Village Bank & Trust Financial Corp. - Quarter Report: 2021 September (Form 10-Q)

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 September 30, 2021

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 0-50765

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Virginia	16-1694602
(State or other jurisdiction of	(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 equity, as of the latest practicable date.

1,473,469 shares of common stock, $4.00 par value, outstanding as of November 8, 2021

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 September 30, 2021 (unaudited) and December 31, 2020	3

Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	4

Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	5

Consolidated Statements of Shareholders’ Equity For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	6

Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2021 and 2020 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3. Quantitative and Qualitative Disclosures About Market Risk	54

Item 4. Controls and Procedures	54

Part II – Other Information

Item 1. Legal Proceedings	55

Item 1A. Risk Factors	55

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3. Defaults Upon Senior Securities	55

Item 4. Mine Safety Disclosures	55

Item 5. Other Information	55

Item 6. Exhibits	55

Signatures	56

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

September 30, 2021 (Unaudited) and December 31, 2020*

(in thousands, except share and per share data)


	September 30,		December 31,
	2021		2020
Assets
Cash and due from banks	$	14,362	$	12,709
Federal funds sold		49,918		30,742
Total cash and cash equivalents		64,280		43,451
Investment securities available for sale, at fair value		88,549		40,844
Restricted stock, at cost		694		825
Loans held for sale		13,275		34,421
Loans
Outstandings		534,306		561,003
Allowance for loan losses		(3,443)		(3,970)
Deferred fees and costs, net		(1,401)		(2,048)
Total loans, net		529,462		554,985
Other real estate owned, net of valuation allowance		—		336
Premises and equipment, net		11,940		11,779
Bank owned life insurance		12,416		7,806
Accrued interest receivable		3,569		4,943
Other assets		5,876		6,846
Total Assets	$	730,061	$	706,236

Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing demand	$	270,397	$	222,305
Interest bearing		375,655		366,077
Total deposits		646,052		588,382
Long-term debt - trust preferred securities		8,764		8,764
Subordinated debt, net		5,652		5,628
Other borrowings		—		41,529
Accrued interest payable		71		194
Other liabilities		7,792		9,743
Total liabilities		668,331		654,240

Shareholders’ equity
Common stock, $4 par value, 10,000,000 shares authorized; 1,466,765 shares issued and outstanding at September 30, 2021 and 1,435,009 shares issued and outstanding at December 31, 2020		5,822		5,794
Additional paid-in capital		54,700		54,510
Retained earnings (accumulated deficit)		1,352		(8,738)
Stock in directors rabbi trust		(730)		(771)
Directors deferred fees obligation		730		771
Accumulated other comprehensive income (loss)		(144)		430
Total shareholders’ equity		61,730		51,996

Total liabilities and shareholders' equity	$	730,061	$	706,236

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2021 and 2020

(Unaudited)

(in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Interest income
Loans	$	6,655	$	6,307	$	20,148	$	17,622
Investment securities		244		230		743		740
Federal funds sold		22		3		32		55
Total interest income		6,921		6,540		20,923		18,417

Interest expense
Deposits		349		728		1,275		2,502
Borrowed funds		143		341		453		1,073
Total interest expense		492		1,069		1,728		3,575

Net interest income		6,429		5,471		19,195		14,842
Provision for (recovery of) loan losses		—		250		(500)		950
Net interest income after provision for (recovery of) loan losses		6,429		5,221		19,695		13,892

Noninterest income
Service charges and fees		580		535		1,711		1,502
Mortgage banking income, net		2,171		2,859		7,827		6,517
Gain on sale of asset held for sale		—		1		—		1
Gain on sale of investment securities, net		—		—		—		12
Gain on sale of Small Business Administration loans		—		—		—		86
Other		108		86		344		238
Total noninterest income		2,859		3,481		9,882		8,356

Noninterest expense
Salaries and benefits		3,607		3,644		10,541		9,278
Occupancy		315		326		948		965
Equipment		267		225		788		640
Supplies		49		50		138		141
Professional and outside services		730		835		2,085		2,276
Advertising and marketing		99		90		347		261
Foreclosed assets, net		—		4		(8)		(152)
FDIC insurance premium		38		47		142		167
Other operating expense		532		534		1,716		1,588
Total noninterest expense		5,637		5,755		16,697		15,164

Income before income tax expense		3,651		2,947		12,880		7,084
Income tax expense		752		678		2,790		1,582

Net income		2,899		2,269		10,090		5,502

Earnings per share, basic	$	1.97	$	1.55	$	6.88	$	3.78
Earnings per share, diluted	$	1.97	$	1.55	$	6.88	$	3.78

See accompanying notes to consolidated financial statements.

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

Three and Nine Months ended September 30, 2021 and 2020

(Unaudited)

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net income	$	2,899	$	2,269	$	10,090	$	5,502
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period		(237)		(52)		(736)		386
Tax effect		50		11		156		(81)
Net change in unrealized holding gains (losses) on securities available for sale, net of tax		(187)		(41)		(580)		305

Reclassification adjustment
Reclassification adjustment for gains realized in income		—		—		—		(12)
Tax effect		—		—		—		3
Reclassification for gains included in net income, net of tax		—		—		—		(9)

Minimum pension adjustment		3		3		9		9
Tax effect		(1)		(1)		(3)		(3)
Minimum pension adjustment, net of tax		2		2		6		6

Total other comprehensive income (loss)		(185)		(39)		(574)		302

Total comprehensive income	$	2,714	$	2,230	$	9,516	$	5,804

See accompanying notes to consolidated financial statements.

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three and Nine Months Ended September 30, 2021 and 2020

(Unaudited)

(In thousands)


	Three Months Ended September 30, 2021

									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Retained		Directors		Fees		Comprehensive
	Stock		Capital		Earnings		Rabbi Trust		Obligation		Income (loss)		Total

Balance, June 30, 2021	$	5,796	$	54,691	$	(1,547)	$	(730)	$	730	$	41	$	58,981
Vesting of restricted stock		26		(26)		—		—		—		—		—
Stock based compensation		—		35		—		—		—		—		35
Net income		—		—		2,899		—		—		—		2,899
Other comprehensive loss		—		—		—		—		—		(185)		(185)
Balance, September 30, 2021		5,822		54,700		1,352		(730)		730		(144)		61,730


	Three Months Ended September 30, 2020

									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Accumulated		Directors		Fees		Comprehensive
	Stock		Capital		Deficit		Rabbi Trust		Obligation		Income (loss)		Total

Balance, June 30, 2020	$	5,779	$	54,414	$	(14,059)	$	(771)	$	771	$	483	$	46,617
Vesting of restricted stock		11		(11)		—		—		—		—		—
Stock based compensation		—		28		—		—		—		—		28
Net income		—		—		2,269		—		—		—		2,269
Other comprehensive loss		—		—		—		—		—		(39)		(39)
Balance, September 30, 2020		5,790		54,431		(11,790)		(771)		771		444		48,875


	Nine Months Ended September 30, 2021

									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, 2020	$	5,794	$	54,510	$	(8,738)	$	(771)	$	771	$	430	$	51,996
Vesting of restricted stock		28		(28)		—		41		(41)		—		—
Stock based compensation		—		218		—		—		—		—		218
Net income		—		—		10,090		—		—		—		10,090
Other comprehensive loss		—		—		—		—		—		(574)		(574)
Balance, September 30, 2021	$	5,822	$	54,700	$	1,352	$	(730)	$	730	$	(144)	$	61,730


	Nine Months Ended September 30, 2020

									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Accumulated		Directors		Fees		Comprehensive
	Stock		Capital		Deficit		Rabbi Trust		Obligation		Loss		Total

Balance, December 31, 2019	$	5,779	$	54,285	$	(17,292)	$	(856)	$	856	$	142	$	42,914
Vesting of restricted stock		11		(11)		—		85		(85)		—		—
Stock based compensation		—		157		—		—		—		—		157
Net income		—		—		5,502		—		—		—		5,502
Other comprehensive income		—		—		—		—		—		302		302
Balance, September 30, 2020	$	5,790	$	54,431	$	(11,790)	$	(771)	$	771	$	444	$	48,875

See accompanying notes to consolidated financial statements

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2021 and 2020

(Unaudited)

(in thousands)


	Nine Months Ended
	September 30,
	2021		2020

Cash Flows from Operating Activities
Net income	$	10,090	$	5,502
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		447		442
Amortization of debt issuance costs		24		25
Deferred income taxes		499		905
Provision for (recovery of) loan losses		(500)		950
Write-down of other real estate owned		10		16
Gain on sale of investment securities		—		(12)
Gain on sales of loans held for sale		(9,608)		(6,517)
Gain on sale of assets held for sale		—		(1)
Gain on sale of other real estate owned		(18)		(175)
Loss on sale and disposal of premises and equipment		10		—
Stock compensation expense		218		157
Proceeds from sale of mortgage loans		271,454		247,205
Origination of mortgage loans held for sale		(240,700)		(255,491)
Amortization of premiums and accretion of discounts on securities, net		189		159
Increase in bank owned life insurance		(202)		(144)
Net change in:
Interest receivable		1,374		(2,283)
Other assets		633		1,669
Interest payable		(123)		10
Other liabilities		(1,951)		608
Net cash provided by (used in) operating activities		31,846		(6,975)

Cash Flows from Investing Activities
Purchases of available for sale securities		(62,613)		(3,387)
Proceeds from the sale of available for sale securities		—		7,936
Proceeds from the sale of assets held for sale		—		515
Proceeds from maturities, calls and paydowns of available for sale securities		13,983		6,309
Net decrease (increase) in loans		26,023		(166,510)
Proceeds from sale of other real estate owned		344		349
Purchases of premises and equipment, net		(618)		(117)
Purchase of bank owned life insurance		(4,408)		—
Redemptions (purchase) of restricted stock, net		131		(447)
Net cash used in investing activities		(27,158)		(155,352)

Cash Flows from Financing Activities
Net increase in deposits		57,670		130,644
Repayments of Federal Home Loan Bank advances		—		10,000
Net (decrease) increase in other borrowings		(41,529)		39,803
Net cash provided by financing activities		16,141		180,447

Net increase in cash and cash equivalents		20,829		18,120
Cash and cash equivalents, beginning of period		43,451		19,967

Cash and cash equivalents, end of period	$	64,280	$	38,087

Supplemental Disclosure of Cash Flow Information
Cash payments for interest	$	1,851	$	3,565
Supplemental Schedule of Non-Cash Activities
Unrealized gains on securities available for sale	$	(736)	$	373
Right of use assets obtained in exchange for new operating lease liabilities	$	243	$	—
Minimum pension adjustment	$	9	$	9

See accompanying notes to consolidated financial statements.

