, 2023. The compression was driven by the following:

oThe cost of interest bearing liabilities increased by 153 basis points to 2.75% for the three months ended March 31, 2024 compared to 1.22% for the three months ended March 31, 2023. The increase in our cost of interest bearing liabilities continues to be driven by an increase in the rate paid on variable rate debt and market pressures on deposit rates. The rate paid on money market deposit accounts increased 192 basis points to 2.93% for the three months ended March 31, 2024 compared to 1.01% for the three months ended March 31, 2023, and the rate paid on time deposits increased 240 basis points to 3.21% for the three months ended March 31, 2024 compared to 0.81% for the three months ended March 31, 2023. The increase in the rate on time deposits was impacted heavily by the addition of $20.0 million in brokered time deposits at a weighted average rate of 4.89% during the three months ended March 31, 2024.  While we expect there will be continued pressure on our funding base, we anticipate the velocity of those increases to slow down during 2024.

oWhile the rate paid on interest bearing liabilities increased by 153 basis points for the three months ended March 31, 2024, overall cost of funds increased by 103 basis points, 1.78% for the three months ended March 31, 2024 vs. 0.75% for the three months ended March 31, 2023. The lower increase in cost of funds was driven by our strong non-interest bearing deposits level, which remained near 38% of our deposit base.

oOffsetting the increased cost of funds, our yield on our earning assets increased by 91 basis points, 5.42% as of the three months ended March 31, 2024 compared to 4.51% as of the three months ended March 31, 2023. The increase in our yield on earning assets continues to be a result of improvement in our earning asset mix as well as the impact of the rise in interest rates during 2023 and 2024. We expect to see continued improvement in the yield on earning assets due to higher yielding loan growth combined with the amortization of lower yielding assets.

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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.

Three Months Ended March 31, 2024

Three Months Ended March 31, 2023

 

Interest

Interest

 

Average

Income/

Yield

Average

Income/

Yield

 

    

Balance

    

Expense

    

Rate

    

Balance

    

Expense

    

Rate

Loans

 

 

Commercial

$

89,376

$

1,533

6.90

%

$

86,007

$

1,218

5.74

%

Real estate - residential

128,486

2,031

6.36

%

95,272

1,296

5.52

%

Real estate - commercial

294,857

3,484

4.75

%

282,952

3,180

4.56

%

Real estate - construction

47,885

676

5.68

%

48,065

623

5.26

%

Student loans

16,878

276

6.58

%

20,482

339

6.71

%

Consumer

4,484

109

9.78

%

4,068

66

6.58

%

Loans net of deferred fees

581,966

8,109

5.60

%

536,846

6,722

5.08

%

Loans held for sale

 

5,681

 

92

 

6.51

%

 

2,553

 

40

 

6.35

%

Investment securities

 

90,742

 

932

 

4.13

%

 

135,011

 

727

 

2.18

%

Federal funds and other

 

13,700

 

202

 

5.93

%

 

7,143

 

94

 

5.34

%

Total interest earning assets

 

692,089

 

9,335

 

5.42

%

 

681,553

 

7,583

 

4.51

%

Allowance for loan losses

 

(3,431)

 

  

 

  

 

(3,253)

 

  

 

  

Cash and due from banks

 

11,406

 

  

 

  

 

11,263

 

  

 

  

Premises and equipment, net

 

11,785

 

  

 

  

 

11,778

 

  

 

  

Other assets

 

24,462

 

  

 

  

 

23,127

 

  

 

  

Total assets

$

736,311

 

  

 

  

$

724,468

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest bearing deposits

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

$

72,753

$

117

 

0.65

%

$

84,262

$

62

 

0.30

%

Money market

 

197,764

 

1,438

 

2.92

%

 

180,020

 

446

 

1.00

%

Savings

 

34,568

 

14

 

0.16

%

 

49,473

 

19

 

0.16

%

Certificates

 

65,628

 

526

 

3.22

%

 

47,986

 

97

 

0.82

%

Total deposits

 

370,713

 

2,095

 

2.27

%

 

361,741

 

624

 

0.70

%

Borrowings

 

 

 

 

 

 

Long-term debt - trust

preferred securities

8,789

161

7.37

%

8,786

140

6.46

%

FHLB advances

43,868

545

5.00

%

29,500

347

4.77

Subordinated debt, net

5,700

135

9.53

%

5,695

104

7.41

%

Other borrowings

324

3

3.72

%

293

3

4.15

%

Total interest bearing liabilities

 

