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Village Bank & Trust Financial Corp. - Quarter Report: 2022 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, 2022

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.

1,475,997 shares of common stock, $4.00 par value, outstanding as of October 31, 2022

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, 2022 (unaudited) and December 31, 2021

3

 

 

Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

4

 

 

Consolidated Statements of Comprehensive Income (Loss) For the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

5

 

 

Consolidated Statements of Shareholders’ Equity For the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

6

 

 

Consolidated Statements of Cash Flows For Nine Months Ended September 30, 2022 and 2021 (unaudited)

8

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

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

38

 

 

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

2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

September 30, 2022 (Unaudited) and December 31, 2021*

(in thousands, except share and per share data)

    

September 30, 

    

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Cash and due from banks

$

20,393

$

12,071

Federal funds sold

 

11,788

 

80,545

Total cash and cash equivalents

 

32,181

 

92,616

Investment securities available for sale, at fair value

 

134,503

 

94,699

Restricted stock, at cost

 

714

 

694

Loans held for sale

 

5,076

 

5,141

Loans

 

 

Outstandings

 

540,683

 

526,457

Allowance for loan losses

 

(3,370)

 

(3,423)

Deferred fees and costs, net

 

592

 

(433)

Total loans, net

 

537,905

 

522,601

Premises and equipment, net

 

11,765

 

11,824

Bank owned life insurance

 

12,718

 

12,494

Accrued interest receivable

 

3,341

 

3,245

Other assets

 

4,500

 

5,087

Total Assets

$

742,703

$

748,401

Liabilities and Shareholders’ Equity

 

 

Liabilities

 

  

 

  

Deposits

 

  

 

  

Noninterest bearing demand

$

279,269

$

268,804

Interest bearing

 

388,550

 

395,244

Total deposits

 

667,819

 

664,048

Long-term debt - trust preferred securities

 

8,764

 

8,764

Subordinated debt, net

 

5,684

 

5,660

Accrued interest payable

 

58

 

68

Other liabilities

 

2,006

 

6,460

Total liabilities

 

684,331

 

685,000

Shareholders’ equity

 

  

 

  

Common stock, $4 par value, 10,000,000 shares authorized; 1,476,017 shares issued and outstanding at September 30, 2022 and 1,473,469 shares issued and outstanding at December 31, 2021

 

5,861

 

5,822

Additional paid-in capital

 

55,047

 

54,814

Retained earnings

 

9,032

 

3,509

Stock in directors rabbi trust

 

(689)

 

(730)

Directors deferred fees obligation

 

689

 

730

Accumulated other comprehensive loss

 

(11,568)

 

(744)

Total shareholders’ equity

 

58,372

 

63,401

Total liabilities and shareholders' equity

$

742,703

$

748,401

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

3

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

(in thousands, except per share data)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

2022

    

2021

Interest income

 

  

 

  

  

 

  

Loans

$

6,210

$

6,655

$

18,101

$

20,148

Investment securities

 

559

 

244

 

1,535

 

743

Federal funds sold

 

186

 

22

 

318

 

32

Total interest income

 

6,955

 

6,921

 

19,954

 

20,923

Interest expense

 

  

 

  

 

  

 

  

Deposits

 

240

 

349

 

755

 

1,275

Borrowed funds

 

180

 

143

 

483

 

453

Total interest expense

 

420

 

492

 

1,238

 

1,728

Net interest income

 

6,535

 

6,429

 

18,716

 

19,195

Provision for (recovery of) loan losses

 

100

 

 

(300)

 

(500)

Net interest income after provision for (recovery of) loan losses

 

6,435

 

6,429

 

19,016

 

19,695

Noninterest income

 

  

 

  

 

  

 

  

Service charges and fees

 

670

 

580

 

1,960

 

1,711

Mortgage banking income, net

 

973

 

2,171

 

2,942

 

7,827

Gain on sale of Small Business Administration loans

 

 

 

79

 

Other

 

107

 

108

 

336

 

344

Total noninterest income

 

1,750

 

2,859

 

5,317

 

9,882

Noninterest expense

 

  

 

  

 

  

 

  

Salaries and benefits

 

3,446

 

3,607

 

10,394

 

10,541

Occupancy

 

305

 

315

 

919

 

948

Equipment

 

260

 

267

 

818

 

788

Supplies

 

46

 

49

 

120

 

138

Professional and outside services

 

655

 

730

 

2,118

 

2,085

Advertising and marketing

 

67

 

99

 

271

 

347

Foreclosed assets, net

 

 

 

 

(8)

FDIC insurance premium

 

64

 

38

 

187

 

142

Other operating expense

 

681

 

532

 

1,893

 

1,716

Total noninterest expense

 

5,524

 

5,637

 

16,720

 

16,697

Income before income tax expense

 

2,661

 

3,651

 

7,613

 

12,880

Income tax expense

 

508

 

752

 

1,470

 

2,790

Net income

$

2,153

$

2,899

$

6,143

$

10,090

Earnings per share, basic

$

1.46

$

1.97

$

4.16

$

6.88

Earnings per share, diluted

$

1.46

$

1.97

$

4.16

$

6.88

See accompanying notes to consolidated financial statements.

4

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months ended September 30, 2022 and 2021

(Unaudited)

(in thousands)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

2022

    

2021

Net income

$

2,153

$

2,899

$

6,143

$

10,090

Other comprehensive (loss) income

 

  

 

  

 

  

 

  

Unrealized holding losses arising during the period

 

(4,672)

 

(237)

 

(13,709)

 

(736)

Tax effect

 

981

 

50

 

2,879

 

156

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

 

(3,691)

 

(187)

 

(10,830)

 

(580)

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 loss

 

(3,689)

 

(185)

 

(10,824)

 

(574)

Total comprehensive income (loss)

$

(1,536)

$

2,714

$

(4,681)

$

9,516

See accompanying notes to consolidated financial statements.

5

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

(In thousands)

Three Months Ended September 30, 2022

Directors

Accumulated

Additional

Stock in

Deferred

Other

Common

Paid-in

Retained

Directors

Fees

Comprehensive

Stock

    

Capital

    

Earnings

    

Rabbi Trust

    

Obligation

    

Loss

    

Total

Balance, June 30, 2022

$

5,837

$

55,009

$

7,086

$

(689)

$

689

$

(7,879)

$

60,053

Vesting of restricted stock

19

(19)

 

 

Exercise of stock options

5

5

10

Stock based compensation

 

 

52

 

 

 

 

 

52

Cash dividend declared ($0.14 per share)

 

 

(207)

 

 

 

 

(207)

Net income

 

 

 

2,153

 

 

 

 

2,153

Other comprehensive loss

 

 

 

 

 

 

(3,689)

 

(3,689)

Balance, September 30, 2022

$

5,861

$

55,047

$

9,032

$

(689)

$

689

$

(11,568)

$

58,372

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

Nine Months Ended September 30, 2022

    

    

    

    

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, 2021

$

5,822

$

54,814

$

3,509

$

(730)

$

730

$

(744)

$

63,401

Vesting of restricted stock

 

33

 

(33)

 

 

41

 

(41)

 

 

Exercise of stock options

6

(6)

Stock based compensation

 

 

272

 

 

 

 

 

272

Cash dividend declared ($0.42 per share)

(620)

(620)

Net income

 

 

 

6,143

 

 

 

 

6,143

Other comprehensive loss

 

 

 

 

 

 

(10,824)

 

(10,824)

Balance, September 30, 2022

$

5,861

$

55,047

$

9,032

$

(689)

$

689

$

(11,568)

$

58,372

6

Table of Contents

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

    

Income (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

See accompanying notes to consolidated financial statements.

7

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2022 and 2021

(Unaudited)

(in thousands)

    

Nine Months Ended

September 30, 

    

2022

    

2021

Cash Flows from Operating Activities

 

  

 

  

Net income

$

6,143

$

10,090

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

409

 

447

Amortization of debt issuance costs

24

24

Deferred income taxes

 

159

 

499

Recovery of loan losses

 

(300)

 

(500)

Write-down of other real estate owned

 

 

10

Gain on sale of Small Business Administration loans

 

(79)

 

Gain on sales of loans held for sale

(4,018)

(9,608)

Gain on sale of other real estate owned

 

 

(18)

Loss on disposal of premises and equipment

3

10

Stock compensation expense

 

272

 

218

Proceeds from sale of mortgage loans

 

143,011

 

271,454

Origination of mortgage loans held for sale

 

(138,928)

 

(240,700)

Amortization of premiums and accretion of discounts on securities, net

 

103

 

189

Increase in bank owned life insurance

 

(224)

 

(202)

Net change in:

 

 

Interest receivable

 

(96)

 

1,374

Other assets

 

3,314

 

633

Interest payable

 

(10)

 

(123)

Other liabilities

 

(4,454)

 

(1,951)

Net cash provided by operating activities

 

5,329

 

31,846

Cash Flows from Investing Activities

 

  

 

  

Purchases of available for sale securities

 

(64,488)

 

(62,613)

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

 

10,871

 

13,983

Net (increase) decrease in loans

 

(14,925)

 

26,023

Proceeds from sale of other real estate owned

 

 

344

Purchases of premises and equipment, net

 

(353)

 

(618)

Purchase of bank owned life insurance

(4,408)

(Purchase) redemptions of restricted stock, net

 

(20)

 

131

Net cash used in investing activities

 

(68,915)

 

(27,158)

Cash Flows from Financing Activities

 

  

 

  

Cash dividends paid

(620)

Net increase in deposits

 

3,771

 

57,670

Net decrease in other borrowings

 

 

(41,529)

Net cash provided by financing activities

 

3,151

 

16,141

Net (decrease) increase in cash and cash equivalents

 

(60,435)

 

20,829

Cash and cash equivalents, beginning of period

 

92,616

 

43,451

Cash and cash equivalents, end of period

$

32,181

$

64,280

Supplemental Disclosure of Cash Flow Information

 

  

 

  

Cash payments for interest

$

1,248

$

1,851

Cash payments for taxes

$

480

$

258

Supplemental Schedule of Non-Cash Activities

 

  

 

  

Unrealized losses on securities available for sale

$

(13,710)

$

(736)

Right of use assets obtained in exchange for new operating lease liabilities

$

263

$

243

Minimum pension adjustment

$

9

$

9

See accompanying notes to consolidated financial statements.