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2021 and 2020

(Unaudited)

Note 1 – Principles of presentation

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

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (“SEC”).

Note 2 – Use of estimates

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

Note 3 – Earnings per common share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Numerator
Net income - basic and diluted	$	2,899	$	2,269	$	10,090	$	5,502

Denominator
Weighted average shares outstanding - basic		1,468		1,462		1,467		1,456
Dilutive effect of common stock options		—		—		—		—

Weighted average shares outstanding - diluted		1,468		1,462		1,467		1,456

Earnings per share - basic	$	1.97	$	1.55	$	6.88	$	3.78
Earnings per share - diluted	$	1.97	$	1.55	$	6.88	$	3.78

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 5,793 and 6,573 at September 30, 2021 and 2020, respectively, of the unvested restricted units included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of September 30, 2021 and 2020, it was indeterminable

Table of Contents

whether these unvested restricted units would vest and as such the underlying shares were excluded from common shares issued and outstanding at such date and were not included in the computation of earnings per share for such period.

Note 4 – Investment securities available for sale

The amortized cost and fair value of investment securities available for sale as of September 30, 2021 and December 31, 2020 are as follows (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

September 30, 2021
U.S. Government agency obligations	$	41,791	$	41	$	(2)	$	41,830
Mortgage-backed securities		35,861		389		(434)		35,816
Municipals		2,272		—		(90)		2,182
Subordinated debt		8,772		65		(116)		8,721

	$	88,696	$	495	$	(642)	$	88,549

December 31, 2020
U.S. Government agency obligations	$	8,048	$	94	$	—	$	8,142
Mortgage-backed securities		23,412		645		(51)		24,006
Subordinated debt		8,795		37		(136)		8,696

	$	40,255	$	776	$	(187)	$	40,844

At September 30, 2021 and December 31, 2020, the Company had no investment securities pledged to secure borrowings from the Federal Home Loan Bank of Atlanta ("FHLB").

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Gross realized gains	$	—	$	—	$	—	$	39
Gross realized losses		—		—		—		(27)

	$	—	$	—	$	—	$	12

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

Table of Contents

Investment securities available for sale that have an unrealized loss position at September 30, 2021 and December 31, 2020 are detailed below (in thousands):


	Securities in a loss				Securities in a loss
	position for less than				position for more than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2021
U.S. Government agency obligations	$	29,812	$	(2)	$	—	$	—	$	29,812	$	(2)
Mortgage-backed securities		24,075		(412)		1,730		(22)		25,805		(434)
Municipals		2,181		(90)		—		—		2,181		(90)
Subordinated debt		929		(71)		959		(45)		1,888		(116)

	$	56,997	$	(575)	$	2,689	$	(67)	$	59,686	$	(642)

December 31, 2020
Mortgage-backed securities		5,475		(51)		—		—		5,475		(51)
Subordinated debt		1,747		(11)		2,807		(125)		4,554		(136)

	$	7,222	$	(62)	$	2,807	$	(125)	$	10,029	$	(187)

As of September 30, 2021, there were 19 investments available for sale totaling $56,997,000 that were in a continuous loss position for less than 12 months and had an unrealized loss of $575,000. There were three investments available for sale totaling $2,689,000 that had been in a continuous loss position for more than 12 months and had an unrealized loss of $67,000.

All of the unrealized losses are attributable to movements in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at September 30, 2021.

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2021, by contractual maturity, are as follows (in thousands):


	Amortized
	Cost		Fair Value

Less than one year	$	40,158	$	40,157
One to five years		165		166
Five to ten years		11,127		11,160
More than ten years		37,246		37,066

Total	$	88,696	$	88,549

Table of Contents

Note 5 – Loans and allowance for loan losses

Loans classified by type as of September 30, 2021 and December 31, 2020 are as follows (dollars in thousands):


	September 30, 2021				December 31, 2020
	Amount		%		Amount		%
Construction and land development
Residential	$	8,981	1.68	%	$	8,103	1.44	%
Commercial		41,810	7.82	%		21,466	3.82	%
		50,791	9.50	%		29,569	5.26	%
Commercial real estate
Owner occupied		106,499	19.93	%		99,784	17.79	%
Non-owner occupied		130,867	24.49	%		121,184	21.60	%
Multifamily		12,027	2.25	%		9,889	1.75	%
Farmland		1,099	0.21	%		367	0.07	%
		250,492	46.88	%		231,224	41.21	%
Consumer real estate
Home equity lines		17,194	3.22	%		18,394	3.28	%
Secured by 1-4 family residential,
First deed of trust		55,918	10.47	%		57,089	10.18	%
Second deed of trust		14,172	2.65	%		11,097	1.98	%
		87,284	16.34	%		86,580	15.44	%
Commercial and industrial loans
(except those secured by real estate)		115,129	21.55	%		181,088	32.28	%
Guaranteed student loans		27,624	5.17	%		29,657	5.29	%
Consumer and other		2,986	0.56	%		2,885	0.51	%

Total loans		534,306	100.0	%		561,003	100.0	%
Deferred fees and costs, net		(1,401)				(2,048)
Less: allowance for loan losses		(3,443)				(3,970)

	$	529,462			$	554,985

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

Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, included in commercial and industrial loans in the above table, were $56,809,000 and $136,674,000 as of September 30, 2021 and December 31, 2020, respectively.

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $41,571,000 and $65,587,000 as of September 30, 2021 and December 31, 2020, respectively.

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

Table of Contents

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


	September 30,		December 31,
	2021		2020
Commercial real estate
Non-owner occupied	$	292	$	303
		292		303
Consumer real estate
Home equity lines		300		300
Secured by 1-4 family residential
First deed of trust		618		630
Second deed of trust		240		317
		1,158		1,247
Commercial and industrial loans
(except those secured by real estate)		22		27

Total loans	$	1,472	$	1,577

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

●

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

●

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

●

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

●

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

Table of Contents

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


	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1‑4		5		6		7		Loans
September 30, 2021
Construction and land development
Residential	$	8,981	$	—	$	—	$	—	$	8,981
Commercial		39,173		2,637		—		—		41,810
		48,154		2,637		—		—		50,791
Commercial real estate
Owner occupied		95,415		7,496		3,588		—		106,499
Non-owner occupied		121,446		9,129		292		—		130,867
Multifamily		12,027		—		—		—		12,027
Farmland		1,099		—		—		—		1,099
		229,987		16,625		3,880		—		250,492
Consumer real estate
Home equity lines		16,269		625		300		—		17,194
Secured by 1-4 family residential
First deed of trust		52,798		2,316		804		—		55,918
Second deed of trust		13,473		432		267		—		14,172
		82,540		3,373		1,371		—		87,284
Commercial and industrial loans
(except those secured by real estate)		112,959		1,890		280		—		115,129
Guaranteed student loans		27,624		—		—		—		27,624
Consumer and other		2,952		34		—		—		2,986

Total loans	$	504,216	$	24,559	$	5,531	$	—	$	534,306


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

Total loans	$	535,128	$	20,632	$	5,243	$	—	$	561,003

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 >
	30‑59 Days		60‑89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
September 30, 2021
Construction and land development
Residential	$	—	$	—	$	—	$	—	$	8,981	$	8,981	$	—
Commercial		—		—		—		—		41,810		41,810		—
		—		—		—		—		50,791		50,791		—
Commercial real estate
Owner occupied		—		—		—		—		106,499		106,499		—
Non-owner occupied		—		—		—		—		130,867		130,867		—
Multifamily		—		—		—		—		12,027		12,027		—
Farmland		—		—		—		—		1,099		1,099		—
		—		—		—		—		250,492		250,492		—
Consumer real estate
Home equity lines		—		—		—		—		17,194		17,194		—
Secured by 1‑4 family residential
First deed of trust		92		—		—		92		55,826		55,918		—
Second deed of trust		—		—		—		—		14,172		14,172		—
		92		—		—		92		87,192		87,284		—
Commercial and industrial loans
(except those secured by real estate)		—		412		—		412		114,717		115,129		—
Guaranteed student loans		1,092		393		2,496		3,981		23,643		27,624		2,496
Consumer and other		—		—		—		—		2,986		2,986		—

Total loans	$	1,184	$	805	$	2,496	$	4,485	$	529,821	$	534,306	$	2,496

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

Total loans	$	1,673	$	1,066	$	2,193	$	4,932	$	556,071	$	561,003	$	2,193

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

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

Table of Contents

portions thereof, are charged off when deemed uncollectible. Impaired loans are set forth in the following table as of the dates indicated (in thousands):