429,394

 

2,939

 

2.75

%

 

406,015

 

1,218

 

1.22

%

Noninterest bearing deposits

 

234,295

 

  

 

 

252,647

 

  

 

Other liabilities

 

4,719

 

  

 

 

3,133

 

  

 

  

Total liabilities

 

668,408

 

  

 

  

 

661,795

 

  

 

  

Equity capital

 

67,903

 

  

 

  

 

62,673

 

  

 

  

Total liabilities and capital

$

736,311

 

  

 

  

$

724,468

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net interest income before provision for loan losses

 

$

6,396

 

  

 

  

$

6,365

 

  

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

 

  

 

  

 

2.67

%

 

  

 

  

 

3.29

%

Net interest margin (net interest income expressed as a percentage of average earning assets)

 

  

 

  

 

3.72

%

 

 

  

 

3.79

%

36

Table of Contents

Provision for Credit losses

On January 1, 2023, the Commercial Banking Segment adopted the CECL methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023. The allowance for credit losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.

As of March 31, 2024, the allowance for credit losses was $3.89 million and included an allowance for credit losses on loans of $3.57 million and a reserve for unfunded commitments of $320,000.

The Company recorded a provision for credit losses for loans of $136,700 for the three months ended March 31, 2024, which was the result of loan growth as all credit metrics remained strong compared to year-end 2023. Non-performing loans as a percentage of loans decreased from 0.12% at March 31, 2023 to 0.05% at March 31, 2024.

The Company recorded a provision for credit losses for unfunded commitments of $13,300 for the three months ended March 31, 2024, which was driven by an increase in the total commitments outstanding at March 31, 2024.

The allowance for credit losses on loans to total loans ratio at the Company is 0.60% compared to the peer average of 1.11%. Management considers this level of allowance sufficient and appropriate based on the current asset quality and assessment of the Company’s loan portfolio.

As of March 31, 2023, the allowance for credit losses was $3.53 million and included an allowance for credit losses on loans of $3.27 million and a reserve for unfunded commitments of $254,000.

The provision for credit losses on loans was driven by the increase in loan balances at March 31, 2023, while the recovery of credit losses for unfunded commitments was a result of the reduction in the total balance outstanding at March 31, 2023. The lack of an overall provision for credit losses was driven by stable local economic conditions and credit quality remaining strong.

While current economic challenges due to higher inflation and the speed at which interest rates have risen remain a risk to credit quality, we believe our current level of allowance for credit losses is sufficient.

For more financial data and other information about the allowance for credit 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 credit 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, and mortgage banking income, net. The most significant noninterest income item has historically been mortgage banking income, net, representing 53% and 38%, for the three month periods ended March 31, 2024 and 2023, respectively.  Service charges and fees represent 40% and 53%, of net interest income for the three month periods ended March 31, 2024 and 2023, respectively.

For the Three Months Ended

 

March 31, 

Change

 

    

2024

    

2023

    

$

    

%

 

 

(dollars in thousands)

Service charges and fees

$

641

$

669

$

(28)

(4.2)

%

Mortgage banking income, net

 

850

 

478

 

372

77.8

%

Other

 

113

 

109

 

4

3.7

%

Total noninterest income

$

1,604

$

1,256

$

348

27.7

%

The increase in noninterest income of $348,000 for the three months ended March 31, 2024, was the result of the following:

During the three months ended March 31, 2024, the fair value of forward sales commitments associated with the Mortgage Banking Segment’s loans held for sale and interest rate lock commitments was adjusted to properly reflect the timing of income

37

Table of Contents

recognition in the life cycle of the interest rate lock commitments and loans held for sale, which resulted in a $233,900 increase to net income for the period.  This increase was a one-time adjustment and is not expected to be recurring.  Mortgage revenue is expected to normalize going forward.

