Village Bank & Trust Financial Corp. - Quarter Report: 2022 June (Form 10-Q)

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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 June 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.

1,467,442 shares of common stock, $4.00 par value, outstanding as of July 31, 2022

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Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS


Part I – Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets June 30, 2022 (unaudited) and December 31, 2021	3

Consolidated Statements of Income For the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	4

Consolidated Statements of Comprehensive Income (Loss) For the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	5

Consolidated Statements of Shareholders’ Equity For the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	6

Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2022 and 2021 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3. Quantitative and Qualitative Disclosures About Market Risk	53

Item 4. Controls and Procedures	53

Part II – Other Information

Item 1. Legal Proceedings	54

Item 1A. Risk Factors	54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3. Defaults Upon Senior Securities	54

Item 4. Mine Safety Disclosures	54

Item 5. Other Information	54

Item 6. Exhibits	54

Signatures	55

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

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

(in thousands, except share and per share data)


	June 30,		December 31,
	2022		2021
Assets
Cash and due from banks	$	22,176	$	12,071
Federal funds sold		32,720		80,545
Total cash and cash equivalents		54,896		92,616
Investment securities available for sale, at fair value		131,623		94,699
Restricted stock, at cost		714		694
Loans held for sale		7,963		5,141
Loans
Outstandings		527,556		526,457
Allowance for loan losses		(3,423)		(3,423)
Deferred fees and costs, net		574		(433)
Total loans, net		524,707		522,601
Premises and equipment, net		11,597		11,824
Bank owned life insurance		12,638		12,494
Accrued interest receivable		3,321		3,245
Other assets		5,138		5,087
Total Assets	$	752,597	$	748,401

Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing demand	$	278,260	$	268,804
Interest bearing		396,381		395,244
Total deposits		674,641		664,048
Long-term debt - trust preferred securities		8,764		8,764
Subordinated debt, net		5,676		5,660
Accrued interest payable		61		68
Other liabilities		3,402		6,460
Total liabilities		692,544		685,000

Shareholders’ equity
Common stock, $4 par value, 10,000,000 shares authorized; 1,476,165 shares issued and outstanding at June 30, 2022 and 1,473,469 shares issued and outstanding at December 31, 2021		5,837		5,822
Additional paid-in capital		55,009		54,814
Retained earnings		7,086		3,509
Stock in directors rabbi trust		(689)		(730)
Directors deferred fees obligation		689		730
Accumulated other comprehensive loss		(7,879)		(744)
Total shareholders’ equity		60,053		63,401

Total liabilities and shareholders' equity	$	752,597	$	748,401

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three and Six Months Ended June 30, 2022 and 2021

(Unaudited)

(in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Interest income
Loans	$	6,042	$	6,715	$	11,891	$	13,494
Investment securities		583		249		977		499
Federal funds sold		106		8		131		10
Total interest income		6,731		6,972		12,999		14,003

Interest expense
Deposits		252		432		515		925
Borrowed funds		158		148		303		310
Total interest expense		410		580		818		1,235

Net interest income		6,321		6,392		12,181		12,768
Provision for (recovery of) loan losses		—		(500)		(400)		(500)
Net interest income after provision for (recovery of) loan losses		6,321		6,892		12,581		13,268

Noninterest income
Service charges and fees		671		595		1,290		1,131
Mortgage banking income, net		1,090		2,165		1,969		5,656
Gain on sale of Small Business Administration loans		79		—		79		—
Other		98		92		229		236
Total noninterest income		1,938		2,852		3,567		7,023

Noninterest expense
Salaries and benefits		3,423		3,512		6,947		6,933
Occupancy		284		281		614		634
Equipment		270		264		558		521
Supplies		36		48		74		89
Professional and outside services		738		667		1,463		1,358
Advertising and marketing		92		130		204		247
Foreclosed assets, net		—		(8)		—		(8)
FDIC insurance premium		64		38		123		104
Other operating expense		607		615		1,213		1,183
Total noninterest expense		5,514		5,547		11,196		11,061

Income before income tax expense		2,745		4,197		4,952		9,230
Income tax expense		555		903		962		2,039

Net income	$	2,190	$	3,294	$	3,990	$	7,191

Earnings per share, basic	$	1.48	$	2.24	$	2.71	$	4.90
Earnings per share, diluted	$	1.48	$	2.24	$	2.70	$	4.90

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

Three and Six Months ended June 30, 2022 and 2021

(Unaudited)