	September 30, 2021						December 31, 2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial real estate
Owner occupied	$	5,106	$	5,121	$	—	$	2,780	$	2,795	$	—
Non-owner occupied		1,843		1,843		—		1,991		1,991		—
		6,949		6,964		—		4,771		4,786		—
Consumer real estate
Home equity lines		300		300		—		300		300		—
Secured by 1‑4 family residential
First deed of trust		1,850		1,850		—		1,937		1,940		—
Second deed of trust		692		776		—		699		992		—
		2,842		2,926		—		2,936		3,232		—
Commercial and industrial loans
(except those secured by real estate)		194		194		—		141		141		—
		9,985		10,084		—		7,848		8,159		—

With an allowance recorded
Commercial real estate
Owner occupied		—		—		—		1,125		1,125		9
		—		—		—		1,125		1,125		9
Consumer real estate
Secured by 1-4 family residential
First deed of trust		148		148		7		74		74		8
		148		148		7		74		74		8

Total
Commercial real estate
Owner occupied		5,106		5,121		—		3,905		3,920		9
Non-owner occupied		1,843		1,843		—		1,991		1,991		—
		6,949		6,964		—		5,896		5,911		9
Consumer real estate
Home equity lines		300		300		—		300		300		—
Secured by 1-4 family residential,
First deed of trust		1,998		1,998		7		2,011		2,014		8
Second deed of trust		692		776		—		699		992		—
		2,990		3,074		7		3,010		3,306		8
Commercial and industrial loans
(except those secured by real estate)		194		194		—		141		141		—
	$	10,133	$	10,232	$	7	$	9,047	$	9,358	$	17

Table of Contents

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


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2021				September 30, 2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Owner occupied	$	5,176	$	40	$	4,569	$	136
Non-owner occupied		1,870		27		1,900		86
		7,046		67		6,469		222
Consumer real estate
Home equity lines		300		6		300		19
Secured by 1-4 family residential
First deed of trust		1,942		20		1,940		65
Second deed of trust		882		20		690		39
		3,124		46		2,930		123
Commercial and industrial loans
(except those secured by real estate)		199		—		184		1
		10,369		113		9,583		346

With an allowance recorded
Commercial real estate
Owner occupied		—		—		281		15
		—		—		281		15
Consumer real estate
Secured by 1-4 family residential
First deed of trust		150		5		131		7
		150		5		131		7

Total
Commercial real estate
Owner occupied		5,176		40		4,850		151
Non-owner occupied		1,870		27		1,900		86
		7,046		67		6,750		237
Consumer real estate
Home equity lines		300		6		300		19
Secured by 1-4 family residential,
First deed of trust		2,092		25		2,071		72
Second deed of trust		882		20		690		39
		3,274		51		3,061		130
Commercial and industrial loans
(except those secured by real estate)		199		—		184		1
	$	10,519	$	118	$	9,995	$	368

Table of Contents

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

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


							Specific
							Valuation
	Total		Performing		Nonaccrual		Allowance
September 30, 2021
Commercial real estate
Owner occupied	$	3,287	$	3,287	$	—	$	—
Non-owner occupied		1,843		1,551		292		—
		5,130		4,838		292		—
Consumer real estate
Secured by 1-4 family residential
First deeds of trust		1,679		1,140		539		7
Second deeds of trust		511		452		59		—
		2,190		1,592		598		7
Commercial and industrial loans
(except those secured by real estate)		22		—		22		—
	$	7,342	$	6,430	$	912	$	7

Number of loans		32		25		7		2


							Specific
							Valuation
	Total		Performing		Nonaccrual		Allowance
December 31, 2020

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

Number of loans		34		27		7		2

Table of Contents

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


	Nine Months Ended					Nine Months Ended
	September 30, 2021					September 30, 2020
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	Loans	Balance		Balance		Loans	Balance		Balance

Commercial real estate Non-owner occupied	—	$	—	$	—	1	$	311	$	311

Secured by 1-4 family residential
First deed of trust	1		267		267	—		—		—
	1	$	267	$	267	1	$	311	$	311

There were no TDR’s identified during the three months ended September 30, 2021 and 2020.

There were no defaults on TDR’s that were modified as TDRs during the prior 12 month period ended September 30, 2021 and 2020.

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

Table of Contents

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


			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance

Three Months Ended September 30, 2021
Construction and land development
Residential	$	66	$	10	$	—	$	—	$	76
Commercial		203		28		—		—		231
		269		38		—		—		307
Commercial real estate
Owner occupied		802		58		—		—		860
Non-owner occupied		1,059		30		—		—		1,089
Multifamily		35		1		—		—		36
Farmland		2		—		—		—		2
		1,898		89		—		—		1,987
Consumer real estate
Home equity lines		11		—		—		—		11
Secured by 1-4 family residential
First deed of trust		113		(3)		—		1		111
Second deed of trust		72		(3)		—		21		90
		196		(6)		—		22		212
Commercial and industrial loans
(except those secured by real estate)		422		55		—		3		480
Student loans		80		1		(11)		—		70
Consumer and other		36		(4)		—		—		32
Unallocated		528		(173)		—		—		355

	$	3,429	$	—	$	(11)	$	25	$	3,443


			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance

Three Months Ended September 30, 2020
Construction and land development
Residential	$	213	$	(23)	$	—	$	14	$	204
Commercial		295		23		—		—		318
		508		—		—		14		522
Commercial real estate
Owner occupied		904		118		—		—		1,022
Non-owner occupied		1,202		171		—		—		1,373
Multifamily		47		1		—		—		48
Farmland		—		2		—		—		2
		2,153		292		—		—		2,445
Consumer real estate
Home equity lines		40		(30)		—		—		10
Secured by 1-4 family residential
First deed of trust		166		(7)		—		1		160
Second deed of trust		75		38		—		44		157
		281		1		—		45		327
Commercial and industrial loans
(except those secured by real estate)		317		27		—		4		348
Student loans		101		6		(10)		—		97
Consumer and other		40		10		(13)		1		38
Unallocated		359		(86)		—		—		273

	$	3,759	$	250	$	(23)	$	64	$	4,050

Table of Contents


			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance

Nine Months Ended September 30, 2021
Construction and land development
Residential	$	214	$	(138)	$	—	$	—	$	76
Commercial		285		(54)		—		—		231
		499		(192)		—		—		307
Commercial real estate
Owner occupied		1,047		(187)		—		—		860
Non-owner occupied		1,421		(346)		—		14		1,089
Multifamily		47		(11)		—		—		36
Farmland		2		—		—		—		2
		2,517		(544)		—		14		1,987
Consumer real estate
Home equity lines		24		(23)		—		10		11
Secured by 1-4 family residential
First deed of trust		166		(65)		—		10		111
Second deed of trust		79		57		(84)		38		90
		269		(31)		(84)		58		212
Commercial and industrial loans
(except those secured by real estate)		408		45		—		27		480
Student loans		87		7		(24)		—		70
Consumer and other		36		14		(18)		—		32
Unallocated		154		201		—		—		355

	$	3,970	$	(500)	$	(126)	$	99	$	3,443


			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance

Nine Months Ended September 30, 2020
Construction and land development
Residential	$	48	$	139	$	—	$	17	$	204
Commercial		137		181		—		—		318
		185		320		—		17		522
Commercial real estate
Owner occupied		671		351		—		—		1,022
Non-owner occupied		831		542		—		—		1,373
Multifamily		85		(37)		—		—		48
Farmland		2		—		—		—		2
		1,589		856		—		—		2,445
Consumer real estate
Home equity lines		271		(261)		—		—		10
Secured by 1-4 family residential
First deed of trust		343		(188)		—		5		160
Second deed of trust		64		42		—		51		157
		678		(407)		—		56		327
Commercial and industrial loans
(except those secured by real estate)		572		(114)		(135)		25		348
Student loans		108		25		(36)		—		97
Consumer and other		30		21		(17)		4		38
Unallocated		24		249		—		—		273

	$	3,186	$	950	$	(188)	$	102	$	4,050

Table of Contents


			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance

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

	$	3,186	$	950	$	(292)	$	126	$	3,970

The amount of the loan loss provision (recovery) is determined by an evaluation of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions. Loans originated under PPP are not considered in the evaluation of the allowance for loan losses because these loans carry a 100% guarantee from the SBA; however, if the collectability on the guarantee on a loan is at risk that loan will be included in the evaluation of the allowance for loan losses.

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

The Company recorded a recovery of provision expense of $500,000 for the nine month period ended September 30, 2021 compared to a provision expense of $950,000 for the nine month period ended September 30, 2020. The recovery of provision for the nine month period ended September 30, 2021 resulted from a reduction in qualitative factors which was driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. The provision expense for the nine month period ended September 30, 2020 was the result of an increase in the qualitative factors driven by economic uncertainty surrounding the COVID-19 pandemic. While the Delta variant of the COVID-19 virus remains a risk to credit quality, we believe our current level of allowance for loan losses is sufficient.

The allowance for loan losses at each of the periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and the variability related to the factors used in calculation of the allowance. The allowance for loan losses included an unallocated portion of approximately $355,000, $154,000, and $273,000 at September 30, 2021, December 31, 2020, and September 30, 2020, respectively.