Noninterest expense

For the Three Months Ended

 

March 31, 

Change

 

    

2024

    

2023

    

$

    

%

 

 

(dollars in thousands)

Salaries and benefits

$

3,464

$

3,448

$

16

0.5

%

Occupancy

 

332

 

311

 

21

6.8

%

Equipment

 

278

 

285

 

(7)

(2.5)

%

Supplies

 

49

 

49

 

%

Data processing

439

 

440

 

(1)

(0.2)

%

Professional and outside services

 

418

 

372

 

46

12.4

%

Advertising and marketing

 

83

 

111

 

(28)

(25.2)

%

FDIC insurance premium

 

92

 

50

 

42

84.0

%

Other operating expense

 

474

 

690

 

(216)

(31.3)

%

Total noninterest expense

$

5,629

$

5,756

$

(127)

(2.2)

%

The decrease in noninterest expense of $127,000 for the three months ended March 31, 2024, was the result of the following:

Professional and outside services expense increased by $46,000 as a result of increased costs associated with the implementation of new licensed software products, consultant fees, and increased fees associated with debit and credit card usage, which were implemented in the latter half of 2023.
FDIC insurance premium increased by $42,000 as a result of an increase in the assessment rate implemented by the FDIC.
Other operating expenses decreased by $216,000 primarily as a result of an decrease in check and card fraud during the three months ended March 31, 2024.

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 differences and available tax credits. Income tax benefit for the three months ended March 31, 2024, was $449,000, resulting in an effective tax rate of 20.2% compared to income tax expense of $325,000 or 17.4%, for the same period in 2023. The increase in the effective tax rate was primarily related to a decrease in the tax credit received related to state taxes attributed to the Company and the Mortgage Banking Segment as well as the impact of permanent difference related to the cash surrender value on bank owned life insurance. The Bank is not subject to Virginia income taxes, and instead is subject to a franchise tax based on bank capital.

Balance Sheet Analysis

Investment securities

At March 31, 2024 and December 31, 2023, 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.

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Table of Contents

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 81.0% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 2.7% 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 15.7% 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. 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.

Loans classified by type as of March 31, 2024 and December 31, 2023 are as follows (dollars in thousands):

March 31, 2024

December 31, 2023

 

    

Amount

    

%

    

Amount

    

%

 

Construction and land development

  

  

  

  

 

Residential

$

9,077

 

1.53

%  

$

10,471

 

1.82

%

Commercial

 

34,437

 

5.83

%  

 

37,024

 

6.44

%

 

43,514

 

7.36

%  

 

47,495

 

8.26

%

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

121,429

 

20.53

%  

 

122,666

 

21.33

%

Non-owner occupied

 

165,508

 

27.99

%  

 

154,855

 

26.93

%

Multifamily

 

18,254

 

3.09

%  

 

12,743

 

2.22

%

Farmland

 

24

 

0.00

%  

 

326

 

0.06

%

 

305,215

 

51.61

%  

 

290,590

 

50.54

%

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

21,682

 

3.67

%  

 

21,557

 

3.75

%

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

First deed of trust

 

95,994

 

16.23

%  

 

95,638

 

16.63

%

Second deed of trust

 

11,955

 

2.02

%  

 

11,337

 

1.97

%

 

129,631

 

21.92

%  

 

128,532

 

22.35

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

92,600

 

15.66

%  

 

86,203

 

14.99

%

Guaranteed student loans

 

15,782

 

2.67

%  

 

17,923

 

3.12

%

Consumer and other

 

4,596

 

0.78

%  

 

4,265

 

0.74

%

 

 

 

 

Total loans

 

591,338

 

100.00

%  

 

575,008

 

100.00

%

Deferred fees and costs, net

 

750

 

 

803

 

Less: allowance for credit losses

 

(3,574)

 

 

(3,423)

 

$

588,514

 

  

$

572,388

 

  

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

39

Table of Contents

Allowance for Credit losses

On January 1, 2023, the Commercial Banking Segment adopted the CECL methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023 to $3.52 million. The allowance for credit losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.

As of March 31, 2024, the allowance for credit losses was $3.89 million and included an allowance for credit losses on loans of $3.57 million and a reserve for unfunded commitments of $320,000.

We monitor and maintain an allowance for credit losses to absorb an estimate of expected losses inherent in the loan portfolio. The following table presents the credit loss experience on loans for the dates indicated (dollars in thousands).