8

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(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, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022. 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, 2021 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.

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, 

    

2022

    

2021

2022

    

2021

Numerator

 

  

 

  

  

 

  

Net income - basic and diluted

$

2,153

$

2,899

$

6,143

$

10,090

Denominator

 

  

 

  

 

  

 

  

Weighted average shares outstanding - basic

 

1,476

 

1,468

 

1,475

 

1,467

Dilutive effect of common stock options

 

 

 

 

Weighted average shares outstanding - diluted

 

1,476

 

1,468

 

1,475

 

1,467

Earnings per share - basic

$

1.46

$

1.97

$

4.16

$

6.88

Earnings per share - diluted

$

1.46

$

1.97

$

4.16

$

6.88

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 5,514 and 5,793 at September 30, 2022 and 2021, respectively, of the unvested restricted units included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of September 30, 2022 and 2021, it was indeterminable whether these unvested restricted units would vest and as such the underlying shares were excluded from common shares issued and outstanding at such date and were not included in the computation of earnings per share for such period.

9

Table of Contents

Note 4 – Investment securities available for sale

The amortized cost and fair value of investment securities available for sale as of September 30, 2022 and December 31, 2021 are as follows (in thousands):

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Cost

Gains

Losses

Fair Value

September 30, 2022

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

64,643

$

$

(4,066)

$

60,577

Mortgage-backed securities

 

71,156

 

 

(9,150)

 

62,006

Municipals

2,268

(723)

1,545

Subordinated debt

 

11,053

 

49

 

(727)

 

10,375

$

149,120

$

49

$

(14,666)

$

134,503

December 31, 2021

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

41,513

$

22

$

(536)

$

40,999

Mortgage-backed securities

 

40,806

 

302

 

(613)

 

40,495

Municipals

2,271

(62)

2,209

Subordinated debt

 

11,016

 

90

 

(110)

 

10,996

$

95,606

$

414

$

(1,321)

$

94,699

At September 30, 2022 and December 31, 2021, the Company had no investment securities pledged to secure borrowings from the Federal Home Loan Bank of Atlanta ("FHLB").

There were no sales of available for sale securities for the three and nine months ended September 30, 2022 and 2021.

Investment securities available for sale that have an unrealized loss position at September 30, 2022 and December 31, 2021 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, 2022

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

23,602

$

(768)

$

36,975

$

(3,298)

$

60,577

$

(4,066)

Mortgage-backed securities

42,320

(5,060)

17,620

(4,090)

59,940

(9,150)

Municipals

1,545

(723)

1,545

(723)

Subordinated debt

 

5,937

 

(615)

 

1,388

 

(112)

 

7,325

 

(727)

$

71,859

$

(6,443)

$

57,528

$

(8,223)

$

129,387

$

(14,666)

December 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

39,617

$

(536)

$

$

$

39,617

$

(536)

Mortgage-backed securities

 

21,911

 

(448)

 

4,518

 

(165)

 

26,429

 

(613)

Municipals

2,208

(62)

2,208

(62)

Subordinated debt

 

919

 

(80)

 

470

 

(30)

 

1,389

 

(110)

$

64,655

$

(1,126)

$

4,988

$

(195)

$

69,643

$

(1,321)

10

Table of Contents

As of September 30, 2022, there were 47 investments available for sale totaling $71,859,000 that were in a continuous loss position for less than 12 months and had an unrealized loss of $6,443,000. There were 24 investments available for sale totaling $57,528,000 that had been in a continuous loss position for more than 12 months and had an unrealized loss of $8,223,000.

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, 2022.

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2022, by contractual maturity, are as follows (in thousands):

    

Amortized

    

Cost

Fair Value

Less than one year

$

10,510

$

10,088

One to five years

53,627

49,995

Five to ten years

 

15,062

 

14,082

More than ten years

 

69,921

 

60,338

Total

$

149,120

$

134,503

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Note 5 – Loans and allowance for loan losses

Loans classified by type as of September 30, 2022  and December 31, 2021 are as follows (dollars in thousands):

September 30, 2022

December 31, 2021

 

    

Amount

    

%  

    

Amount

    

%

Construction and land development

 

  

 

  

 

  

 

  

Residential

$

8,437

 

1.56

%  

$

6,805

 

1.29

%

Commercial

 

32,109

 

5.94

%  

 

42,344

 

8.05

%

 

40,546

 

7.50

%  

 

49,149

 

9.34

%

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

122,067

 

22.59

%  

 

113,108

 

21.48

%

Non-owner occupied

 

155,981

 

28.85

%  

 

129,786

 

24.65

%

Multifamily

 

11,309

 

2.09

%  

 

11,666

 

2.22

%

Farmland

 

564

 

0.10

%  

 

977

 

0.19

%

 

289,921

 

53.63

%  

 

255,537

 

48.54

%

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

19,891

 

3.68

%  

 

17,977

 

3.41

%

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

First deed of trust

 

65,704

 

12.15

%  

 

62,277

 

11.83

%

Second deed of trust

 

6,930

 

1.28

%  

 

12,118

 

2.31

%

 

92,525

 

17.11

%  

 

92,372

 

17.55

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

91,603

 

16.94

%  

 

100,421

 

19.07

%

Guaranteed student loans

 

22,010

 

4.07

%  

 

25,975

 

4.93

%

Consumer and other

 

4,078

 

0.75

%  

 

3,003

 

0.57

%

Total loans

 

540,683

 

100.0

%  

 

526,457

 

100.0

%

Deferred fees and costs, net

 

592

 

 

(433)

 

Less: allowance for loan losses

 

(3,370)

 

 

(3,423)

 

$

537,905

$

522,601

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

U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, included in commercial and industrial loans in the above table, were $710,000 and $32,601,000 as of September 30, 2022 and December 31, 2021, respectively.

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $35,822,000 and $35,510,000 as of September 30, 2022 and December 31, 2021, 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.

12

Table of Contents

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

    

September 30, 

    

December 31, 

2022

2021

Commercial real estate

  

  

Non-owner occupied

$

275

$

286

 

275

 

286

Consumer real estate

 

  

 

  

Home equity lines

 

300

 

300

Secured by 1-4 family residential

 

  

 

  

First deed of trust

 

166

 

556

Second deed of trust

 

224

 

198

 

690

 

1,054

Commercial and industrial loans

 

  

 

  

(except those secured by real estate)

 

19

 

19

Total loans

$

984

$

1,359

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.

13

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

14

5

6

7

Loans

September 30, 2022

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

8,437

$

$

$

$

8,437

Commercial

 

29,472

 

2,637

 

 

 

32,109

 

37,909

 

2,637

 

 

 

40,546

Commercial real estate

 

 

  

 

  

 

  

 

  

Owner occupied

 

118,343

 

2,454

 

1,270

 

 

122,067

Non-owner occupied

 

151,609

 

4,097

 

275

 

 

155,981

Multifamily

 

11,309

 

 

 

 

11,309

Farmland

 

564

 

 

 

 

564

 

281,825

 

6,551

 

1,545

 

 

289,921

Consumer real estate

 

 

  

 

  

 

  

 

  

Home equity lines

 

19,026

 

565

 

300

 

 

19,891

Secured by 1-4 family residential

 

 

  

 

 

  

 

  

First deed of trust

 

64,661

 

553

 

490

 

 

65,704

Second deed of trust

 

6,608

 

72

 

250

 

 

6,930

 

90,295

 

1,190

 

1,040

 

 

92,525

Commercial and industrial loans

 

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

91,088

 

426

 

89

 

 

91,603

Guaranteed student loans

 

22,010

 

 

 

 

22,010

Consumer and other

 

4,054

 

 

24

 

 

4,078

Total loans

$

527,181

$

10,804

$

2,698

$

$

540,683

    

Risk Rated

    

Risk Rated

    

Risk Rated

    

Risk Rated

    

Total

14

5

6

7

Loans

December 31, 2021

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

6,805

$

$

$

$

6,805

Commercial

 

39,707

 

2,637

 

 

 

42,344

 

46,512

 

2,637

 

 

 

49,149

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

103,370

 

6,181

 

3,557

 

 

113,108

Non-owner occupied

 

114,168

 

15,332

 

286

 

 

129,786

Multifamily

 

11,666

 

 

 

 

11,666

Farmland

 

977

 

 

 

 

977

 

230,181

 

21,513

 

3,843

 

 

255,537

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

17,054

 

623

 

300

 

 

17,977

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

57,932

 

3,605

 

740

 

 

62,277

Second deed of trust

 

11,492

 

429

 

197

 

 

12,118

 

86,478

 

4,657

 

1,237

 

 

92,372

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

98,362

 

1,806

 

253

 

 

100,421

Guaranteed student loans

 

25,975

 

 

 

 

25,975

Consumer and other

 

2,972

 

31

 

 

 

3,003

 

Total loans

$

490,480

$

30,644

$

5,333

$

$

526,457

14

Table of Contents

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

Greater

Investment >

3059 Days

6089 Days

Than

Total Past

Total

90 Days and

Past Due

Past Due

90 Days

Due

Current

Loans

Accruing

September 30, 2022

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

$

$

$

$

8,437

$

8,437

$

Commercial

 