Table of Contents

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


	Recorded Investment in Loans
	Allowance						Loans
	Ending						Ending
	Balance		Individually		Collectively		Balance		Individually		Collectively

Nine Months Ended September 30, 2021
Construction and land development
Residential	$	76	$	—	$	76	$	8,981	$	—	$	8,981
Commercial		231		—		231		41,810		—		41,810
		307		—		307		50,791		—		50,791
Commercial real estate
Owner occupied		860		—		860		106,499		5,106		101,393
Non-owner occupied		1,089		—		1,089		130,867		1,843		129,024
Multifamily		36		—		36		12,027		—		12,027
Farmland		2		—		2		1,099		—		1,099
		1,987		—		1,987		250,492		6,949		243,543
Consumer real estate
Home equity lines		11		—		11		17,194		300		16,894
Secured by 1-4 family residential
First deed of trust		111		7		104		55,918		1,998		53,920
Second deed of trust		90		—		90		14,172		692		13,480
		212		7		205		87,284		2,990		84,294
Commercial and industrial loans
(except those secured by real estate)		480		—		480		115,129		194		114,935
Student loans		70		—		70		27,624		—		27,624
Consumer and other		387		—		387		2,986		—		2,986

	$	3,443	$	7	$	3,436	$	534,306	$	10,133	$	524,173

Year Ended December 31, 2020
Construction and land development
Residential	$	214	$	—	$	214	$	8,103	$	—	$	8,103
Commercial		285		—		285		21,466		—		21,466
		499		—		499		29,569		—		29,569
Commercial real estate
Owner occupied		1,047		9		1,038		99,784		3,905		95,879
Non-owner occupied		1,421		—		1,421		121,184		1,991		119,193
Multifamily		47		—		47		9,889		—		9,889
Farmland		2		—		2		367		—		367
		2,517		9		2,508		231,224		5,896		225,328
Consumer real estate
Home equity lines		24		—		24		18,394		300		18,094
Secured by 1-4 family residential
First deed of trust		166		8		158		57,089		2,011		55,078
Second deed of trust		79		—		79		11,097		699		10,398
		269		8		261		86,580		3,010		83,570
Commercial and industrial loans
(except those secured by real estate)		408		—		408		181,088		141		180,947
Student loans		87		—		87		29,657		—		29,657
Consumer and other		190		—		190		2,885		—		2,885

	$	3,970	$	17	$	3,953	$	561,003	$	9,047	$	551,956

Table of Contents

Note 6 – Deposits

Deposits as of September 30, 2021 and December 31, 2020 were as follows (dollars in thousands):


	September 30, 2021				December 31, 2020
	Amount		%		Amount		%

Demand accounts	$	270,397	41.9	%	$	222,305	37.8	%
Interest checking accounts		76,693	11.9	%		70,342	11.9	%
Money market accounts		183,096	28.3	%		152,726	26.0	%
Savings accounts		46,750	7.2	%		38,083	6.5	%
Time deposits of $250,000 and over		8,189	1.3	%		16,014	2.7	%
Other time deposits		60,927	9.4	%		88,912	15.1	%

Total	$	646,052	100.0	%	$	588,382	100.0	%

Note 7 – Borrowings

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

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $353,000 in FHLB stock at September 30, 2021 and $484,000 at December 31, 2020, which is held at cost. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings are secured by the pledge of commercial, 1-4 family residential loans. The Company had no outstanding FHLB advances at September 30, 2021 or December 31, 2020.

Through the Federal Reserve Bank of Richmond, the Company could borrow funds through the Paycheck Protection Program Liquidity Fund (“PPPLF”), which were secured by the Company’s PPP loans. The PPPLF ceased extending credit on July 30, 2021. The Company did not have outstanding advances under the PPPLF at September 30, 2021 and had $41.5 million in outstanding advances under the PPPLF at December 31, 2020. The Company’s available borrowing capacity under the PPPLF was $95.2 million as of December 31, 2020.

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 September 30, 2021 or December 31, 2020.

The Company’s unused lines of credit for future borrowings total approximately $73.1 million at September 30, 2021, which consists of $30.3 million available from the FHLB, $10 million on revolving bank line of credit, $7.8 million under secured federal funds agreements with third party financial institutions, and $25 million in repurchase lines of credit with third party financial institutions. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank of Richmond or the FHLB above the current lendable collateral value.

Table of Contents

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 September 30, 2021 was 2.27%. 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 September 30, 2021 and there are no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

During the third quarter of 2007, Village Financial Statutory Trust II, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4)% which adjusts, and is also payable, quarterly. The interest rate at September 30, 2021 was 1.52%. 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 September 30, 2021 and there are no plans to do so. The principal asset of the Trust is $3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

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

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

Note 9 – Subordinated Debt

On March 21, 2018, the Company issued $5,700,000 of fixed-to-floating rate subordinated notes due March 31, 2028 in a private placement. The Company received $5,539,000 in net proceeds after deducting issuance costs. The subordinated notes accrue interest at a fixed rate of 6.50% for the first five years until March 31, 2023; thereafter, the subordinated notes will accrue interest at an annual floating rate equal to three-month LIBOR plus a spread of 3.73% until maturity or early redemption. The Company may redeem the subordinated notes in whole or in part, on or after March 31, 2023. The subordinated notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior indebtedness, whether secured or unsecured, including claims of depositors and general creditors, and rank equally in right of payment with any unsecured, subordinated indebtedness that the Company may incur in the future. The carrying value of the notes totaled $5,652,000 and $5,628,000 at September 30, 2021 and December 31, 2020, 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.

Table of Contents

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


	Nine Months Ended September 30,
	2021							2020
		Weighted							Weighted
		Average							Average
		Exercise		Fair Value		Intrinsic			Exercise		Fair Value		Intrinsic
	Options	Price		Per Share		Value			Price		Per Share		Value

Options outstanding, beginning of period	734	$	25.63	$	9.76			734	$	25.63	$	9.76
Granted	—		—		—			—		—		—
Forfeited	—		—		—			—		—		—
Exercised	—		—		—			—		—		—
Options outstanding, end of period	734	$	25.63	$	9.76	$	—	734	$	25.63	$	9.76	$	—
Options exercisable, end of period	734							734

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

The total number of shares underlying non-vested restricted stock was 17,077 and 24,736 at September 30, 2021 and 2020, respectively. The fair value of the stock is based on the grant date of the award and the expense is recognized over the vesting period. Unamortized stock-based compensation related to non-vested share-based compensation arrangements granted under the stock incentive plan as of September 30, 2021 and 2020 was $437,600 and $271,600, respectively. The time-based unrecognized compensation of $297,500 is expected to be recognized over a weighted average period of 1.60 years. For the period ended September 30, 2021, there were no forfeitures, and for the period ended September 30, 2020, there 1,094 forfeitures of restricted stock and restricted stock units.

A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the nine months ended September 30, 2021 follows:


		Weighted-
		Average		Aggregate
		Grant-Date		Intrinsic
	Shares	Fair-Value		Value

December 31, 2020	25,247	$	30.88	$	1,305,270
Granted	—		—		—
Vested	(8,771)		31.23		(453,461)
Forfeited	—		—		—
Other	601		31.86		31,072

September 30, 2021	17,077	$	30.73	$	882,881

Stock-based compensation expense was approximately $35,000 and $218,000 for the three and nine months ended September 30, 2021, respectively compared to $28,000 and $157,000 for the three and nine months ended September 30, 2020, respectively.

Table of Contents

Note 11 – Fair value

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

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

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

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

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

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

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

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

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.

Table of Contents

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.

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

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

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


	Fair Value Measurement
	at September 30, 2021 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	41,830	$	40,157	$	1,673	$	—
Mortgage-backed securities		35,816		—		35,816		—
Municipals		2,182		—		2,182		—
Subordinated debt		8,721		250		7,921		550
Loans held for sale		13,275		—		13,275		—
IRLC		513		—		513		—

Financial Liabilities - Recurring
Forward sales commitment		842		—		842		—

Table of Contents


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

Financial Liabilities - Recurring
Forward sales commitment		3,105		—		3,105		—

Financial Assets - Non-Recurring
Other real estate owned		336		—		—		336

The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at December 31, 2020, there were no outstanding level 3 instruments at September 30, 2021 (dollars in thousands):


	December 31, 2020
					Range
	Fair Value		Valuation	Unobservable	(Weighted
	Estimate		Techniques	Input	Average)

Other real estate owned	$	336	Appraisal (1) or Internal Valuation (2)	Selling costs	6%-10% (7%)

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not identifiable.

(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances.

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.

Table of Contents

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


		September 30,				December 31,
		2021				2020
	Level in Fair
	Value	Carrying		Estimated		Carrying		Estimated
	Hierarchy	Value		Fair Value		Value		Fair Value

	(In thousands)
Financial assets
Cash	Level 1	$	14,362	$	14,362	$	12,709	$	12,709
Cash equivalents	Level 2		49,918		49,918		30,742		30,742
Investment securities available for sale	Level 1		40,407		40,157		1,193		1,193
Investment securities available for sale	Level 2		47,592		48,142		39,401		39,401
Investment securities available for sale	Level 3		550		250		250		250
Federal Home Loan Bank stock	Level 2		353		353		484		484
Loans held for sale	Level 2		13,275		13,275		34,421		34,421
Loans	Level 3		534,306		535,555		561,003		562,362
Other real estate owned	Level 3		—		—		336		336
Bank owned life insurance	Level 3		12,416		12,416		7,806		7,806
Accrued interest receivable	Level 2		3,569		3,569		4,943		4,943
Interest rate lock commitments	Level 2		513		513		1,552		1,552

Financial liabilities
Deposits	Level 2		646,052		645,989		588,382		589,017
Trust preferred securities	Level 2		8,764		9,601		8,764		9,697
Other borrowings	Level 2		5,652		5,652		47,157		47,157
Accrued interest payable	Level 2		71		71		194		194
Forward sales commitment	Level 2		842		842		3,105		3,105

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.