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net income	$	2,190	$	3,294	$	3,990	$	7,191
Other comprehensive (loss) income
Unrealized holding gains (losses) arising during the period		(4,471)		62		(9,037)		(498)
Tax effect		939		(13)		1,898		105
Net change in unrealized holding gains (losses) on securities available for sale, net of tax		(3,532)		49		(7,139)		(393)

Minimum pension adjustment		3		3		6		6
Tax effect		(1)		(1)		(2)		(2)
Minimum pension adjustment, net of tax		2		2		4		4

Total other comprehensive income (loss)		(3,530)		51		(7,135)		(389)

Total comprehensive income (loss)	$	(1,340)	$	3,345	$	(3,145)	$	6,802

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three and Six Months Ended June 30, 2022 and 2021

(Unaudited)

(In thousands)


	Three Months Ended June 30, 2022

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

Balance, March 31,2022	$	5,835	$	54,891	$	5,103	$	(689)	$	689	$	(4,349)	$	61,480
Vesting of restricted stock		2		(2)		—		—		—		—		—
Stock based compensation		—		120		—		—		—		—		120
Cash dividend declared ($0.14 per share)		—		—		(207)		—		—		—		(207)
Net income		—		—		2,190		—		—		—		2,190
Other comprehensive loss		—		—		—		—		—		(3,530)		(3,530)
Balance, June 30, 2022	$	5,837	$	55,009	$	7,086	$	(689)	$	689	$	(7,879)	$	60,053


	Three Months Ended June 30, 2021

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

Balance, March 31,2021	$	5,796	$	54,593	$	(4,841)	$	(730)	$	730	$	(10)	$	55,538
Stock based compensation		—		98		—		—		—		—		98
Net income		—		—		3,294		—		—		—		3,294
Other comprehensive income		—		—		—		—		—		51		51
Balance, June 30, 2021	$	5,796	$	54,691	$	(1,547)	$	(730)	$	730	$	41	$	58,981


	Six Months Ended June 30, 2022

									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, 2021	$	5,822	$	54,814	$	3,509	$	(730)	$	730	$	(744)	$	63,401
Vesting of restricted stock		14		(14)		—		41		(41)		—		—
Exercise of stock options		1		(1)										—
Stock based compensation		—		210		—		—		—		—		210
Cash dividend declared ($0.14 per share)		—		—		(413)								(413)
Net income		—		—		3,990		—		—		—		3,990
Other comprehensive loss		—		—		—		—		—		(7,135)		(7,135)
Balance, June 30, 2022	$	5,837	$	55,009	$	7,086	$	(689)	$	689	$	(7,879)	$	60,053


	Six Months Ended June 30, 2021

									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Accumulated		Directors		Fees		Comprehensive
	Stock		Capital		Deficit		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		2		(2)		—		41		(41)		—		—
Stock based compensation		—		183		—		—		—		—		183
Net income		—		—		7,191		—		—		—		7,191
Other comprehensive loss		—		—		—		—		—		(389)		(389)
Balance, June 30, 2021	$	5,796	$	54,691	$	(1,547)	$	(730)	$	730	$	41	$	58,981

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2022 and 2021

(Unaudited)

(in thousands)


	Six Months Ended
	June 30,
	2022		2021

Cash Flows from Operating Activities
Net income	$	3,990	$	7,191
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		271		291
Amortization of debt issuance costs		16		16
Deferred income taxes		150		232
Provision for (recovery of) loan losses		(400)		(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		(2,668)		(6,904)
Gain on sale of other real estate owned		—		(18)
Loss on disposal of premises and equipment		—		10
Stock compensation expense		210		183
Proceeds from sale of mortgage loans		96,113		189,300
Origination of mortgage loans held for sale		(96,267)		(164,349)
Amortization of premiums and accretion of discounts on securities, net		88		99
Increase in bank owned life insurance		(144)		(124)
Net change in:
Interest receivable		(76)		593
Other assets		1,702		671
Interest payable		(7)		(109)
Other liabilities		(3,058)		(3,368)
Net cash (used in) provided by operating activities		(159)		23,224

Cash Flows from Investing Activities
Purchases of available for sale securities		(52,364)		(17,217)
Proceeds from maturities, calls and paydowns of available for sale securities		6,314		8,712
Net (increase) decrease in loans		(1,627)		9,828
Proceeds from sale of other real estate owned		—		344
Purchases of premises and equipment, net		(44)		(578)
Purchase of bank owned life insurance		—		(4,408)
(Purchase) redemptions of restricted stock, net		(20)		131
Net cash used in investing activities		(47,741)		(3,188)