 

 

 

 

32,109

 

32,109

 

 

 

 

 

 

40,546

 

40,546

 

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

 

 

122,067

 

122,067

 

Non-owner occupied

 

 

 

 

 

155,981

 

155,981

 

Multifamily

 

 

 

 

 

11,309

 

11,309

 

Farmland

 

 

 

 

 

564

 

564

 

 

 

 

 

 

289,921

 

289,921

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

 

 

 

 

19,891

 

19,891

 

Secured by 1‑4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

 

 

 

 

65,704

 

65,704

 

Second deed of trust

 

 

 

 

 

6,930

 

6,930

 

 

 

 

 

 

92,525

 

92,525

 

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

377

 

 

 

377

 

91,226

 

91,603

 

Guaranteed student loans

 

783

 

396

 

1,714

 

2,893

 

19,117

 

22,010

 

1,714

Consumer and other

 

 

 

 

 

4,078

 

4,078

 

Total loans

$

1,160

$

396

$

1,714

$

3,270

$

537,413

$

540,683

$

1,714

15

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, 2021

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

$

$

$

$

6,805

$

6,805

$

Commercial

 

 

 

 

 

42,344

 

42,344

 

 

 

 

 

 

49,149

 

49,149

 

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

 

 

113,108

 

113,108

 

Non-owner occupied

 

 

 

 

 

129,786

 

129,786

 

Multifamily

 

 

 

 

 

11,666

 

11,666

 

Farmland

 

 

 

 

 

977

 

977

 

 

 

 

 

 

255,537

 

255,537

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

 

 

 

 

17,977

 

17,977

 

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

 

  

 

  

First deed of trust

 

 

 

 

 

62,277

 

62,277

 

Second deed of trust

 

 

 

 

 

12,118

 

12,118

 

 

 

 

 

 

92,372

 

92,372

 

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

1,031

 

 

 

1,031

 

99,390

 

100,421

 

Guaranteed student loans

 

956

 

791

 

1,961

 

3,708

 

22,267

 

25,975

 

1,961

Consumer and other

 

 

 

 

 

3,003

 

3,003

 

Total loans

$

1,987

$

791

$

1,961

$

4,739

$

521,718

$

526,457

$

1,961

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

16

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, 2022

December 31, 2021

    

    

Unpaid

    

    

    

Unpaid

    

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance

With no related allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

$

4,134

$

4,149

$

$

4,776

$

4,791

$

Non-owner occupied

 

589

 

589

 

 

1,458

 

1,458

 

 

4,723

 

4,738

 

 

6,234

 

6,249

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

300

 

300

 

 

300

 

300

 

Secured by 1‑4 family residential

 

 

  

 

  

 

 

  

 

  

First deed of trust

 

1,847

 

1,847

 

 

1,873

 

1,873

 

Second deed of trust

 

264

 

348

 

 

238

 

406

 

 

2,411

 

2,495

 

 

2,411

 

2,579

 

Commercial and industrial loans

 

  

 

 

  

 

  

 

 

  

(except those secured by real estate)

 

89

 

89

 

 

185

 

185

 

 

7,223

 

7,322

 

 

8,830

 

9,013

 

With an allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

255

 

255

 

3

 

267

 

267

 

4

 

255

 

255

 

3

 

267

 

267

 

4

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

65

 

65

 

6

 

146

 

146

 

7

 

65

 

65

 

6

 

146

 

146

 

7

Consumer and other

24

24

1

 

344

 

344

 

10

 

413

 

413

 

11

Total

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

4,389

 

4,404

 

3

 

5,043

 

5,058

 

4

Non-owner occupied

 

589

 

589

 

 

1,458

 

1,458

 

 

4,978

 

4,993

 

3

 

6,501

 

6,516

 

4

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

300

 

300

 

 

300

 

300

 

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

1,912

 

1,912

 

6

 

2,019

 

2,019

 

7

Second deed of trust

 

264

 

348

 

 

238

 

406

 

 

2,476

 

2,560

 

6

 

2,557

 

2,725

 

7

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

89

 

89

 

 

185

 

185

 

Consumer and other

24

24

1

$

7,567

$

7,666

$

10

$

9,243

$

9,426

$

11

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, 2022

September 30, 2022

    

Average

    

Interest

    

Average

    

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

With no related allowance recorded

 

  

 

  

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

$

4,352

$

34

4,450

$

100

Non-owner occupied

 

1,039

 

4

 

1,144

 

29

 

5,391

 

38

 

5,594

 

129

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

100

 

6

 

300

 

21

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deed of trust

 

1,816

 

23

 

1,830

 

60

Second deed of trust

 

337

 

3

 

228

 

8

 

2,253

 

32

 

2,358

 

89

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

119

 

2

 

136

 

3

 

7,763

 

72

 

8,088

 

221

With an allowance recorded

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

259

 

4

 

261

 

11

 

259

 

4

 

261

 

11

Consumer real estate

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deed of trust

 

116

 

124

 

4

Second deed of trust

 

65

 

3

 

49

 

3

 

181

 

3

 

173

 

7

Consumer and other

 

12

 

 

6

 

 

452

 

7

 

440

 

18

Total

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

4,611

 

38

 

4,711

 

111

Non-owner occupied

 

1,039

 

4

 

1,144

 

29

 

5,650

 

42

 

5,855

 

140

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

100

 

6

 

300

 

21

Secured by 1-4 family residential,

 

  

 

  

 

  

 

First deed of trust

 

1,932

 

23

 

1,954

 

64

Second deed of trust

 

402

 

6

 

277

 

11

 

2,434

 

35

 

2,531

 

96

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

119

 

2

 

136

 

3

Consumer and other

 

12

 

 

6

 

$

8,215

$

79

$

8,528

$

239

18

Table of Contents

Included in impaired loans are loans classified as troubled debt restructurings (“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, 2022

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

$

3,119

 

$

3,119

 

$

 

$

3

Non-owner occupied

 

589

 

314

 

275

 

 

3,708

 

3,433

 

275

 

3

Consumer real estate

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deeds of trust

 

1,422

 

1,422

 

 

6

Second deeds of trust

 

91

 

35

 

56

 

 

1,513

 

1,457

 

56

 

6

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

19

 

 

19

 

$

5,240

$

4,890

$

350

$

9

Number of loans

 

25

 

22

 

3

 

2

    

    

    

    

Specific

Valuation

Total

Performing

Nonaccrual

Allowance

December 31, 2021

 

  

 

  

 

  

 

  

 

 

 

 

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

$

3,243

$

3,243

$

$

4

Non-owner occupied

 

1,458

 

1,172

 

286

 

 

4,701

 

4,415

 

286

 

4

Consumer real estate

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deeds of trust

 

1,666

 

1,279

 

387

 

7

Second deeds of trust

 

99

 

40

 

59

 

 

1,765

 

1,319

 

446

 

7

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

19

 

 

19

 

$

6,485

$

5,734

$

751

$

11

Number of loans

 

28

 

23

 

5

 

3

19

Table of Contents

There were no TDRs identified for the three month periods ended September 30, 2022 and 2021.  The following table provides information about TDRs identified during the indicated periods (dollars in thousands).

Nine Months Ended

Nine Months Ended

September 30, 2022

September 30, 2021

    

    

Pre-

    

Post-

    

    

Pre-

    

Post-

Modification

Modification

Modification

Modification

Number of

Recorded

Recorded

Number of

Recorded

Recorded

Loans

Balance

Balance

Loans

Balance

Balance

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

 

  

 

 

  

First deed of trust

 

$

$

 

1

 

$

267

 

$

267

 

$

$

 

1

 

$

267

 

$

267

A TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.  The specific reserve associated with a TDR is reevaluated when a TDR payment default occurs. There were no defaults on TDR’s that were modified as TDRs during the prior 12 month period ended September 30, 2022 and 2021.

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, 2022 and December 31, 2021, all previously modified loans had returned to contractual payment terms. The Company’s modification program primarily included payment deferrals and interest only modifications.

20

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, 2022

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

57

$

12

$

$

$

69

Commercial

 

171

 

4

 

 

 

175

 

228

 

16

 

 

 

244

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

868

 

7

 

 

 

875

Non-owner occupied

 

1,267

 

40

 

 

 

1,307

Multifamily

 

50

 

(17)

 

 

 

33

Farmland

 

2

 

(1)

 

 

 

1

 

2,187

 

29

 

 

 

2,216

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

12

 

 

 

 

12

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

114

 

13

 

 

2

 

129

Second deed of trust

 

49

 

(11)

 

(27)

 

27

 

38

 

175

 

2

 

(27)

 

29

 

179

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

533

 

201

 

(157)

 

5

 

582

Student loans

 

60

 

9

 

(2)

 

 

67

Consumer and other

 

45

 

(7)

 

(1)

 

 

37

Unallocated

 

195

 

(150)

 

 

 

45

$

3,423

$

100

$

(187)

$

34

$

3,370

    

    

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

21

Table of Contents

    

    

Provision for

    

    

    

Beginning

(Recovery of)

Ending

Balance

Loan Losses

Charge-offs

Recoveries

Balance

Nine Months Ended September 30, 2022

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

57

$

12

$

$

$

69

Commercial

 

229

 

(54)

 

 

 

175

 

286

 

(42)

 

 

 

244

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

833

 

42

 

 

 

875

Non-owner occupied

 

1,083

 

224

 

 

 

1,307

Multifamily

 

35

 

(2)

 

 

 

33

Farmland

 

2

 

(1)

 

 

 

1

 

1,953

 

263

 

 

 

2,216

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

12

 

(58)

 

 

58

 