Table of Contents

The following table presents segment information as of and for the three and nine months ended September 30, 2021 and 2020 (in thousands):


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Three Months Ended September 30, 2021

Revenues
Interest income	$	6,818	$	104	$	(1)	$	6,921
Gain on sale of loans		—		2,704		—		2,704
Other revenues		733		228		(70)		891
Total revenues		7,551		3,036		(71)		10,516

Expenses
Interest expense		493		—		(1)		492
Salaries and benefits		2,632		975		—		3,607
Commissions		—		736		—		736
Other expenses		1,738		362		(70)		2,030
Total operating expenses		4,863		2,073		(71)		6,865

Income before income taxes		2,688		963		—		3,651
Income tax expense		550		202		—		752
Net income	$	2,138	$	761	$	—	$	2,899

Total assets	$	733,611	$	19,417	$	(22,967)	$	730,061


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Three Months Ended September 30, 2020

Revenues
Interest income	$	6,430	$	156	$	(46)	$	6,540
Gain on sale of loans		—		3,585		—		3,585
Other revenues		666		346		(62)		950
Total revenues		7,096		4,087		(108)		11,075

Expenses
Provision for loan losses		250		—		—		250
Interest expense		1,069		46		(46)		1,069
Salaries and benefits		2,526		1,118		—		3,644
Commissions		—		1,054		—		1,054
Other expenses		1,873		300		(62)		2,111
Total operating expenses		5,718		2,518		(108)		8,128

Income before income taxes		1,378		1,569		—		2,947
Income tax expense		349		329		—		678
Net income	$	1,029	$	1,240	$	—	$	2,269

Total assets	$	728,707	$	13,789	$	(15,132)	$	727,364

Table of Contents


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Nine Months Ended September 30, 2021

Revenues
Interest income	$	20,606	$	341	$	(24)	$	20,923
Gain on sale of loans		—		9,608		—		9,608
Other revenues		2,190		694		(205)		2,679
Total revenues		22,796		10,643		(229)		33,210

Expenses
Provision for (recovery of) loan losses		(500)		—		—		(500)
Interest expense		1,728		24		(24)		1,728
Salaries and benefits		7,274		3,267		—		10,541
Commissions		—		2,405		—		2,405
Other expenses		5,372		989		(205)		6,156
Total operating expenses		13,874		6,685		(229)		20,330

Income before income taxes		8,922		3,958		—		12,880
Income tax expense		1,959		831		—		2,790
Net income	$	6,963	$	3,127	$	—	$	10,090

Total assets	$	733,611	$	19,417	$	(22,967)	$	730,061


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Nine Months Ended September 30, 2020

Revenues
Interest income	$	18,107	$	401	$	(91)	$	18,417
Gain on sale of loans		—		8,014		—		8,014
Other revenues		1,970		820		(179)		2,611
Total revenues		20,077		9,235		(270)		29,042

Expenses
Provision for loan losses		950		—		—		950
Interest expense		3,575		91		(91)		3,575
Salaries and benefits		6,362		2,916		—		9,278
Commissions		—		2,269		—		2,269
Other expenses		5,187		878		(179)		5,886
Total operating expenses		16,074		6,154		(270)		21,958

Income before income taxes		4,003		3,081		—		7,084
Income tax expense		935		647		—		1,582
Net income	$	3,068	$	2,434	$	—	$	5,502

Total assets	$	728,707	$	13,789	$	(15,132)	$	727,364

Table of Contents

Note 13 – Shareholders’ Equity and Regulatory Matters

Accumulated Other Comprehensive Income

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss) , net of deferred taxes of $38,000 and $114,000 as of September 30, 2021 and December 31, 2020, respectively (in thousands):


	September 30,		December 31,
	2021		2020

Net unrealized gains (losses) on securities	$	(114)	$	466
Net unrecognized losses on defined benefit plan		(30)		(36)
Total accumulated other comprehensive income (loss)	$	(144)	$	430

Regulatory Matters

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

The Basel III Capital Rules require banks to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7)%; (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5)%; (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5)%; and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of September 30, 2021, the Bank exceeded the minimum ratios under the Basel III Capital Rules.

The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act of 1950. To be well capitalized under these regulations, a bank must have the following minimum capital ratios: (1) a common equity Tier 1 capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least 8.0%; (3) a total risk-based capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%. As of September 30, 2021, the Bank exceeded the minimum ratios to be classified as well capitalized.

Table of Contents

On September 17, 2019, the federal bank regulators issued a final rule required by the EGRRCPA that permits qualifying banks and bank holding companies that have less than $10 billion of assets, like the Company and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or “CBLR”). Under the rule, which became effective January 1, 2020, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework. In April 2020, as required by the CARES Act, which was passed in response to the COVID-19 pandemic, federal bank regulators issued two interim final rules related to the CBLR framework. One interim final rule provides that, as of the second quarter of 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. The Bank elected not to opt into the CBLR framework as of September 30, 2021 and December 31, 2020.

The capital amounts and ratios at September 30, 2021 and December 31, 2020 for the Bank are presented in the table below (dollars in thousands):


					For Capital
	Actual				Adequacy Purposes				To be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio

September 30, 2021
Total capital (to risk- weighted assets) Village Bank	$	75,416	14.63	%	$	41,250	8.00	%	$	51,563	10.00	%

Tier 1 capital (to risk- weighted assets) Village Bank		71,973	13.96	%		30,938	6.00	%		41,250	8.00	%

Leverage ratio (Tier 1 capital to average assets) Village Bank		71,973	9.96	%		28,914	4.00	%		36,142	5.00	%

Common equity tier 1 (to risk- weighted assets) Village Bank		71,973	13.96	%		23,203	4.50	%		33,516	6.50	%

December 31, 2020
Total capital (to risk- weighted assets) Village Bank	$	65,723	14.20	%	$	37,015	8.00	%	$	46,269	10.00	%

Tier 1 capital (to risk- weighted assets) Village Bank		61,753	13.35	%		27,761	6.00	%		37,015	8.00	%

Leverage ratio (Tier 1 capital to average assets) Village Bank		61,753	9.28	%		26,607	4.00	%		33,259	5.00	%

Common equity tier 1 (to risk- weighted assets) Village Bank		61,753	13.35	%		20,821	4.50	%		30,075	6.50	%

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.

Table of Contents

At September 30, 2021 and December 31, 2020, the Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):


	September 30,		December 31,
	2021		2020

Undisbursed credit lines	$	101,428	$	107,130
Commitments to extend or originate credit		22,737		38,910
Standby letters of credit		4,877		4,934

Total commitments to extend credit	$	129,042	$	150,974

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

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

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

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 $13.3 million as of September 30, 2021, of which $13.0 million is related to unpaid principal, and totaled $34.4 million as of December 31, 2020, of which $32.9 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

Table of Contents

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 September 30, 2021, and totaled $513,000 with a notional amount of $22,737,000 million and total positions of 85 and was reported in “Other Assets” at December 31, 2020, and totaled $1.6 million, with a notional amount of $38.9 million and total positions of 150. Changes in fair value are recorded as a component of mortgage banking income, net in the Consolidated Income Statement for the period ended September 30, 2021. The Company’s IRLCs are classified as Level 2. At September 30, 2021 and December 31, 2020, 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 September 30, 2021, and totaled $842,000, with a notional amount of $35.7 million and total positions of 134, and was reported in “Other Liabilities” at December 31, 2020, and totaled $3.1 million, with a notional amount of $71.7 million and total positions of 289.

Note 16 – Recent accounting pronouncements

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

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

Table of Contents

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

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

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

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

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

Table of Contents

In December 2020, the CAA was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. As of September 30, 2021, the Company had no loans modified under the CAA. The Company’s modification program primarily included payment deferrals and interest only modifications. For more financial data and other information about loan deferrals refer to Note 5 “Loans and allowance for loan losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. For both public and private companies, the ASU is effective for fiscal years beginning after December 15, 2021. Transition is prospective. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements.

In August 2021, the FASB issued ASU 2021-06, “'Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”. The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2021-06 to have a material impact on its consolidated financial statements.

Table of Contents

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Caution about forward-looking statements

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

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

●

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

●

the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;

●

the effects of future economic, business and market conditions;

●

legislative and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of Federal Deposit Insurance Corporation insurance and other coverages;

●

our inability to maintain our regulatory capital position;

●

the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions despite security measures implemented by the Company;

●

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

●

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

●

changes in operations of the mortgage company as a result of the activity in the residential real estate market;

●

exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;

●

governmental monetary and fiscal policies;

●

changes in accounting policies, rules and practices;

●

reliance on our management team, including our ability to attract and retain key personnel;

●

competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

●

demand, development and acceptance of new products and services;

●

problems with technology utilized by us;

●

natural disasters, war, terrorist activities, pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which the Company operates;

●

adverse effects due to COVID-19 on the Company and its customers, counterparties, employees, and third-party service providers, and the adverse impacts to our business, financial position, results of operations, and prospects;

●

changing trends in customer profiles and behavior; and

●

other factors described from time to time in our reports filed with the SEC.

Table of Contents

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

General

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

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

Continued Response to COVID-19

We continue to see signs of recovery in both the economy and our customers. All loans that were modified pursuant to the CARES Act as of June 30, 2021 returned to contractual payment terms, and as of September 30, 2021 there were no such modified loans. With the continued uncertainty around the Delta variant of COVID-19, we continue to take the necessary measures to protect the health and wellbeing of our employees and customers. We remain well positioned to weather the economic uncertainty created by the COVID-19 pandemic.