(Recovery of)

Ratio of Net

Beginning

Credit Losses

Ending

Average

(Charge-offs) to

Balance

on Loans

Charge-offs

Recoveries

Balance

Loans

Average Loans

Three Months Ended March 31, 2024

 

  

  

 

  

 

  

 

  

Construction and land development

 

  

  

 

  

 

  

 

  

Residential

$

86

$

(29)

$

$

$

57

$

10,129

%

Commercial

 

228

 

(26)

 

 

 

202

37,756

%

 

314

 

(55)

 

 

 

259

47,885

%

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

409

 

28

 

 

 

437

122,015

%

Non-owner occupied

 

1,467

 

129

 

 

 

1,596

157,933

%

Multifamily

 

44

 

42

 

 

 

86

14,673

%

Farmland

 

3

 

(3)

 

 

 

236

%

 

1,923

 

196

 

 

 

2,119

294,857

%

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

40

 

(18)

 

 

10

 

32

21,777

0.05

Secured by 1-4 family residential

 

  

 

 

  

 

  

 

  

First deed of trust

 

293

 

4

 

 

1

 

298

94,906

0.00

%

Second deed of trust

 

99

 

(6)

 

 

5

 

98

11,803

0.04

%

 

432

 

(20)

 

 

16

 

428

128,486

0.01

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

640

 

22

 

 

4

 

666

89,376

0.00

%

Student loans

 

57

 

4

 

(6)

 

 

55

16,878

(0.04)

%

Consumer and other

 

36

 

 

 

 

36

4,484

%

Unallocated

 

21

 

(10)

 

 

 

11

%

0

$

3,423

$

137

$

(6)

$

20

$

3,574

$

581,966

0.00

%

Impact of

Provision for

Ratio of Net

Beginning

adopting

(Recovery of)

Ending

Average

(Charge-offs) to

Balance

ASC 326

Loan Losses

Charge-offs

Recoveries

Balance

Loans

Average Loans

Year Ended December 31, 2023

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

79

$

3

$

4

$

$

$

86

$

8,153

%

Commercial

 

192

34

 

2

 

 

 

228

41,328

%

 

271

37

 

6

 

 

 

314

49,481

%

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

867

(475)

 

17

 

 

 

409

119,678

%

Non-owner occupied

 

1,289

192

 

(14)

 

 

 

1,467

153,506

%

Multifamily

 

33

7

 

4

 

 

 

44

12,385

%

Farmland

 

 

3

 

 

 

3

183

%

 

2,189

(276)

 

10

 

 

 

1,923

285,752

%

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

11

24

 

5

 

 

 

40

18,459

%

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

131

76

 

83

 

 

3

 

293

79,584

0.00

%

Second deed of trust

 

43

25

 

15

 

 

16

 

99

9,550

0.17

%

 

185

125

 

103

 

 

19

 

432

107,593

0.02

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

576

1

 

(110)

 

 

173

 

640

86,065

0.20

%

Student loans

 

52

 

35

 

(30)

 

 

57

19,716

(0.15)

%

Consumer and other

 

37

(5)

 

7

 

(3)

 

 

36

4,270

(0.07)

%

Unallocated

 

60

(9)

 

(30)

 

 

 

21

%

$

3,370

$

(127)

$

21

$

(33)

$

192

$

3,423

$

552,877

0.03

%

40

Table of Contents

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

Asset quality

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

March 31, 

December 31, 

 

    

2024

    

2023

 

Nonaccrual loans

$

281

$

291

Foreclosed properties

 

 

Total nonperforming assets

$

281

$

291

 

  

 

  

Restructured loans (not included in nonaccrual loans above)

$

$

 

  

 

  

Loans past due 90 days and still accruing (1)

$

2,200

$

2,228

 

  

 

  

Nonaccrual loans to total loans (2)

0.05

%

0.05

%

Nonperforming assets to loans (2)

 

0.05

%  

 

0.05

%

 

  

 

  

Nonperforming assets to total assets

 

0.04

%  

 

0.04

%

 

  

 

  

Allowance for credit losses on loans to

 

 

Loans, net of deferred fees and costs

0.60

%  

0.59

%  

Loans, net of deferred fees and costs (excluding guaranteed loans)

0.62

%  

0.61

%  

Nonaccrual loans

1,271.89

%  

1,176.29

%  

(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 $281,000 at March 31, 2024 compared to $291,000 at December 31, 2023.  Nonperforming assets, consisting solely of nonaccrual loans, totaled $281,000 at March 31, 2024, compared to $291,000 at December 31, 2023.

The following table presents an analysis of the changes in nonperforming assets for the three months ended March 31, 2024 (in thousands):

    

Nonaccrual

    

    

Loans

OREO

Total

Balance December 31, 2023

$

291

$

$

291

Additions

 

 

 

Loans placed back on accrual

 

 

 

Repayments

 

(10)

 

 

(10)

Charge-offs

 

 

 

Balance March 31, 2024

$

281

$

$

281

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 three 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

41

Table of Contents

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.