12

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

123

 

2

 

 

4

 

129

Second deed of trust

 

47

 

(312)

 

(27)

 

330

 

38

 

182

 

(368)

 

(27)

 

392

 

179

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

486

 

189

 

(157)

 

64

 

582

Student loans

 

65

 

26

 

(24)

 

 

67

Consumer and other

 

29

 

9

 

(1)

 

 

37

Unallocated

 

422

 

(377)

 

 

 

45

$

3,423

$

(300)

$

(209)

$

456

$

3,370

    

    

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

22

Table of Contents

    

    

Provision for

    

    

    

Beginning

(Recovery of)

Ending

Balance

Loan Losses

Charge-offs

Recoveries

Balance

Year Ended December 31, 2021

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

214

$

(157)

$

$

$

57

Commercial

 

285

 

(56)

 

 

 

229

 

499

 

(213)

 

 

 

286

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

1,047

 

(214)

 

 

 

833

Non-owner occupied

 

1,421

 

(352)

 

 

14

 

1,083

Multifamily

 

47

 

(12)

 

 

 

35

Farmland

 

2

 

 

 

 

2

 

2,517

 

(578)

 

 

14

 

1,953

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

24

 

(23)

 

 

11

 

12

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

166

 

(54)

 

 

11

 

123

Second deed of trust

 

79

 

1

 

(84)

 

51

 

47

 

269

 

(76)

 

(84)

 

73

 

182

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

408

 

47

 

 

31

 

486

Student loans

 

87

 

13

 

(35)

 

 

65

Consumer and other

 

36

 

39

 

(46)

 

 

29

Unallocated

 

154

 

268

 

 

 

422

$

3,970

$

(500)

$

(165)

$

118

$

3,423

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 for loan loss expense of $300,000 and $500,000 for the nine month period ended September 30, 2022 and September 30, 2021, respectively. The recovery of provision for loan loss expense, during the nine months ended September 30, 2022 and September 30, 2021, resulted from reductions in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. While current economic challenges due to higher inflation and the speed at which interest rates are rising remain risks 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 $45,000, $422,000, and $355,000 at September 30, 2022, December 31, 2021, and September 30, 2021, respectively.

23

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, 2022

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

69

$

$

69

$

8,437

$

$

8,437

Commercial

 

175

 

 

175

 

32,109

 

 

32,109

 

244

 

 

244

 

40,546

 

 

40,546

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

875

 

3

 

872

 

122,067

 

4,389

 

117,678

Non-owner occupied

 

1,307

 

 

1,307

 

155,981

 

589

 

155,392

Multifamily

 

33

 

 

33

 

11,309

 

 

11,309

Farmland

 

1

 

 

1

 

564

 

 

564

 

2,216

 

3

 

2,213

 

289,921

 

4,978

 

284,943

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

12

 

 

12

 

19,891

 

300

 

19,591

Secured by 1-4 family residential

 

  

 

  

 

 

 

  

 

  

First deed of trust

 

129

 

6

 

123

 

65,704

 

1,912

 

63,792

Second deed of trust

 

38

 

 

38

 

6,930

 

264

 

6,666

 

179

 

6

 

173

 

92,525

 

2,476

 

90,049

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

(except those secured by real estate)

 

582

 

 

582

 

91,603

 

89

 

91,514

Student loans

 

67

 

 

67

 

22,010

 

 

22,010

Consumer and other

 

82

 

1

 

81

 

4,078

 

24

 

4,054

$

3,370

$

10

$

3,360

$

540,683

$

7,567

$

533,116

Year Ended December 31, 2021

 

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

57

$

$

57

$

6,805

$

$

6,805

Commercial

 

229

 

 

229

 

42,344

 

 

42,344

 

286

 

 

286

 

49,149

 

 

49,149

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

833

 

4

 

829

 

113,108

 

5,043

 

108,065

Non-owner occupied

 

1,083

 

 

1,083

 

129,786

 

1,458

 

128,328

Multifamily

 

35

 

 

35

 

11,666

 

 

11,666

Farmland

 

2

 

 

2

 

977

 

 

977

 

1,953

 

4

 

1,949

 

255,537

 

6,501

 

249,036

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

12

 

 

12

 

17,977

 

300

 

17,677

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

123

 

7

 

116

 

62,277

 

2,019

 

60,258

Second deed of trust

 

47

 

 

47

 

12,118

 

238

 

11,880

 

182

 

7

 

175

 

92,372

 

2,557

 

89,815

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

486

 

 

486

 

100,421

 

185

 

100,236

Student loans

 

65

 

 

65

 

25,975

 

 

25,975

Consumer and other

 

451

 

 

451

 

3,003

 

 

3,003

$

3,423

$

11

$

3,412

$

526,457

$

9,243

$

517,214

24

Table of Contents

Note 6 – Deposits

Deposits as of September 30, 2022 and December 31, 2021 were as follows (dollars in thousands):

September 30, 2022

December 31, 2021

 

    

Amount

    

%  

    

Amount

    

%

Demand accounts

$

279,269

 

41.8

%  

$

268,804

 

40.5

%

Interest checking accounts

 

86,894

 

13.0

%  

 

89,599

 

13.5

%

Money market accounts

 

193,642

 

29.0

%  

 

187,942

 

28.3

%

Savings accounts

 

57,498

 

8.6

%  

 

54,106

 

8.1

%

Time deposits of $250,000 and over

 

4,643

 

0.7

%  

 

6,977

 

1.1

%

Other time deposits

 

45,873

 

6.9

%  

 

56,620

 

8.5

%

Total

$

667,819

 

100.0

%  

$

664,048

 

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 $373,000 in FHLB stock at September 30, 2022 and $353,000 at December 31, 2021, which is held at cost. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings are secured by the pledge of commercial and 1-4 family residential loans. The Company had no outstanding FHLB advances at September 30, 2022 or December 31, 2021.

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, 2022 or December 31, 2021.  

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, 2022 or December 31, 2021.

The Company’s unused lines of credit for future borrowings total approximately $66.1 million at September 30, 2022, which consists of $23.3 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.

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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, 2022 was 5.60%. 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, 2022 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, 2022 was 4.85%. 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, 2022 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 $5,684,000 and $5,660,000 at September 30, 2022 and December 31, 2021, respectively.

Note 10 – Stock incentive plan

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

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

Nine Months Ended September 30, 

2022

2021

    

    

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

 

(345)

 

25.50

$

9.76

 

 

 

 

Options outstanding, end of period

 

389

$

25.74

$

9.76

$

734

$

25.63

$

9.76

$

Options exercisable, end of period

 

389

 

  

 

  

734

 

  

 

  

During the nine months ended September 30, 2021, 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, 2022, vest based on the Company’s achievement of performance targets related to return on tangible common equity over the performance period with possible payouts ranging from 0% to 150% of the target awards.

During the nine months ended September 30, 2022, 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 begins on January 2, 2023, vest based on the Company’s achievement of performance targets related to return on tangible common equity 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 16,316 and 17,077 at September 30, 2022 and 2021, 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, 2022 and 2021 was $551,691 and $437,600, respectively. The time-based unrecognized compensation of $363,742 is expected to be recognized over a weighted average period of 1.73 years. For the periods ended September 30, 2022, there were 924 forfeitures of restricted stock and restricted stock units, and no forfeitures for the period ended September 30, 2021.

A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the nine months ended September 30, 2022 follows:

    

    

Weighted-

    

Average

Aggregate

Grant-Date

Intrinsic

Shares

Fair-Value

Value

December 31, 2021

 

23,734

$

37.46

$

1,142,792

Granted

 

3,341

 

54.56

 

160,869

Vested

 

(11,270)

 

32.30

 

(542,651)

Forfeited

(924)

34.30

(44,491)

Other

 

1,435

 

32.32

 

69,095

September 30, 2022

 

16,316

$

44.25

$

785,615

Stock-based compensation expense was approximately $272,000 and $218,000 for the nine months ended September 30, 2022 and 2021, respectively.

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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.

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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.

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

Fair Value Measurement

at September 30, 2022 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

$

60,577

$

$

60,577

$

Mortgage-backed securities

 

62,006

 

62,006

 

Municipals

1,545

1,545

Subordinated debt

 

10,375

 

 

8,875

 

1,500

Loans held for sale

5,076

5,076

IRLC

111

111

Financial Liabilities - Recurring

Forward sales commitment

113

113

Fair Value Measurement

at December 31, 2021 Using

    

    

Quoted Prices

    

    

in Active

Other

Significant

Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets - Recurring

US Government Agencies

$

40,999

$

$

40,999

$

Mortgage-backed securities

 

40,495

 

 

40,495

 

Municipals

2,209

2,209

Subordinated debt

 

10,996

 

 

9,246

 

1,750

Loans held for sale

5,141

5,141

IRLC

471

471

Financial Liabilities - Recurring

Forward sales commitment

651

651

There were no Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at September 30, 2022 and December 31, 2021.

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

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Update (“ASU”) 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The following table reflects the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value (in thousands).