Small Business Administration Paycheck Protection Program

Through PPP rounds one and two, our team provided essential funds to over 2,300 businesses and nonprofits and protected more than 28,600 jobs in our community. PPP Loans were $56,809,000 and $136,674,000 as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, approximately $182,144,000 in PPP round one loans and $24,119,000 in PPP round two loans had received SBA approval for forgiveness. PPP loans decreased by $40,808,000, or 41.80%, from the period ended June 30, 2021, and decreased by $79,865,000, or 58.43%, from the period ended December 31, 2020. Our expectations are that the majority of the remaining PPP loans will receive forgiveness by the end of 2021.

Capital Risk Management

The Bank maintains a strong, well-capitalized position with a common equity Tier 1 capital ratio of 13.96%, a Tier 1 risk-based capital ratio of 13.96%, a total risk-based capital ratio of 14.63% and a leverage ratio of 9.96% as of September 30, 2021. The most significant risk to capital as a result of the COVID-19 pandemic is the risk of default within our loan portfolio and the potential loan losses as a result of those defaults. The Company has taken several steps to mitigate this risk to our capital by building a diversified loan portfolio over the years to be capable of sustaining through a crisis, working with our customers during this time to defer loan payments, as permitted under the CARES Act, to allow time for economic stabilization and participating in the SBA PPP round one and round two loan programs to help provide much needed funds to our borrowers and the community. As of September 30, 2021, the Company has provided essential funds to its community through rounds one and two of the SBA PPP loan program, credit metrics have improved and all loans that were on deferral have returned to contractual payment terms as a result of improving local and national economic factors. While the Delta variant of COVID-19 virus remains a risk to capital, the Company believes the actions we are taking will protect our capital levels.

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at September 30, 2021 and December 31, 2020 and the results of operations for the Company for the three and nine months ended September 30, 2021 and 2020. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

Table of Contents

Summary

For the three months ended September 30, 2021, the Company had net income of $2,899,000, or $1.97 per fully diluted share, compared to net income of $2,269,000, or $1.55 per fully diluted share, for the same period in 2020. For the nine months ended September 30, 2021, the Company had net income of $10,090,000, or $6.88 per fully diluted share, compared to net income of $5,502,000, or $3.78 per fully diluted share, for the same period in 2020.

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. 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 September 30,
	2021			2020			Change

	(dollars in thousands)
Average interest-earning assets	$	681,164		$	677,338		$	3,826
Interest income	$	6,921		$	6,540		$	381
Yield on interest-earning assets		4.03	%		3.84	%		0.19	%
Average interest-bearing liabilities	$	396,194		$	451,090		$	(54,896)
Interest expense	$	492		$	1,069		$	(577)
Cost of interest-bearing liabilities		0.49	%		0.94	%		(0.45)	%
Net interest income	$	6,429		$	5,471		$	958
Net interest margin		3.74	%		3.21	%		0.53	%

The following are variances of note for the three months ended September 30, 2021 compared to the three months ended September 30, 2020:

●NIM expanded by 53 basis points to 3.74% for the three months ended September 30, 2021 compared to 3.21% for the three months ended September 30, 2020. The expansion was driven by the following:

The yield on average earning assets expanded by 19 basis points, 4.03% for the three months ended September 30, 2021 vs. 3.84% for the three months ended September 30, 2020, primarily because of the recognition of net deferred income associated with the origination and forgiveness of PPP loans.

During the three months ended September 30, 2021, the Commercial Banking Segment recognized $1,210,000 in SBA fee income, net of deferred costs, through interest income as a result of normal amortization and the receipt of funds from PPP loans forgiven by the SBA. In addition, the Commercial Banking Segment recognized $192,000 in interest income associated with these loans during the three months ended September 30, 2021. PPP income of $1,402,000, during the three months ended September 30, 2021, had a 44 basis points impact on the yield of average earnings assets.

Adjusting solely for the impact of PPP income recognized during the three months ended September 30, 2021, our NIM would have been 3.30%; however, as PPP loans have been forgiven, the funds from that forgiveness have driven the increase in our federal funds position, which averaged $70,620,000 during the three months ended September 30, 2021, compared to $16,661,000 during the three months ended September 30, 2020. During the three months ended September 30, 2021, management put approximately $45,250,000 of the excess liquidity to work in the investment portfolio through a mix of U.S. Government agency obligations, taxable municipals and subordinated debt. The increased levels in liquidity will continue to have a negative impact on our net interest margin; however, we believe

Table of Contents

that through our disciplined approach in the investment portfolio, to deposit pricing, and through core loan growth we will be able to manage the impact and keep our balance sheet well positioned for the short and long-term.

The cost of interest bearing liabilities dropped by 45 basis points to 0.49% for the three months ended September 30, 2021 compared to 0.94% for the three months ended September 30, 2020, as a result of the Commercial Banking Segment’s continued efforts to build low cost relationship deposits and its disciplined approach to deposit pricing. We have been able to decrease the cost of money market deposit accounts by 33 basis points, 0.23% for the three months ended September 30, 2021 vs. 0.56% for the three months ended September 30, 2020, and time deposit accounts by 52 basis points, 1.01% for the three months ended September 30, 2021 vs. 1.53% for the three months ended September 30, 2020.


	For the Nine Months Ended September 30,
	2021			2020			Change

	(dollars in thousands)
Average interest-earning assets	$	669,583		$	612,705		$	56,878
Interest income	$	20,923		$	18,417		$	2,506
Yield on interest-earning assets		4.18	%		4.02	%		0.16	%
Average interest-bearing liabilities	$	400,963		$	415,689		$	(14,726)
Interest expense	$	1,728		$	3,575		$	(1,847)
Cost of interest-bearing liabilities		0.58	%		1.15	%		(0.57)	%
Net interest income	$	19,195		$	14,842		$	4,353
Net interest margin		3.83	%		3.24	%		0.59	%

The following are variances of note for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020:

●

NIM expanded by 59 basis points to 3.83% for the nine months ended September 30, 2021 compared to 3.24% for the nine months ended September 30, 2020. The expansion was driven by the following:

The yield on average earning assets expanded by 16 basis points, 4.18% for the nine months ended September 30, 2021 vs. 4.02% for the nine months ended September 30, 2020, primarily because of the impact of the recognition of net deferred income associated with the origination and forgiveness of PPP loans.

During the nine months ended September 30, 2021, the Commercial Banking Segment recognized $4,034,000 in PPP fee income, net of deferred costs, through interest income, as a result of normal amortization and the receipt of funds from loans forgiven by the SBA. In addition, the Commercial Banking Segment recognized $930,000 in interest income associated with these loans during the nine months ended September 30 2021. PPP income of $4,964,000, during the nine months ended September 30, 2021, had a 38 basis points impact on the yield of average earnings assets.

The cost of interest bearing liabilities dropped by 57 basis points to 0.58% for the nine months ended September 30, 2021 compared to 1.15% for the nine months ended September 30, 2020, as a result of the Commercial Banking Segment’s continued efforts to build low cost relationship deposits and its disciplined approach to deposit pricing. We were able to decrease the cost of money market deposit accounts by 43 basis points, 0.28% for the nine months ended September 30, 2021 vs. 0.71% for the nine months ended September 30, 2020, and time deposits accounts by 54 basis points, 1.15% for the nine months ended September 30, 2021 vs. 1.69% for the nine months ended September 30, 2020. We believe that there continues to be opportunities through our funding mix and pricing strategies to lower our cost of funds further.

Table of Contents

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 September 30, 2021						Three Months Ended September 30, 2020
			Interest						Interest
	Average		Income/		Yield		Average		Income/		Yield
	Balance		Expense		Rate		Balance		Expense		Rate
Loans net of deferred fees	$	539,945	$	6,551	4.81	%	$	600,261	$	6,151	4.08	%
Loans held for sale		13,668		104	3.02	%		21,540		156	2.88	%
Investment securities		56,931		244	1.70	%		38,876		230	2.35	%
Federal funds and other		70,620		22	0.12	%		16,661		3	0.07	%
Total interest earning assets		681,164		6,921	4.03	%		677,338		6,540	3.84	%
Allowance for loan losses		(3,444)						(3,779)
Cash and due from banks		12,592						9,484
Premises and equipment, net		12,027						11,793
Other assets		22,765						21,016
Total assets	$	725,104					$	715,852

Interest bearing deposits
Interest checking		80,049		26	0.13	%		59,123		26	0.17	%
Money market		180,261		103	0.23	%		144,890		205	0.56	%
Savings		41,245		16	0.15	%		30,255		13	0.17	%
Certificates		80,229		204	1.01	%		126,237		484	1.53	%
Total deposits		381,784		349	0.36	%		360,505		728	0.80	%
Borrowings		14,410		143	3.94			90,585		341	1.50
Total interest bearing liabilities		396,194		492	0.49	%		451,090		1,069	0.94	%
Noninterest bearing deposits		261,714						211,257
Other liabilities		6,035						5,331
Total liabilities		663,943						667,678
Equity capital		61,161						48,174
Total liabilities and capital	$	725,104					$	715,852


Net interest income before provision for loan losses			$	6,429					$	5,471
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities					3.54	%					2.90	%
Net interest margin (net interest income expressed as a percentage of average earning assets)					3.74	%					3.21	%