Cash Flows from Financing Activities
Cash dividends paid		(413)		—
Net increase in deposits		10,593		49,701
Net decrease in other borrowings		—		(41,529)
Net cash provided by financing activities		10,180		8,172

Net (decrease) increase in cash and cash equivalents		(37,720)		28,208
Cash and cash equivalents, beginning of period		92,616		43,451

Cash and cash equivalents, end of period	$	54,896	$	71,659

Supplemental Disclosure of Cash Flow Information
Cash payments for interest	$	825	$	1,344
Cash payments for taxes	$	321	$	258
Supplemental Schedule of Non-Cash Activities
Unrealized losses on securities available for sale	$	(9,038)	$	(498)
Right of use assets obtained in exchange for new operating lease liabilities	$	263	$	243
Minimum pension adjustment	$	6	$	3

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Six Months Ended June 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 six month periods ended June 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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Numerator
Net income - basic and diluted	$	2,190	$	3,294	$	3,990	$	7,191

Denominator
Weighted average shares outstanding - basic		1,477		1,468		1,476		1,467
Dilutive effect of common stock options		—		—		—		—

Weighted average shares outstanding - diluted		1,477		1,468		1,476		1,467

Earnings per share - basic	$	1.48	$	2.24	$	2.71	$	4.90
Earnings per share - diluted	$	1.48	$	2.24	$	2.70	$	4.90

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 6,264 and 6,656 at June 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 June 30, 2022 and 2021, it was indeterminable whether

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

Note 4 – Investment securities available for sale

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

June 30, 2022
U.S. Government agency obligations	$	61,034	$	—	$	(2,914)	$	58,120
Mortgage-backed securities		65,760		—		(6,122)		59,638
Municipals		2,270		—		(565)		1,705
Subordinated debt		12,504		79		(423)		12,160

	$	141,568	$	79	$	(10,024)	$	131,623

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 June 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 six months ended June 30, 2022 and 2021.

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Investment securities available for sale that have an unrealized loss position at June 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
June 30, 2022
U.S. Government agency obligations	$	57,987	$	(2,914)	$	—	$	—	$	57,987	$	(2,914)
Mortgage-backed securities		46,226		(3,912)		13,412		(2,210)		59,638		(6,122)
Municipals		778		(213)		926		(352)		1,704		(565)
Subordinated debt		6,416		(387)		964		(36)		7,380		(423)

	$	111,407	$	(7,426)	$	15,302	$	(2,598)	$	126,709	$	(10,024)

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)

As of June 30, 2022, there were 53 investments available for sale totaling $111,407,000 that were in a continuous loss position for less than 12 months and had an unrealized loss of $7,426,000. There were 13 investments available for sale totaling $15,302,000 that had been in a continuous loss position for more than 12 months and had an unrealized loss of $2,598,000.

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 June 30, 2022.

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


	Amortized
	Cost		Fair Value

Less than one year	$	26	$	25
One to five years		60,537		57,614
Five to ten years		16,699		16,150
More than ten years		64,306		57,834

Total	$	141,568	$	131,623

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Note 5 – Loans and allowance for loan losses

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


	June 30, 2022				December 31, 2021
	Amount		%		Amount		%
Construction and land development
Residential	$	7,026	1.33	%	$	6,805	1.29	%
Commercial		30,002	5.69	%		42,344	8.05	%
		37,028	7.02	%		49,149	9.34	%
Commercial real estate
Owner occupied		124,496	23.61	%		113,108	21.48	%
Non-owner occupied		151,738	28.76	%		129,786	24.65	%
Multifamily		17,119	3.24	%		11,666	2.21	%
Farmland		916	0.17	%		977	0.19	%
		294,269	55.78	%		255,537	48.54	%
Consumer real estate
Home equity lines		19,938	3.78	%		17,977	3.41	%
Secured by 1-4 family residential,
First deed of trust		58,378	11.07	%		62,277	11.83	%
Second deed of trust		5,653	1.07	%		12,118	2.31	%
		83,969	15.92	%		92,372	17.55	%
Commercial and industrial loans
(except those secured by real estate)		85,119	16.13	%		100,421	19.07	%
Guaranteed student loans		23,413	4.44	%		25,975	4.93	%
Consumer and other		3,758	0.71	%		3,003	0.57	%

Total loans		527,556	100.0	%		526,457	100.0	%
Deferred fees and costs, net		574				(433)
Less: allowance for loan losses		(3,423)				(3,423)

	$	524,707			$	522,601

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

Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, included in commercial and industrial loans in the above table, were $1,069,000 and $32,601,000 as of June 30, 2022 and December 31, 2021, respectively.