September 30, 

December 31, 

2022

2021

    

Level in Fair

    

    

    

    

Value

Carrying

Estimated

Carrying

Estimated

Hierarchy

Value

Fair Value

Value

Fair Value

Financial assets

 

  

 

  

 

  

 

  

 

  

Cash

 

Level 1

$

20,393

$

20,393

$

12,071

$

12,071

Cash equivalents

 

Level 2

 

11,788

 

11,788

 

80,545

 

80,545

Investment securities available for sale

 

Level 2

 

133,003

 

133,003

 

92,949

 

92,949

Investment securities available for sale

 

Level 3

 

1,500

 

1,500

 

1,750

 

1,750

Federal Home Loan Bank stock

 

Level 2

 

373

 

373

 

353

 

353

Loans held for sale

 

Level 2

 

5,076

 

5,076

 

5,141

 

5,141

Loans

 

Level 3

 

540,683

 

518,727

 

526,457

 

526,668

Bank owned life insurance

 

Level 2

 

12,718

 

12,718

 

12,494

 

12,494

Accrued interest receivable

 

Level 2

 

3,341

 

3,341

 

3,245

 

3,245

Interest rate lock commitments

Level 2

111

111

471

471

Financial liabilities

 

  

 

  

 

  

 

  

 

  

Deposits

 

Level 2

 

667,819

 

667,512

 

664,048

 

663,898

Trust preferred securities

 

Level 2

 

8,764

 

7,990

 

8,764

 

9,554

Other borrowings

 

Level 2

 

5,684

 

5,684

 

5,660

 

5,660

Accrued interest payable

 

Level 2

 

58

 

58

 

68

 

68

Forward sales commitment

Level 2

113

113

651

651

Note 12 – Segment Reporting

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

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

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Table of Contents

The following table presents segment information as of and for the three and nine months ended September 30, 2022 and 2021 (in thousands):

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Three Months Ended September 30, 2022

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

6,885

$

70

$

$

6,955

Gain on sale of loans

 

 

1,350

 

 

1,350

Other revenues

 

822

 

108

 

(71)

 

859

Total revenues

 

7,707

 

1,528

 

(71)

 

9,164

Expenses

 

  

 

  

 

  

 

  

Provision for loan losses

100

100

Interest expense

 

420

 

 

 

420

Salaries and benefits

 

2,646

 

800

 

 

3,446

Commissions

 

 

459

 

 

459

Other expenses

 

1,853

 

296

 

(71)

 

2,078

Total operating expenses

 

5,019

 

1,555

 

(71)

 

6,503

Income (loss) before income taxes

2,688

(27)

2,661

Income tax expense (benefit)

514

(6)

508

Net income (benefit)

$

2,174

$

(21)

$

$

2,153

Total assets

$

755,071

$

18,281

$

(30,649)

$

742,703

    

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

 

  

 

  

 

  

 

  

Recovery of provision for loan losses

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

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Table of Contents

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Nine Months Ended September 30, 2022

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

19,762

$

192

$

$

19,954

Gain on sale of loans

 

 

4,018

 

 

4,018

Other revenues

 

2,510

 

413

 

(148)

 

2,775

Total revenues

 

22,272

 

4,623

 

(148)

 

26,747

Expenses

 

  

 

  

 

  

 

  

Recovery of provision for loan losses

(300)

(300)

Interest expense

 

1,238

 

 

 

1,238

Salaries and benefits

 

7,900

 

2,494

 

 

10,394

Commissions

 

 

1,405

 

 

1,405

Other expenses

 

5,610

 

935

 

(148)

 

6,397

Total operating expenses

 

14,448

 

4,834

 

(148)

 

19,134

Income (loss) before income taxes

7,824

(211)

7,613

Income tax expense (benefit)

1,514

(44)

1,470

Net income (loss)

$

6,310

$

(167)

$

$

6,143

Total assets

$

755,071

$

18,281

$

(30,649)

$

742,703

    

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

 

  

 

  

 

  

 

  

Recovery of provision for 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

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Note 13 – Shareholders’ Equity and Regulatory Matters

Accumulated Other Comprehensive Loss

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred tax benefits of $3,075,000 and $198,000 as of September 30, 2022 and December 31, 2021, respectively (in thousands):

September 30,

December 31,

2022

    

2021

Net unrealized losses on securities

$

(11,547)

$

(717)

Net unrecognized losses on defined benefit plan

 

(21)

 

(27)

Total accumulated other comprehensive loss

$

(11,568)

$

(744)

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

The Basel III Capital Rules require banks to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).  The 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, 2022, 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, 2022, the Bank exceeded the minimum ratios to be classified as well capitalized.

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On September 17, 2019, the federal bank regulators issued a final rule required by the EGRRCPA that permits qualifying banks and bank holding companies that have less than $10 billion of assets, like the Company and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or “CBLR”). The Bank elected not to opt into the CBLR framework as of September 30, 2022 and December 31, 2021.

The capital amounts and ratios at September 30, 2022 and December 31, 2021 for the Bank are presented in the table below (dollars in thousands):

For Capital

 

Requirements

Actual

Including Conservation Buffer (1)

To be Well Capitalized

    

Amount

    

Ratio

Amount

    

Ratio

Amount

    

Ratio

September 30, 2022

 

  

 

  

 

  

 

  

 

  

 

  

Total capital (to risk- weighted assets) Village Bank

$

82,996

 

14.48

%  

$

60,166

 

10.50

%  

$

57,301

 

10.00

%

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

 

79,626

 

13.90

%  

 

48,706

 

8.50

%  

 

45,841

 

8.00

%

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

 

79,626

 

10.53

%  

 

30,253

 

4.00

%  

 

37,817

 

5.00

%

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

 

79,626

 

13.90

%  

 

40,111

 

7.00

%  

 

37,246

 

6.50

%

December 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Total capital (to risk- weighted assets) Village Bank

$

77,547

 

14.66

%  

$

55,558

 

10.50

%  

$

52,912

 

10.00

%

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

 

74,124

 

14.01

%  

 

44,975

 

8.50

%  

 

42,330

 

8.00

%

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

 

74,124

 

9.86

%  

 

30,068

 

4.00

%  

 

37,585

 

5.00

%

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

 

74,124

 

14.01

%  

 

37,038

 

7.00

%  

 

34,393

 

6.50

%

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

Note 14 – Commitments and contingencies

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

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

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At September 30, 2022 and December 31, 2021, the Company had the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

    

September 30, 

    

December 31, 

2022

2021

Undisbursed credit lines

$

110,269

$

103,125

Commitments to extend or originate credit

 

13,326

 

18,551

Standby letters of credit

 

557

 

4,680

Total commitments to extend credit

$

124,152

$

126,356

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 $5.1 million as of September 30, 2022, of which $5.1 million is related to unpaid principal, and totaled $5.1 million as of December 31, 2021, of which $5.0 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

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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, 2022, and totaled $111,000, with a notional amount of $13.3 million and total positions of 45, and was reported in “Other Assets” at December 31, 2021, and totaled $471,000 with a notional amount of $18.2 million and total positions of 67. 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, 2022 and 2021. The Company’s IRLCs are classified as Level 2. At September 30, 2022 and December 31, 2021, 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, 2022, and totaled $113,000 with a notional amount of $18.4 million and total positions of 62, and was reported in “Other Liabilities” at December 31, 2021, and totaled $651,000, with a notional amount of $24.3 million and total positions of 95.

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. ASC 326, and the associated amendments, will be applied on a modified retrospective basis upon adoption, and the cumulative effect of adopting the new standard will be recorded as an adjustment to opening retained earnings in the period of adoption. The Company created a cross-functional team to prepare for and implement ASC 326. In preparation for ASC 326, the Company has gathered and validated historical loan loss data to ensure its accuracy for purposes of evaluating appropriate segmentation, modeling method, and to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under ASC 326. The Company has engaged a vendor to assist in the modeling of expected lifetime losses under ASC 326, and is continuing to develop and refine an approach to estimating the allowance for credit losses. The adoption of ASC 326 will result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in total equity and regulatory capital of the Bank, differences in the timing of recognizing changes to the allowance for credit losses and expanded disclosures. The Company has not yet determined an estimate of the effect of these changes. The adoption of ASC 326 will result in significant changes in the Company’s internal controls over financial reporting of the allowance for credit losses.

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

In March 2022, the FASB issued ASU 2022-02 “Financial Instruments – Credit Losses (Topic 326) Trouble Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post implementation review of the credit losses

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Table of Contents

standard (ASU 2016-13) that introduced the current expected credit losses (“CECL”) model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022-01 to have a material impact on its 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.

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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;
geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;
changes in accounting policies, rules and practices;
reliance on our management team, including our ability to attract and retain key personnel;
competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
demand, development and acceptance of new products and services;
problems with technology utilized by us;
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.

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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.

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at September 30, 2022 and December 31, 2021 and the results of operations for the Company for the three and nine months ended September 30, 2022 and 2021. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

Summary

For the three months ended September 30, 2022, the Company had net income of $2,153,000, or $1.46 per fully diluted share, compared to net income of $2,899,000, or $1.97 per fully diluted share, for the same period in 2021. For the nine months ended September 30, 2022, the Company had net income of $6,143,000, or $4.16 per fully diluted share, compared to net income of $10,090,000, or $6.88 per fully diluted share, for the same period in 2021.