There were no individual allowances associated with the total nonaccrual loans of $281,000 and $291,000 at March 31, 2024 and December 31, 2023, respectively, that were considered individually evaluated.

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $85,000 and $80,000 for the three months ended March 31, 2024 and 2023, respectively. Student loans totaling $2,200,000 and $2,228,000 at March 31, 2024 and December 31, 2023, 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 credit losses.

Deposits

Deposits as of March 31, 2024 and December 31, 2023 were as follows (dollars in thousands):

March 31, 2024

December 31, 2023

 

    

Amount

    

%

    

Amount

    

%

 

Demand accounts

$

230,118

37.1

%  

$

247,624

40.9

%

Interest checking accounts

 

78,739

 

12.7

%

76,289

 

12.6

%

Money market accounts

 

207,640

 

33.5

%

195,249

 

32.3

%

Savings accounts

 

35,238

 

5.7

%

39,633

 

6.5

%

Time deposits of $250,000 and over

 

31,355

 

5.0

%

9,145

 

1.5

%

Other time deposits

 

37,179

 

6.0

%

37,405

 

6.2

%

Total

$

620,269

 

100.0

%

$

605,345

 

100.0

%

Total deposits increased by $14,924,000, or 2.47%, from December 31, 2023. Variances of note are as follows:

Noninterest bearing demand account balances decreased $17,506,000, or 7.07%, from December 31, 2023 and represented 37.1% of total deposits compared to 40.9% as of December 31, 2023. The decrease in noninterest bearing demand deposits was driven by a combination of consumers and businesses drawing down balances due to higher costs associated with continued pressure from inflation, as well as some movement into higher yielding accounts.
Low cost relationship deposits (i.e. interest checking, money market, and savings) balances increased $10,446,000, or 3.36%, from December 31, 2023. The increase in low-cost relationship deposits from the prior periods was the result of seasonal relationship growth as well as some deposits moving from non-interest bearing to interest bearing.
Time deposits increased by $21,984,000, or 47.23%, from December 31, 2023. The increase was the result of the Commercial Bank Segment issuing $20.0 million in brokered time deposits, at a weighted average rate of 4.89%, during the quarter to supplement the noninterest-bearing reduction.

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The following table presents the average deposits balance and average rate paid for the dates indicated (dollars in thousands).

    

Average Balance

    

Average Cost Rate

    

March 31,

December 31,

March 31,

December 31,

2024

2023

 

2024

2023

Noninterest bearing deposits

$

234,295

$

249,711

Interest checking

72,753

79,744

 

0.65

%

 

0.53

%

Money market

 

197,764

 

197,720

 

2.92

%

 

1.97

%

Savings

 

34,568

 

42,559

 

0.16

%

 

0.16

%

Certificates

 

 

 

Less than $250,000

34,854

42,191

3.95

%

1.49

%

$250,000 or more

30,774

9,396

2.39

%

2.94

%

Total interest bearing deposits

370,713

371,610

2.27

%

1.42

%

Total deposits

$

605,008

$

621,321

 

1.39

%

 

0.85

%

The following table presents (in thousands) the scheduled maturities of time deposits greater than $250,000 which is the maximum FDIC insurance limit.

    

    

March 31,

December 31,

2024

2023

 

Months to maturity:

Three or less

$

3,924

$

1,268

 

Over three through six

 

9,244

 

3,889

 

Over six through twelve

 

17,647

 

3,449

 

Over twelve

 

540

 

539

 

Total

$

31,355

$

9,145

 

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.

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, 2024 was $68,358,000 compared to $67,556,000 at December 31, 2023. The $802,000 increase in shareholders’ equity during the three months ended March 31, 2024, was due primarily to the recognition of net income of $1,772,000 offset by the $782,000 increase in accumulated other comprehensive loss.