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $37,009,000 and $35,510,000 as of June 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.

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


	June 30,		December 31,
	2022		2021
Commercial real estate
Non-owner occupied	$	279	$	286
		279		286
Consumer real estate
Home equity lines		300		300
Secured by 1-4 family residential
First deed of trust		345		556
Second deed of trust		276		198
		921		1,054
Commercial and industrial loans
(except those secured by real estate)		19		19

Total loans	$	1,219	$	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.

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


	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1‑4		5		6		7		Loans
June 30, 2022
Construction and land development
Residential	$	7,026	$	—	$	—	$	—	$	7,026
Commercial		27,365		2,637		—		—		30,002
		34,391		2,637		—		—		37,028
Commercial real estate
Owner occupied		119,080		3,884		1,532		—		124,496
Non-owner occupied		146,012		5,446		280		—		151,738
Multifamily		17,119		—		—		—		17,119
Farmland		916		—		—		—		916
		283,127		9,330		1,812		—		294,269
Consumer real estate
Home equity lines		19,016		622		300		—		19,938
Secured by 1-4 family residential
First deed of trust		57,319		526		533		—		58,378
Second deed of trust		5,292		85		276		—		5,653
		81,627		1,233		1,109		—		83,969
Commercial and industrial loans
(except those secured by real estate)		83,477		1,553		89		—		85,119
Guaranteed student loans		23,413		—		—		—		23,413
Consumer and other		3,732		26		—		—		3,758

Total loans	$	509,767	$	14,779	$	3,010	$	—	$	527,556


	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1‑4		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

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


					Greater								Investment >
	30‑59 Days		60‑89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
June 30, 2022
Construction and land development
Residential	$	—	$	—	$	—	$	—	$	7,026	$	7,026	$	—
Commercial		—		—		—		—		30,002		30,002		—
		—		—		—		—		37,028		37,028		—
Commercial real estate
Owner occupied		—		—		—		—		124,496		124,496		—
Non-owner occupied		—		—		—		—		151,738		151,738		—
Multifamily		—		—		—		—		17,119		17,119		—
Farmland		—		—		—		—		916		916		—
		—		—		—		—		294,269		294,269		—
Consumer real estate
Home equity lines		—		—		—		—		19,938		19,938		—
Secured by 1‑4 family residential
First deed of trust		42		—		—		42		58,336		58,378		—
Second deed of trust		—		6		—		6		5,647		5,653		—
		42		6		—		48		83,921		83,969		—
Commercial and industrial loans
(except those secured by real estate)		423		157		—		580		84,539		85,119		—
Guaranteed student loans		1,141		790		1,638		3,569		19,844		23,413		1,638
Consumer and other		—		—		—		—		3,758		3,758		—

Total loans	$	1,606	$	953	$	1,638	$	4,197	$	523,359	$	527,556	$	1,638

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													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

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


	June 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	$	4,172	$	4,187	$	—	$	4,776	$	4,791	$	—
Non-owner occupied		1,083		1,083		—		1,458		1,458		—
		5,255		5,270		—		6,234		6,249		—
Consumer real estate
Home equity lines		300		300		—		300		300		—
Secured by 1‑4 family residential
First deed of trust		1,792		1,792		—		1,873		1,873		—
Second deed of trust		176		344		—		238		406		—
		2,268		2,436		—		2,411		2,579		—
Commercial and industrial loans
(except those secured by real estate)		89		89		—		185		185		—
		7,612		7,795		—		8,830		9,013		—

With an allowance recorded
Commercial real estate
Owner occupied		259		259		3		267		267		4
		259		259		3		267		267		4
Consumer real estate
Secured by 1-4 family residential
First deed of trust		141		141		6		146		146		7
Second deed of trust		34		34		19		—		—		—
		175		175		25		146		146		7
		434		434		28		413		413		11

Total
Owner occupied		4,431		4,446		3		5,043		5,058		4
Non-owner occupied		1,083		1,083		—		1,458		1,458		—
		5,514		5,529		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		1,933		1,933		6		2,019		2,019		7
Second deed of trust		210		378		19		238		406		—
		2,443		2,611		25		2,557		2,725		7
Commercial and industrial loans
(except those secured by real estate)		89		89		—		185		185		—
	$	8,046	$	8,229	$	28	$	9,243	$	9,426	$	11