Table of Contents


	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
			Interest						Interest
	Average		Income/		Yield		Average		Income/		Yield
	Balance		Expense		Rate		Balance		Expense		Rate
Loans net of deferred	$	564,261	$	19,807	4.69	%	$	531,792	$	17,221	4.33	%
Loans held for sale		16,162		341	2.82	%		16,160		401	3.31	%
Investment securities		48,219		743	2.06	%		40,759		740	2.43	%
Federal funds and other		40,941		32	0.10	%		23,994		55	0.31	%
Total interest earning assets		669,583		20,923	4.18	%		612,705		18,417	4.02	%
Allowance for loan losses		(3,803)						(3,474)
Cash and due from banks		12,826						9,708
Premises and equipment, net		11,980						(639)
Other assets		23,008						34,389
Total assets	$	713,594					$	652,689

Interest bearing deposits
Interest checking		75,823		76	0.13	%		54,373		72	0.18	%
Money market		171,093		359	0.28	%		125,687		664	0.71	%
Savings		39,827		47	0.16	%		27,002		34	0.17	%
Certificates		92,328		793	1.15	%		136,762		1,732	1.69	%
Total deposits		379,071		1,275	0.45	%		343,824		2,502	0.97	%
Borrowings		21,892		453	2.77			71,865		1,073	1.99	%
Total interest bearing liabilities		400,963		1,728	0.58	%		415,689		3,575	1.15	%
Noninterest bearing deposits		247,523						185,223
Other liabilities		7,252						5,528
Total liabilities		655,738						606,440
Equity capital		57,856						46,249
Total liabilities and capital	$	713,594					$	652,689


Net interest income before provision for loan losses			$	19,195					$	14,842
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities					3.60	%					2.87	%
Net interest margin (net interest income expressed as a percentage of average earning assets)					3.83	%					3.24	%

Provision for (recovery of) loan losses

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

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

The Company did not record provision expense for the three months ended September 30, 2021 and recorded a recovery of the provision expense of $500,000 for the nine months ended September 30, 2021 compared to a provision expense of $250,000 and $950,000 for the three and nine months ended September 30, 2020, respectively.

The recovery of provision for the nine months ended September 30, 2021 resulted from a reduction in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. While the Delta variant of the COVID-19 virus remains a risk to credit quality, we believe our current level of allowance for loan losses is sufficient.

The provision expense for the three and nine months ended September 30, 2020 was a result of growth in the loan portfolio, an increase in the historical loan loss experience and an increase in the qualitative factors due to the anticipated economic impact of COVID-19.

Table of Contents

The increase in the qualitative factors due to COVID-19 were a result of deterioration in local economic factors such as the higher levels of unemployment and the increased credit risk due to loan payment deferrals under the CARES Act.

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

Noninterest income

Noninterest income includes service charges and fees on deposit accounts, fee income related to loan origination, mortgage banking income, net, and gains and losses on securities available for sale. The most significant noninterest income item has been mortgage banking income, net, representing 76% and 82% for the three month periods ended September 30, 2021 and 2020, respectively, and 79% and 78% for the nine month periods ended September 30, 2021 and 2020, respectively.


	For the Three Months Ended
	September 30,				Change
	2021		2020		$		%

	(dollars in thousands)
Service charges and fees	$	580	$	535	$	45	8.4	%
Mortgage banking income, net		2,171		2,859		(688)	(24.1)
Gain on sale of asset held for sale		—		1		(1)	(100.0)
Other		108		86		22	25.6
Total noninterest income	$	2,859	$	3,481	$	(622)	(17.9)	%

The decrease in noninterest income of $622,000 for the three months ended September 30, 2021, was the result of the following:

●The $45,000 increase in service charges and fees was driven primarily by an increase in interchange fee income as macroeconomic conditions continued to improve and consumer spending picked up during the three months ended September 30, 2021.

●The $688,000 decrease in mortgage banking income, net is a result of decreased loan originations and sales compared to the prior year due to mortgage rates experiencing a slight rise during the first half of 2021 and remaining elevated through the period ended September 30, 2021, which softened the refinance market. The Mortgage Banking Segment continues to maintain a strong pipeline of purchase money loans going into the fourth quarter of 2021. The biggest risk to mortgage earnings is the historically low inventory of homes for sale.


	For the Nine Months Ended
	September 30,				Change
	2021		2020		$		%

	(dollars in thousands)
Service charges and fees	$	1,711	$	1,502	$	209	13.9
Mortgage banking income, net		7,827		6,517		1,310	20.1	%
Gain on sale of asset held for sale		—		1		(1)	100.0	%
Gain on sale of investment securities		—		12		(12)	(100.0)
Gain on sale of SBA loans		—		86		(86)	(100.0)
Other		344		238		106	44.5
Total noninterest income	$	9,882	$	8,356	$	1,526	18.3	%

The increase in noninterest income of $1,526,000 for the nine months ended September 30, 2021, was the result of the following:

●

The $209,000 increase in service charges and fees was driven primarily by an increase in interchange fee income as macroeconomic conditions continued to improve and consumer spending picked up during the nine months ended September 30, 2021.

●

The $1,310,000 increase in mortgage banking income, net is a result of higher proceeds from mortgage sales of $271,454,000 for the nine months ended September 30, 2021, up 9.81% from $247,205,000 for the nine months ended September 30, 2020.

Table of Contents

Mortgage rates experienced a slight rise during the nine months ended September 30, 2021, which has softened the refinance market; however, the bigger risk to mortgage earnings continues to be the historically low inventory of homes for sale.

Noninterest expense


	For the Three Months Ended
	September 30,				Change
	2021		2020		$		%

	(dollars in thousands)
Salaries and benefits	$	3,607	$	3,644	$	(37)	(1.0)	%
Occupancy		315		326		(11)	(3.4)	%
Equipment		267		225		42	18.7	%
Supplies		49		50		(1)	(2.0)	%
Professional and outside services		730		835		(105)	(12.6)	%
Advertising and marketing		99		90		9	10.0	%
Foreclosed assets, net		—		4		(4)	(100.0)	%
FDIC insurance premium		38		47		(9)	(19.1)	%
Other operating expense		532		534		(2)	(0.4)	%
Total noninterest expense	$	5,637	$	5,755	$	(118)	(2.1)	%

The decrease in noninterest expense of $118,000 for the three months ended September 30, 2021, was the result of the following:

●Professional and outside services expenses decreased by $105,000 due to lower expenses associated with data processing.

●The increase in equipment expense of $42,000 is primarily due to the increased investments in technology and in software to support the PPP loan forgiveness process.


	For the Nine Months Ended
	September 30,				Change
	2021		2020		$		%

	(dollars in thousands)
Salaries and benefits	$	10,541	$	9,278	$	1,263	13.6	%
Occupancy		948		965		(17)	(1.8)	%
Equipment		788		640		148	23.1	%
Supplies		138		141		(3)	(2.1)	%
Professional and outside services		2,085		2,276		(191)	(8.4)	%
Advertising and marketing		347		261		86	33.0	%
Foreclosed assets, net		(8)		(152)		144	(94.7)	%
FDIC insurance premium		142		167		(25)	(15.0)	%
Other operating expense		1,716		1,588		128	8.1	%
Total noninterest expense	$	16,697	$	15,164	$	1,533	10.1	%

The increase in noninterest expense of $1,533,000 for the nine months ended September 30, 2021, was the result of the following:

●

The $1,263,000 increase in salaries and benefits expense was driven primarily by the following:

The deferral of $1,078,000 in salary and benefits costs during the nine months ended September 30, 2020 compared to the deferral of $580,300 during the nine months ended September 30, 2021 associated with the volume related to the origination of PPP loans during those periods.

Increased salaries and benefits expenses related to mortgage production.

●

Equipment expense increased by $148,000 primarily due to increased investments in technology and in software to support the PPP loan forgiveness process.

●

Professional and outside services expenses decreased by $191,000 due to lower expenses associated with data processing.

●

Advertising and marketing expense increased by $86,000 as a result of increased marketing efforts during the nine months ended September 30, 2021, compared to a reduction in marketing efforts during the nine months ended September 30, 2020 due to the COVID-19 pandemic.

Table of Contents

●

The increase in foreclosed assets, net expenses was the result of the recognition of a higher gain on sales related to the sale of two foreclosed properties during the nine months ended September 30, 2020.

●

Other operating expense increased by $128,000 primarily due to the accrual of $126,300 for an expected loss on the prior sale of an SBA loan that defaulted during the nine months ended September 30, 2021.

Income taxes

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent difference and available tax credits. Income tax expense for the three and nine months ended September 30, 2021 was $752,000 and $2,790,000, respectively, resulting in an effective tax rate of 20.6% and 21.7%, respectively, compared to $678,000 and $1,582,000, or 23.0% and 22.3%, respectively, for the same periods in 2020. The decrease in the effective tax rate was primarily related to an increase in the tax credit received related to state taxes attributed to the Company and the Mortgage Banking Segment. The Bank is not subject Virginia income taxes, and instead is subject to a franchise tax based on bank capital.

Balance Sheet Analysis

Investment securities

At September 30, 2021 and December 31, 2020, all of our investment securities were classified as available for sale.

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

Loans

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

Approximately 72.7% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 5.2% 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 21.6% of all loans. Loans in this category are typically made to individuals and small and medium-sized businesses, and range between $250,000 and $2.5 million; however, the increase in the portfolio was the result of the Company originating $185,137,000 in first round of PPP loans and $77,539,000 in second round PPP loans through September 30, 2021, which are 100% guaranteed by the SBA. Based on underwriting standards, commercial and industrial loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory, and real property. The collateral securing any loan may depend on the type of loan and may vary in value based on market conditions. The remainder of our loan portfolio is in consumer loans which represent less than 1% of the total.