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, 

 

    

2022

    

2021

    

Change

 

 

(dollars in thousands)

Average interest-earning assets

$

700,755

$

681,164

 

$

19,591

Interest income

$

6,955

$

6,921

 

$

34

Yield on interest-earning assets

 

3.94

%

 

4.03

%

(0.09)

%

Average interest-bearing liabilities

$

406,837

$

396,194

 

$

10,643

Interest expense

$

420

$

492

 

$

(72)

Cost of interest-bearing liabilities

 

0.41

%

 

0.49

%

(0.08)

%

Net interest income

$

6,535

$

6,429

 

$

106

Net interest margin

 

3.70

%

 

3.74

%

(0.04)

%

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Table of Contents

The following are variances of note for the three months ended September 30, 2022 compared to the three months ended September 30, 2021:

NIM compressed by four basis points to 3.70% for the three months ended September 30, 2022 compared to 3.74% for the three months ended September 30, 2021. The compression was driven by the following:
oThe Commercial Banking Segment recorded SBA fee income, net of deferred costs, of $23,000 for the three months ended September 30, 2022, compared to $1,210,000 for the three months ended September 30, 2021, 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 recorded interest income associated with PPP loans of $3,000 for the three months ended September 30, 2022, compared to $192,000 for the three months ended September 30, 2021. Total income associated with PPP loans was $26,000 for the three months ended September 30, 2022 compared to $1,402,000 for the three months ended September 30, 2021.  
oThe yield on average earning assets compressed by nine basis points, 3.94% for the three months ended September 30, 2022 vs. 4.03% for the three months ended September 30, 2021. The increase in our yield on earning assets, adjusting for PPP income, is a result of improvement in our earning asset mix as well as the impact of the rise in interest rates during 2022.  
oThe cost of interest bearing liabilities dropped by eight basis points to 0.41% for the three months ended September 30, 2022 compared to 0.49% for the three months ended September 30, 2021, because of the shift in our deposit mix from higher cost time deposits to lower cost relationship deposits. Average time deposits decreased $23,066,000, or 28.75%, from the three months ended September 30, 2021, and low cost relationship deposits and non-interest bearing deposits together increased $59,220,000, or 10.69%, from the three months ended September 30, 2021.

For the Nine Months Ended September 30, 

 

    

2022

    

2021

    

Change

 

 

(dollars in thousands)

Average interest-earning assets

$

705,935

$

669,583

 

$

36,352

Interest income

$

19,954

$

20,923

 

$

(969)

Yield on interest-earning assets

 

3.78

%

 

4.18

%

(0.40)

%

Average interest-bearing liabilities

$

408,150

$

400,963

 

$

7,187

Interest expense

$

1,238

$

1,728

 

$

(490)

Cost of interest-bearing liabilities

 

0.41

%

 

0.58

%

(0.17)

%

Net interest income

$

18,716

$

19,195

 

$

(479)

Net interest margin

 

3.54

%

 

3.83

%

(0.29)

%

The following are variances of note for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021:

NIM compressed by 29 basis points to 3.54% for the nine months ended September 30, 2022 compared to 3.83% for the nine months ended September 30, 2021. The expansion was driven by the following:
oThe Commercial Banking Segment recorded SBA fee income, net of deferred costs, of $973,000 for the nine months ended September 30, 2022 compared to $4,034,000 for the nine months ended September 30, 2021, 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 recorded interest income associated with PPP loans of $81,000 for the nine months ended September 30, 2022 compared to $930,000 for the nine months ended September 30, 2021. Total income associated with PPP loans was $1,054,000 for the nine months ended September 30, 2022 compared to $4,964,000 for the nine months ended September 30, 2021.
oThe yield on average earning assets compressed by 40 basis points, 3.78% for the nine months ended September 30, 2022 vs. 4.18% for the nine months ended September 30, 2021. The decrease in our yield on earning assets for the

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nine months ended September 30, 2022, adjusting for PPP income, was a result of the shift in our earning asset mix which was driven by an increase in our liquid assets (i.e. interest bearing due from other institutions and investment securities) due to the reduction in the PPP loan balances because of loan forgiveness, which was partially offset by growth in the core loan portfolio and growth in our deposit base. The rise in interest rates during the nine months ended September 30, 2022 partially offset the impact of the increased liquid assets.
oThe cost of interest bearing liabilities dropped by 17 basis points to 0.41% for the nine months ended September 30, 2022 compared to 0.58% for the nine months ended September 30, 2021, because of the shift in our deposit mix from higher cost time deposits to lower cost relationship deposits. Average time deposits decreased $28,322,000, or 30.68%, from September 30, 2021, and average low cost relationship deposits and non-interest bearing deposits together increased $80,956,000, or 15.36%, from September 30, 2021.

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

Three Months Ended September 30, 2022

Three Months Ended September 30, 2021

 

Interest

Interest

 

Average

Income/

Yield

Average

Income/

Yield

 

    

Balance

    

Expense

    

Rate

    

Balance

    

Expense

    

Rate

Loans

 

 

Commercial

$

86,757

$

1,055

4.82

%

$

128,417

$

1,921

5.93

%

Real estate - residential

91,071

1,091

4.75

%

85,660

977

4.53

%

Real estate - commercial

290,769

3,282

4.48

%

247,158

2,881

4.62

%

Real estate - construction

38,728

412

4.22

%

47,358

463

3.88

%

Student loans

23,062

252

4.34

%

28,285

269

3.77

%

Consumer

4,004

48

4.76

%

3,067

40

5.17

%

Loans net of deferred fees

$

534,391

$

6,140

4.56

%

$

539,945

$

6,551

4.81

%

Loans held for sale

 

5,239

 

70

 

5.30

%

 

13,668

 

104

 

3.02

%

Investment securities

 

130,288

 

559

 

1.70

%

 

56,931

 

244

 

1.70

%

Federal funds and other

 

30,837

 

186

 

2.39

%

 

70,620

 

22

 

0.12

%

Total interest earning assets

 

700,755

 

6,955

 

3.94

%

 

681,164

 

6,921

 

4.03

%

Allowance for loan losses

 

(3,329)

 

  

 

  

 

(3,444)

 

  

 

  

Cash and due from banks

 

17,828

 

  

 

  

 

12,592

 

  

 

  

Premises and equipment, net

 

11,681

 

  

 

  

 

12,027

 

  

 

  

Other assets

 

22,383

 

  

 

  

 

22,765

 

  

 

  

Total assets

$

749,318

 

  

 

  

$

725,104

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest bearing deposits

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

 

87,371

 

27

 

0.12

%

 

80,049

 

26

 

0.13

%

Money market

 

196,469

 

110

 

0.22

%

 

180,261

 

103

 

0.23

%

Savings

 

51,391

 

20

 

0.15

%

 

41,245

 

16

 

0.15

%

Certificates

 

57,163

 

83

 

0.58

%

 

80,229

 

204

 

1.01

%

Total deposits

 

392,394

 

240

 

0.24

%

 

381,784

 

349

 

0.36

%

Borrowings

 

 

 

 

 

 

Long-term debt - trust

preferred securities

8,764

80

3.62

%

8,764

42

1.90

%

Subordinated debt, net

5,679

100

6.99

%

5,646

101

7.10

%

Other borrowings

%

%

Total interest bearing liabilities

 

406,837

 

420

 

0.41

%

 

396,194

 

492

 

0.49

%

Noninterest bearing deposits

 

277,758

 

  

 

  

 

261,714

 

  

 

  

Other liabilities

 

3,260

 

  

 

  

 

6,035

 

  

 

  

Total liabilities

 

687,855

 

  

 

  

 

663,943

 

  

 

  

Equity capital

 

61,463

 

  

 

  

 

61,161

 

  

 

  

Total liabilities and capital

$

749,318

 

  

 

  

$

725,104

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net interest income before provision for loan losses

 

$

6,535

 

  

 

  

$

6,429

 

  

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

 

  

 

  

 

3.53

%

 

  

 

  

 

3.54

%

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

 

  

 

  

 

3.70

%

 

 

  

 

3.74

%

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Table of Contents

Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2021

Interest

Interest

Average

Income/

Yield

Average

Income/

Yield

    

Balance

    

Expense

    

Rate

    

Balance

    

Expense

    

Rate

Loans

 

 

Commercial

$

85,429

$

3,682

5.76

%

$

169,218

$

6,401

5.06

%

Real estate - residential

91,475

2,932

4.29

%

86,733

2,991

4.61

%

Real estate - commercial

278,196

9,379

4.51

%

239,041

8,286

4.63

%

Real estate - construction

41,057

1,048

3.41

%

37,202

1,195

4.29

%

Student loans

24,293

729

4.01

%

28,902

805

3.72

%

Consumer

3,609

139

5.15

%

3,165

129

5.45

%

Loans net of deferred fees

$

524,059

$

17,909

4.57

%

$

564,261

$

19,807

4.69

%

Loans held for sale

 

5,854

 

192

 

4.39

%

 

16,162

 

341

 

2.82

%

Investment securities

 

125,447

 

1,535

 

1.64

%

 

48,219

 

743

 

2.06

%

Federal funds and other

 

50,575

 

318

 

0.84

%

 

40,941

 

32

 

0.10

%

Total interest earning assets

 

705,935

 

19,954

 

3.78

%

 

669,583

 

20,923

 

4.18

%

Allowance for loan losses

 

(3,490)

 

  

 

  

 

(3,803)

 

  

 

  

Cash and due from banks

 

17,858

 

  

 

  

 

12,826

 

  

 

  

Premises and equipment, net

 

11,716

 

  

 

  

 

11,980

 

  

 

  

Other assets

 

20,000

 

  

 

  

 

23,008

 

  

 

  

Total assets

$

752,019

 

  

 

  

$

713,594

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest bearing deposits

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

 

86,679

 

80

 

0.12

%

 

75,823

 

76

 

0.13

%

Money market

 

194,635

 

321

 

0.22

%

 

171,093

 

359

 

0.28

%

Savings

 

50,701

 

59

 

0.16

%

 

39,827

 

47

 

0.16

%

Certificates

 

61,700

 

295

 

0.64

%

 

92,328

 

793

 

1.15

%

Total deposits

 

393,715

 

755

 

0.26

%

 

379,071

 

1,275

 

0.45

%

Borrowings

 

 

 

 

 

 

Long-term debt - trust

preferred securities

8,764

181

2.76

%

8,764

130

1.98

%

Subordinated debt, net

5,671

302

7.12

%

5,639

302

7.16

%

Other borrowings

%

7,489

21

0.37

%

Total interest bearing liabilities

 

408,150

 

1,238

 

0.41

%

 

400,963

 

1,728

 

0.58

%

Noninterest bearing deposits

 

276,662

 

  

 

  

 

247,523

 

  

 

  

Other liabilities

 

5,203

 

  

 

  

 

7,252

 

  

 

  

Total liabilities

 

690,015

 

  

 

  

 

655,738

 

  

 

  

Equity capital

 

62,004

 

  

 

  

 

57,856

 

  

 

  

Total liabilities and capital

$

752,019

 

  

 

  

$

713,594

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net interest income before provision for loan losses

 

  

$

18,716

 

  

 

  

$

19,195

 

  

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

 

  

 

  

 

3.37

%

 

  

 

  

 

3.60

%

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

 

  

 

  

 

3.54

%

 

  

 

  

 

3.83

%

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.