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Table of Contents

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, 

 

    

2024

    

2023

 

Tier 1 capital

 

  

 

  

Total bank equity capital

$

77,960

$

77,151

Net unrealized loss on available-for-sale securities

 

6,385

5,603

Defined benefit postretirement plan

 

10

10

Total Tier 1 capital

 

84,355

82,764

 

  

  

Tier 2 capital

 

  

  

Allowance for credit losses

 

3,894

3,729

Tier 2 capital deduction

 

Total Tier 2 capital

 

3,894

3,729

 

  

  

Total risk-based capital

 

88,249

86,493

 

  

  

Risk-weighted assets

$

624,461

$

596,946

 

  

 

  

Average assets

$

742,444

$

742,655

 

  

 

  

Capital ratios

 

  

 

  

Leverage ratio (Tier 1 capital to average assets)

 

11.36

%  

 

11.14

%

Common equity tier 1 capital ratio (CET 1)

 

13.51

%  

 

13.86

%

Tier 1 capital to risk-weighted assets

 

13.51

%  

 

13.86

%

Total capital to risk-weighted assets

 

14.13

%  

 

14.49

%

Equity to total assets

 

10.46

%  

 

10.50

%

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.

At March 31, 2024, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $115,180,000, or 15.42% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

At March 31, 2024, the Company had approximately $218.5 million in uninsured deposits, which represents 35.30% of total deposits. Total liquidity sources at March 31, 2024 equal $196.4 million, or 89.88% of uninsured deposits.

The Company’s internal policy limits wholesale deposits (i.e., brokered deposits and internet listing services) to 15 percent of total funding, representing $108.5 million of additional availability as of March 31, 2024. The Company had $20.0 million in wholesale deposits as of March 31, 2024, which were brokered deposits with a weighted average rate of 4.89%.

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,

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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 three federal funds lines of credit with correspondent banks totaling $22.8 million for which there were no borrowings against the lines at March 31, 2024 and December 31, 2023.

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, 2024 was $3.3 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, which would result in a total remaining credit availability of $143.7 million as of March 31, 2024.

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, 2024, we had commitments to originate $149,774,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at March 31, 2024. Certificates of deposit scheduled to mature in the 12-month period ending March 31, 2025 totaled $61,259,000. We believe that a significant portion of such deposits will remain with us. We further believe that deposit growth, loan repayments and other sources of funds will be adequate to meet our foreseeable short-term and long-term liquidity needs.

Interest rate sensitivity

An important element of asset/liability management is the monitoring of our sensitivity to interest rate movements. In order to measure the effects of interest rates on our net interest income, management takes into consideration the expected cash flows from the securities and loan portfolios and the expected magnitude of the repricing of specific asset and liability categories. We evaluate interest sensitivity risk and then formulate guidelines to manage this risk based on management’s outlook regarding the economy, forecasted interest rate movements and other business factors. Our goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.

Contractual principal repayments of loans do not necessarily reflect the actual term of our loan portfolio. The average lives of mortgage loans are substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which gives us the right to declare a loan immediately due and payable in the event, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid. In addition, certain borrowers increase their equity in the security property by making payments in excess of those required under the terms of the mortgage.

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

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Table of Contents

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

The administrator of LIBOR announced that the most commonly used U.S. dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on Secured Overnight Funding Rate (“SOFR”) for contracts governed by U.S. law that have no or ineffective fallbacks. We have a number of borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. As a result of the announced discontinuation of LIBOR on June 30, 2023, the Company replaced the LIBOR leg of the calculated floating rate for these instruments with the corresponding term SOFR plus the applicable tenor spread adjustment as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System.  

This transition did not have a significant impact on the Company’s consolidated financial statements.

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, 2024. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024 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 the Company’s 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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Table of Contents

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, 2023 filed with the SEC on March 22, 2024.

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

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

Not applicable.

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Table of Contents

ITEM 6 – EXHIBITS

10.1

Amendment No. 2 to Employment Agreement, dated March 26, 2024, by and between Village Bank and Trust Financial Corp. and Donald M. Kaloski, Jr. (incorporated herein by reference to Exhibit 10.1 of the Current Report).

10.2

Amendment No. 2 to Employment Agreement, dated March 26, 2024, by and between Village Bank and Max C. Morehead, Jr. (incorporated herein by reference to Exhibit 10.2 of the Current Report).

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

32.1

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

101

The following materials from the Village Bank and Trust Financial Corp. Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed

Consolidated Financial Statements.

104

Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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Table of Contents

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 10, 2024

By:

/s/ James E. Hendricks, Jr.

James E. Hendricks, Jr.

President and Chief Executive Officer

Date:

May 10, 2024

By:

/s/ Donald M. Kaloski, Jr.

Donald M. Kaloski, Jr.

Executive Vice President and Chief Financial Officer

49


ATTACHMENTS / EXHIBITS

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