Table of Contents

Loans classified by type as of September 30, 2021 and December 31, 2020 are as follows (dollars in thousands):


	September 30, 2021				December 31, 2020
	Amount		%		Amount		%
Construction and land development
Residential	$	8,981	1.68	%	$	8,103	1.44	%
Commercial		41,810	7.82	%		21,466	3.82	%
		50,791	9.50	%		29,569	5.26	%
Commercial real estate
Owner occupied		106,499	19.93	%		99,784	17.79	%
Non-owner occupied		130,867	24.49	%		121,184	21.60	%
Multifamily		12,027	2.25	%		9,889	1.75	%
Farmland		1,099	0.21	%		367	0.07	%
		250,492	46.88	%		231,224	41.21	%
Consumer real estate
Home equity lines		17,194	3.22	%		18,394	3.28	%
Secured by 1-4 family residential,
First deed of trust		55,918	10.47	%		57,089	10.18	%
Second deed of trust		14,172	2.65	%		11,097	1.98	%
		87,284	16.34	%		86,580	15.44	%
Commercial and industrial loans
(except those secured by real estate)		115,129	21.55	%		181,088	32.28	%
Guaranteed student loans		27,624	5.17	%		29,657	5.29	%
Consumer and other		2,986	0.56	%		2,885	0.52	%

Total loans		534,306	100.0	%		561,003	100.0	%
Deferred fees and costs, net		(1,401)				(2,048)
Less: allowance for loan losses		(3,443)				(3,970)
	$	529,462			$	554,985

PPP loans included in commercial and industrial loans in the above table were $56,809,000 and $136,674,000 as of September 30, 2021 and December 31, 2020, respectively.

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

Table of Contents

Allowance for loan losses

We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. The allowance for loan losses at September 30, 2021 was $3,443,000, compared to $3,970,000 at December 31, 2020. The ratio of the allowance for loan losses to gross portfolio loans (net of unearned income and excluding mortgage loans held for sale) at September 30, 2021 and December 31, 2020 was 0.64% and 0.71%, respectively. The ratio of the allowance for loan losses to gross portfolio loans (net of unearned income and excluding mortgage loans held for sale and government guaranteed loans) at September 30, 2021 and December 31, 2020 was 0.77% and 1.02%, respectively. The decrease in the allowance for loan losses for the first nine months of 2021 was the result of a recovery of provision expenses of $500,000 during that period which was driven by a reduction in the qualitative factors due to improving economic factors, improved credit metrics, and the movement of all loan deferrals back to contractual payment terms. While the Delta variant of the COVID-19 virus remains a risk to credit quality, we believe our current level of allowance for loan losses is sufficient. For more financial data and other information about loans refer to Note 5 “Loans and allowance for loan losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Asset quality

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


	September 30,			December 31,			September 30,
	2021			2020			2020
Nonaccrual loans	$	1,472		$	1,577		$	2,226
Foreclosed properties		—			336			336
Total nonperforming assets	$	1,472		$	1,913		$	2,562

Restructured loans (not included in nonaccrual loans above)	$	6,430		$	6,550		$	6,584

Loans past due 90 days and still accruing ⁽¹⁾	$	2,496		$	2,193		$	1,674

Nonperforming assets to loans ⁽²⁾		0.28	%		0.34	%		0.42	%

Nonperforming assets to total assets		0.20	%		0.27	%		0.35	%

Allowance for loan losses to
Loans, net of deferred fees and costs		0.64	%		0.71	%		0.60	%
Loans, net of deferred fees and costs (excluding guaranteed loans)		0.77	%		1.02	%		1.06	%
Nonaccrual loans		233.90	%		251.75	%		181.96	%

(1) All loans 90 days past due and still accruing are rehabilitated student loans which have a 98% guarantee by the DOE.

(2) Loans are net of unearned income and deferred cost.

Nonperforming assets totaled $1,472,000 at September 30, 2021, compared to $1,913,000 at December 31, 2020. Nonperforming assets at September 30, 2021 consisted of $1,472,000 in nonaccrual loans, compared to $1,577,000 at December 31, 2020.

Table of Contents

The following table presents an analysis of the changes in nonperforming assets for the nine months ended September 30, 2021 (in thousands):


	Nonaccrual
	Loans		OREO		Total
Balance December 31, 2020	$	1,577	$	336	$	1,913
Additions		316		—		316
Loans placed back on accrual		(7)		—		(7)
Repayments		(278)		—		(278)
Charge-offs		(136)		—		(136)
Sales		—		(336)		(336)
Balance September 30, 2021	$	1,472	$	—	$	1,472

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 nine months, it will remain on nonaccrual status.

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

There were no specific allowances associated with the total nonaccrual loans of $1,472,000 and $1,577,000 at September 30, 2021 and December 31, 2020, respectively, that were considered impaired.

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $82,000 and $98,000 for the nine months ended September 30, 2021 and 2020, respectively. Student loans totaling $2,496,000 and $2,193,000 at September 30, 2021 and December 31, 2020, respectively, were past due 90 days or more and interest was still being accrued as principal and interest on such loans have a 98% guarantee by the DOE. The 2% not covered by the DOE guarantee is provided for in the allowance for loan losses.

Deposits

Deposits as of September 30, 2021 and December 31, 2020 were as follows (dollars in thousands):


	September 30, 2021				December 31, 2020
	Amount		%		Amount		%
Demand accounts	$	270,397	41.9	%	$	222,305	37.8	%
Interest checking accounts		76,693	11.9	%		70,342	11.9	%
Money market accounts		183,096	28.3	%		152,726	26.0	%
Savings accounts		46,750	7.2	%		38,083	6.5	%
Time deposits of $250,000 and over		8,189	1.3	%		16,014	2.7	%
Other time deposits		60,927	9.4	%		88,912	15.1	%
Total	$	646,052	100.0	%	$	588,382	100.0	%

Table of Contents

Total deposits increased by $57,670,000, or 9.8%, from December 31, 2020. Variances of note are as follows:

●Noninterest bearing demand account balances increased $48,092,000 from December 31, 2020, and represented 41.9% of total deposits compared to 37.8% as of December 31, 2020. The increase in noninterest bearing demand accounts is a result of core relationship growth and continued success at converting non-customer PPP loan applicants into customers.

●Low cost relationship deposits (i.e. interest checking, money market, and savings) balances increased $45,388,000, or 17.4%, from December 31, 2020. The increase in these accounts continues to be a result of adding core relationships, continued growth in accounts from non-customer PPP loan applicants and the migration of customer funds from time deposits.

●Time deposits decreased by $35,810,000, or 34.1%, from December 31, 2020. The decrease in time deposits continues to be driven by the migration of customers from time deposits to lower cost deposit products and the maturity of $3,733,000 of internet listing service deposits and the maturity of $2,585,000 of brokered deposits which were not replaced. This decrease continues to allow us to lower our cost of interest bearing deposits.

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 September 30, 2021 was $61,730,000 compared to $51,996,000 at December 31, 2020. The $9,734,000 increase in shareholders’ equity during the nine months ended September 30, 2021 is primarily due to net income of $10,090,000.

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):


	September 30,			December 31,
	2021			2020
Tier 1 capital
Total bank equity capital	$	71,829		$	62,183
Net unrealized gain on available-for-sale securities		114			(466)
Defined benefit postretirement plan		30			36
Disallowed deferred tax asset		—			—
Total Tier 1 capital		71,973			61,753

Tier 2 capital
Allowance for loan losses		3,443			3,970
Tier 2 capital deduction		—			—
Total Tier 2 capital		3,443			3,970

Total risk-based capital		75,416			65,723

Risk-weighted assets	$	515,629		$	462,690

Average assets	$	722,840		$	665,172

Capital ratios
Leverage ratio (Tier 1 capital to average assets)		9.96	%		9.28	%
Common equity tier 1 capital ratio (CET 1)		13.96	%		13.35	%
Tier 1 capital to risk-weighted assets		13.96	%		13.35	%
Total capital to risk-weighted assets		14.63	%		14.20	%
Equity to total assets		9.86	%		8.81	%

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

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At September 30, 2021, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $152,829,000, or 20.9% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Our holdings of liquid assets plus the ability to maintain and expand our deposit base and borrowing capabilities serve as our principal sources of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain two federal funds lines of credit with correspondent banks totaling $15 million for which there were no borrowings against the lines at September 30, 2021 and December 31, 2020.

We are also a member of the Federal Home Loan Bank of Atlanta, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from

Table of Contents

the FHLB. The unused borrowing capacity currently available from the FHLB at September 30, 2021 was $30.3 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.

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 September 30, 2021, we had commitments to originate $129,127,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at September 30, 2021. Certificates of deposit scheduled to mature in the 12-month period ending September 30, 2022 totaled $44,013,000. 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.

Impact of inflation and changing prices

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

LIBOR and Other Benchmark Rates

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

Table of Contents

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

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 September 30, 2021. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

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, 2020 filed with the SEC on March 19, 2021.

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

Not applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

Not applicable.

ITEM 6 – EXHIBITS

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 September 30, 2021 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104	Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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:	November 12, 2021	By:	/s/ James E. Hendricks, Jr.
		James E. Hendricks, Jr.
		President and Chief Executive Officer

Date:	November 12, 2021	By:	/s/ Donald M. Kaloski, Jr.
		Donald M. Kaloski, Jr.
		Executive Vice President and Chief Financial Officer