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Table of Contents

The Company recorded a provision for loan loss expense of $100,000 for the three months ended September 30, 2022, compared to no provision for loan loss expense for the three months ended September 30, 2021. The provision expense for three months ended September 30, 2022 was due to growth in the overall loan portfolio as well as the impact of the $153,000 net charge-offs during the quarter. The lack of a provision for loan loss, during the three months ended September 30, 2021, was driven by improving macroeconomic conditions, the return of all loan deferrals to contractual payment terms and credit quality remaining strong. While current economic challenges due to higher inflation and the speed at which interest rates are rising remain risks to credit quality, we believe our current level of allowance for loan losses is sufficient.

The Company recorded a recovery of provision for loan loss expense of $300,000 and $500,000 for the nine months ended September 30, 2022 and September 30, 2021, respectively. The recovery of provision for loan loss expense, during the nine months ended September 30, 2022 and September 30, 2021, resulted from reductions in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. While current economic challenges due to higher inflation and the speed at which interest rates are rising remain risks to credit quality, we believe our current level of allowance for loan losses is sufficient.

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 56% and 73% for the three month periods ended September 30, 2022 and 2021, respectively, and 55% and 79% for the nine month periods ended September 30, 2022 and 2021, respectively.

For the Three Months Ended

 

September 30, 

Change

 

    

2022

    

2021

    

$

    

%

 

 

(dollars in thousands)

Service charges and fees

$

670

$

580

$

90

15.5

%

Mortgage banking income, net

 

973

 

2,171

 

(1,198)

(55.2)

%

Other

 

107

 

108

 

(1)

(0.9)

%

Total noninterest income

$

1,750

$

2,859

$

(1,109)

(38.8)

%

The decrease in noninterest income of $1,109,000 for the three months ended September 30, 2022, was the result of the following:

The $90,000 increase in service charges and fees was driven by higher consumer and business spending during the three months ended September 30, 2022.
The $1,198,000 decrease in mortgage banking income, net is a result of decreased loan originations and sales compared to the prior year due the sharp rise in mortgage rates during the nine months ended September 30, 2022, the historically low inventory of homes for sale, and compressed gain on sale margins during the three months ended September 30, 2022. As a result of the sharp drop in origination volume, the Mortgage Banking Segment has taken steps to right size its expense structure to minimize the impact to earnings.

For the Nine Months Ended

 

September 30, 

Change

 

    

2022

    

2021

    

$

    

%

 

 

(dollars in thousands)

Service charges and fees

$

1,960

$

1,711

$

249

14.6

%

Mortgage banking income, net

 

2,942

 

7,827

 

(4,885)

(62.4)

%

Gain on sale of SBA loans

 

79

 

 

79

100.0

%

Other

 

336

 

344

 

(8)

(2.3)

%

Total noninterest income

$

5,317

$

9,882

$

(4,565)

(46.2)

%

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Table of Contents

The decrease in noninterest income of $4,565,000 for the nine months ended September 30, 2022, was the result of the following:

The $249,000 increase in service charges and fees was driven by higher consumer and business spending during the nine months ended September 30, 2022.
The $4,885,000 decrease in mortgage banking income, net is a result of decreased loan originations and sales compared to the prior year due the sharp rise in mortgage rates during the nine months ended September 30, 2022, the historically low inventory of homes for sale, and compressed gain on sale margins during the nine months ended September 30, 2022. As a result of the sharp drop in origination volume, the Mortgage Banking Segment has taken steps to right size its expense structure to minimize the impact to earnings.
The Company began selling the guaranteed strip on SBA loans again during the nine months ended September 30, 2022, and recognized a gain of $79,000 for the period, compared to no sales for the same period in 2021.

Noninterest expense

For the Three Months Ended

 

September 30, 

Change

 

    

2022

    

2021

    

$

    

%

 

 

(dollars in thousands)

Salaries and benefits

$

3,446

$

3,607

$

(161)

(4.5)

%

Occupancy

 

305

 

315

 

(10)

(3.2)

%

Equipment

 

260

 

267

 

(7)

(2.6)

%

Supplies

 

46

 

49

 

(3)

(6.1)

%

Professional and outside services

 

655

 

730

 

(75)

(10.3)

%

Advertising and marketing

 

67

 

99

 

(32)

(32.3)

%

FDIC insurance premium

 

64

 

38

 

26

68.4

%

Other operating expense

 

681

 

532

 

149

28.0

%

Total noninterest expense

$

5,524

$

5,637

$

(113)

(2.0)

%

The decrease in noninterest expense of $113,000 for the three months ended September 30, 2022, was the result of the following:

The $161,000 decrease in salaries and benefits expense was driven primarily by lower expenses related to the decreased mortgage production for the three months ended September 30, 2022.
Professional and outside services expenses decreased by $75,000 primarily due to lower expenses associated with data processing.
Advertising and marketing expense decreased by $32,000 as a result of decreased marketing efforts during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
Other operating expense increased $149,000 as a result of an increase in check and card fraud during the three months ended September 30, 2022.

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Table of Contents

For the Nine Months Ended

 

September 30, 

Change

 

    

2022

    

2021

    

$

    

%

 

 

(dollars in thousands)

Salaries and benefits

$

10,394

$

10,541

$

(147)

(1.4)

%

Occupancy

 

919

 

948

 

(29)

(3.1)

%

Equipment

 

818

 

788

 

30

3.8

%

Supplies

 

120

 

138

 

(18)

(13.0)

%

Professional and outside services

 

2,118

 

2,085

 

33

1.6

%

Advertising and marketing

 

271

 

347

 

(76)

(21.9)

%

Foreclosed assets, net

 

 

(8)

 

8

(100.0)

%

FDIC insurance premium

 

187

 

142

 

45

31.7

%

Other operating expense

 

1,893

 

1,716

 

177

10.3

%

Total noninterest expense

$

16,720

$

16,697

$

23

0.1

%

The increase in noninterest expense of $23,000 for the nine months ended September 30, 2022, was the result of the following:

The $147,000 decrease in salaries and benefits expense was driven primarily by lower expenses related to the decreased mortgage production for the nine months ended September 30, 2022.
Advertising and marketing expense decreased by $76,000 as a result of decreased marketing efforts during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
Other operating expense increased $177,000 primarily as a result of an increase in check and card fraud during the nine months ended September 30, 2022.

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, 2022 was $508,000 and $1,470,000, respectively, resulting in an effective tax rate of 19.1% and 19.3%, respectively, compared to $752,000 and $2,790,000, or 20.6% and 21.7%, respectively, for the same periods in 2021. 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 to Virginia income taxes, and instead is subject to a franchise tax based on bank capital.

Balance Sheet Analysis

Investment securities

At September 30, 2022 and December 31, 2021, 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 78.2% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 4.1% 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 16.9% of all loans.  Loans in

46

Table of Contents

this category are typically made to individuals and small and medium-sized businesses, and range between $250,000 and $2.5 million. Based on underwriting standards, commercial and industrial loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory, and real property.  The collateral securing any loan may depend on the type of loan and may vary in value based on market conditions.  The remainder of our loan portfolio is in consumer loans which represent less than 1% of the total.

Loans classified by type as of September 30, 2022 and December 31, 2021 are as follows (dollars in thousands):

September 30, 2022

December 31, 2021

 

    

Amount

    

%

    

Amount

    

%

 

Construction and land development

  

  

  

  

 

Residential

$

8,437

 

1.56

%  

$

6,805

 

1.29

%

Commercial

 

32,109

 

5.94

%  

 

42,344

 

8.05

%

 

40,546

 

7.50

%  

 

49,149

 

9.34

%

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

122,067

 

22.59

%  

 

113,108

 

21.48

%

Non-owner occupied

 

155,981

 

28.85

%  

 

129,786

 

24.65

%

Multifamily

 

11,309

 

2.09

%  

 

11,666

 

2.22

%

Farmland

 

564

 

0.10

%  

 

977

 

0.19

%

 

289,921

 

53.63

%  

 

255,537

 

48.54

%

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

19,891

 

3.68

%  

 

17,977

 

3.41

%

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

First deed of trust

 

65,704

 

12.15

%  

 

62,277

 

11.83

%

Second deed of trust

 

6,930

 

1.28

%  

 

12,118

 

2.31

%

 

92,525

 

17.11

%  

 

92,372

 

17.55

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

91,603

 

16.94

%  

 

100,421

 

19.07

%

Guaranteed student loans

 

22,010

 

4.07

%  

 

25,975

 

4.93

%

Consumer and other

 

4,078

 

0.75

%  

 

3,003

 

0.57

%

 

 

 

 

Total loans

 

540,683

 

100.00

%  

 

526,457

 

100.00

%

Deferred fees and costs, net

 

592

 

 

(433)

 

Less: allowance for loan losses

 

(3,370)

 

 

(3,423)

 

$

537,905

 

  

$

522,601

 

  

PPP loans included in commercial and industrial loans in the above table were $710,000 and $32,601,000 as of September 30, 2022 and December 31, 2021, 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.

47

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 following table presents the loan loss experience for the dates indicated (dollars in thousands).

    

    

Provision for

    

    

    

 

Ratio of Net

Beginning

(Recovery of)

Ending

 

Average

Charge-offs to

Balance

Loan Losses

Charge-offs

Recoveries

Balance

 

Loans

Average Loans

Nine Months Ended September 30, 2022

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

57

$

12

$

$

$

69

$

6,676

%

Commercial

 

229

 

(54)

 

 

 

175

34,381

%

 

286

 

(42)

 

 

 

244

41,057

%

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

833

 

42

 

 

 

875

122,052

%

Non-owner occupied

 

1,083

 

224

 

 

 

1,307

141,138

%

Multifamily

 

35

 

(2)

 

 

 

33

14,194

%

Farmland

 

2

 

(1)

 

 

 

1

812

%

 

1,953

 

263

 

 

 

2,216

278,196

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

12

 

(58)

 

 

58

 

12

19,468

0.30

%

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

123

 

2

 

 

4

 

129

61,001

%

Second deed of trust

 

47

 

(312)

 

(27)

 

330

 

38

11,006

2.75

%

 

182

 

(368)

 

(27)

 

392

 

179

91,475

0.40

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

486

 

189

 

(157)

 

64

 

582

85,429

(0.11)

%

Student loans

 

65

 

26

 

(24)

 

 

67

24,293

(0.10)

%

Consumer and other

 

29

 

9

 

(1)

 

 

37

3,609

(0.03)

%

Unallocated

 

422

 

(377)

 

 

 

45

%

$

3,423

$

(300)

$

(209)

$

456

$

3,370

$

524,059

0.05

%

Year Ended December 31, 2021

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

214

$

(157)

$

$

$

57

$

7,959

%

Commercial

 

285

 

(56)

 

 

 

229

32,750

%

 

499

 

(213)

 

 

 

286

40,709

%

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

1,047

 

(214)

 

 

 

833

127,150

%

Non-owner occupied

 

1,421

 

(352)

 

 

14

 

1,083

103,535

0.01

%

Multifamily

 

47

 

(12)

 

 

 

35

11,111

%

Farmland

 

2

 

 

 

 

2

744

%

 

2,517

 

(578)

 

 

14

 

1,953

242,540

0.01

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

24

 

(23)

 

 

11

 

12

17,860

0.06

%

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

166

 

(54)

 

 

11

 

123

57,446

0.02

%

Second deed of trust

 

79

 

1

 

(84)

 

51

 

47

11,821

(0.28)

%

 

269

 

(76)

 

(84)

 

73

 

182

87,127

(0.01)

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

408

 

47

 

 

31

 

486

152,760

0.02

%

Student loans

 

87

 

13

 

(35)

 

 

65

28,502

(0.12)

%

Consumer and other

 

36

 

39

 

(46)

 

 

29

3,079

(1.49)

%

Unallocated

 

154

 

268

 

 

 

422

%

$

3,970

$

(500)

$

(165)

$

118

$

3,423

$

554,717

(0.01)

%

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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, 

 

    

2022

    

2021

 

Nonaccrual loans

$

984

$

1,359

Foreclosed properties

 

 

Total nonperforming assets

$

984

$

1,359

 

  

 

  

Restructured loans (not included in nonaccrual loans above)

$

4,890

$

5,734

 

  

 

  

Loans past due 90 days and still accruing (1)

$

1,714

$

1,961

 

  

 

  

Nonaccrual loans to total loans (2)

0.18

%

0.26

%

Nonperforming assets to loans (2)

 

0.18

%  

 

0.26

%

 

  

 

  

Nonperforming assets to total assets

 

0.13

%  

 

0.18

%

 

  

 

  

Allowance for loan losses to

 

 

Loans, net of deferred fees and costs

0.62

%  

0.65

%  

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

0.65

%  

0.69

%  

Nonaccrual loans

342.48

%  

251.94

%  

(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, consisting solely of nonaccrual loans, totaled $984,000 at September 30, 2022, compared to $1,359,000 at December 31, 2021.

The following table presents an analysis of the changes in nonperforming assets for the nine months ended September 30, 2022 (in thousands):

    

Nonaccrual

    

    

Loans

OREO

Total

Balance December 31, 2021

$

1,359

$

$

1,359

Additions

 

168

 

 

168

Loans placed back on accrual

 

(177)

 

 

(177)

Repayments

 

(339)

 

 

(339)

Charge-offs

 

(27)

 

 

(27)

 Balance September 30, 2022

$

984

$

$

984

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

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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 $984,000 and $1,359,000 at September 30, 2022 and December 31, 2021, respectively, that were considered impaired.

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $84,000 and $82,000 for the nine months ended September 30, 2022 and 2021, respectively. Student loans totaling $1,714,000 and $1,961,000 at September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 were as follows (dollars in thousands):

September 30, 2022

December 31, 2021

 

    

Amount

    

%

    

Amount

    

%

 

Demand accounts

$

279,269

41.8

%  

$

268,804

40.5

%

Interest checking accounts

 

86,894

 

13.0

%

89,599

 

13.5

%

Money market accounts

 

193,642

 

29.0

%

187,942

 

28.3

%

Savings accounts

 

57,498

 

8.6

%

54,106

 

8.1

%

Time deposits of $250,000 and over

 

4,643

 

0.7

%

6,977

 

1.1

%

Other time deposits

 

45,873

 

6.9

%

56,620

 

8.5

%

Total

$

667,819

 

100.0

%

$

664,048

 

100.0

%

Total deposits increased by $3,771,000, or 0.57%, from December 31, 2021. Variances of note are as follows:

Noninterest bearing demand account balances increased $10,464,000 from December 31, 2021 and represented 41.8% of total deposits compared to 40.5% as of December 31, 2021. 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 $6,388,000, or 1.93%, from December 31, 2021. 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 $13,081,000, or 22.11%, from December 31, 2021. 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 $993,000 of internet listing service deposits which were not replaced. This decrease continues to allow us to lower our cost of interest bearing deposits.

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Table of Contents

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

    

Average Balance

    

Average Cost Rate

    

Nine Months Ended

Nine Months Ended

September 30,

December 31,

September 30,

December 31,

2022

2021

 

2022

2021

Noninterest bearing deposits

$

276,662

$

254,481

Interest checking

86,679

77,665

 

0.12

%

 

0.14

%

Money market

 

194,635

 

175,313

 

0.22

%

 

0.26

%

Savings

 

50,701

 

41,135

 

0.16

%

 

0.16

%

Certificates

 

 

 

Less than $250,000

55,329

74,515

0.63

%

1.10

%

$250,000 or more

6,371

12,254

0.69

%

0.99

%

Total interest bearing deposits

393,715

380,882

0.40

%

0.41

%

Total deposits

$

670,377

$

635,363

 

0.26

%

 

0.25

%

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

    

    

September 30,

December 31,

2022

2021

 

Months to maturity:

Three or less

$

1,029

$

2,458

 

Over three through six

 

 

938

 

Over six through twelve

 

2,013

 

2,785

 

Over twelve

 

1,601

 

796

 

Total

$

4,643

$

6,977

 

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, 2022 was $58,372,000 compared to $63,401,000 at December 31, 2021. The $5,029,000 decrease in shareholders’ equity during the nine months ended September 30, 2022 is primarily due to the $10,824,000 increase in accumulated other comprehensive loss associated with the unrealized holding losses arising in the available for sale investment securities portfolio during the period, which were the result of the movement in interest rates during the nine months ended September 30, 2022. The increase in the holding losses was partially offset by the net income of $6,143,000 during the nine months ended September 30, 2022.

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Table of Contents

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

September 30, 

December 31, 

 

    

2022

    

2021

 

Tier 1 capital

 

  

 

  

Total bank equity capital

$

68,058

$

73,380

Net unrealized loss on available-for-sale securities

 

11,547

717

Defined benefit postretirement plan

 

21

27

Total Tier 1 capital

 

79,626

74,124

 

  

  

Tier 2 capital

 

  

  

Allowance for loan losses

 

3,370

3,423

Tier 2 capital deduction

 

Total Tier 2 capital

 

3,370

3,423

 

  

  

Total risk-based capital

 

82,996

77,547

 

  

  

Risk-weighted assets

$

573,012

$

531,225

 

  

 

  

Average assets

$

756,336

$

751,708

 

  

 

  

Capital ratios

 

  

 

  

Leverage ratio (Tier 1 capital to average assets)

 

10.53

%  

 

9.86

%

Common equity tier 1 capital ratio (CET 1)

 

13.90

%  

 

14.01

%

Tier 1 capital to risk-weighted assets

 

13.90

%  

 

14.01

%

Total capital to risk-weighted assets

 

14.48

%  

 

14.66

%

Equity to total assets

 

9.16

%  

 

9.83

%

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, 2022, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $166,684,000, or 22.44% 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, 2022 and December 31, 2021.

We are also a member of the Federal Home Loan Bank of Atlanta, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at September 30, 2022 was $33.4 million, based on the

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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, 2022, we had commitments to originate $124,152,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at September 30, 2022. Certificates of deposit scheduled to mature in the 12-month period ending September 30, 2022 totaled $32,879,000. 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.

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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, 2022. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

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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, 2021 filed with the SEC on March 25, 2022.

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, 2022 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (loss), (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed

Consolidated Financial Statements.

104

Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

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

    

VILLAGE BANK AND TRUST FINANCIAL CORP.

Date:

November 10, 2022

By:

/s/ James E. Hendricks, Jr.

James E. Hendricks, Jr.

President and Chief Executive Officer

Date:

November 10, 2022

By:

/s/ Donald M. Kaloski, Jr.

Donald M. Kaloski, Jr.

Executive Vice President and Chief Financial Officer

56