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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 Six Months Ended
	June 30, 2022				June 30, 2022
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial real estate
Owner occupied	$	4,461	$	35		4,694	$	66
Non-owner occupied		1,264		8		1,457		25
		5,725		43		6,151		91
Consumer real estate
Home equity lines		300		15		300		15
Secured by 1-4 family residential
First deed of trust		1,800		17		1,831		37
Second deed of trust		373		2		335		5
		2,473		34		2,466		57
Commercial and industrial loans
(except those secured by real estate)		135		—		162		1
		8,333		77		8,779		149

With an allowance recorded
Commercial real estate
Owner occupied		261		—		197		7
		261		—		197		7
Consumer real estate
Secured by 1-4 family residential
First deed of trust		142		3		144		4
Second deed of trust		98		—		49		—
		240		3		193		4
Commercial and industrial loans
(except those secured by real estate)		—		—		—		—
		501		3		390		11

Total
Commercial real estate
Owner occupied		4,722		35		4,891		73
Non-owner occupied		1,264		8		1,457		25
		5,986		43		6,348		98
Consumer real estate
Home equity lines		300		15		300		15
Secured by 1-4 family residential,
First deed of trust		1,942		20		1,975		41
Second deed of trust		471		2		384		5
		2,713		37		2,659		61
Commercial and industrial loans
(except those secured by real estate)		135		—		162		1
	$	8,834	$	80	$	9,169	$	160

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

An accruing loan that is modified in a TDR can remain in accrual status if, based on a current well-documented credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained

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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
June 30, 2022
Commercial real estate
Owner occupied	$	3,158	$	3,158	$	—	$	3
Non-owner occupied		1,084		804		280		—
		4,242		3,962		280		3
Consumer real estate
Secured by 1-4 family residential
First deeds of trust		1,436		1,259		177		6
Second deeds of trust		93		36		57		—
		1,529		1,295		234		6
Commercial and industrial loans
(except those secured by real estate)		19		—		19		—
	$	5,790	$	5,257	$	533	$	9

Number of loans		26		22		4		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

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


	Six Months Ended					Six Months Ended
	June 30, 2022					June 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 June 30, 2022 and 2021.

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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 June 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.

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 June 30, 2022
Construction and land development
Residential	$	46	$	11	$	—	$	—	$	57
Commercial		199		(28)		—		—		171
		245		(17)		—		—		228
Commercial real estate
Owner occupied		892		(24)		—		—		868
Non-owner occupied		1,106		161		—		—		1,267
Multifamily		37		13		—		—		50
Farmland		2		—		—		—		2
		2,037		150		—		—		2,187
Consumer real estate
Home equity lines		12		—		—		—		12
Secured by 1-4 family residential
First deed of trust		118		(5)		—		1		114
Second deed of trust		80		(32)		—		1		49
		210		(37)		—		2		175
Commercial and industrial loans
(except those secured by real estate)		446		56		—		31		533
Student loans		63		10		(13)		—		60
Consumer and other		35		10		—		—		45
Unallocated		367		(172)		—		—		195

	$	3,403	$	—	$	(13)	$	33	$	3,423

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

Three Months Ended June 30, 2021
Construction and land development
Residential	$	100	$	(34)	$	—	$	—	$	66
Commercial		168		35		—		—		203
		268		1		—		—		269
Commercial real estate
Owner occupied		899		(97)		—		—		802
Non-owner occupied		1,286		(241)		—		14		1,059
Multifamily		38		(3)		—		—		35
Farmland		1		1		—		—		2
		2,224		(340)		—		14		1,898
Consumer real estate
Home equity lines		15		(14)		—		10		11
Secured by 1-4 family residential
First deed of trust		146		(41)		—		8		113
Second deed of trust		67		86		(84)		3		72
		228		31		(84)		21		196
Commercial and industrial loans
(except those secured by real estate)		410		3		—		9		422
Student loans		76		9		(5)		—		80
Consumer and other		38		16		(18)		—		36
Unallocated		748		(220)		—		—		528

	$	3,992	$	(500)	$	(107)	$	44	$	3,429


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

Six Months Ended June 30, 2022
Construction and land development
Residential	$	57	$	—	$	—	$	—	$	57
Commercial		229		(58)		—		—		171
		286		(58)		—		—		228
Commercial real estate
Owner occupied		833		35		—		—		868
Non-owner occupied		1,083		184		—		—		1,267
Multifamily		35		15		—		—		50
Farmland		2		—		—		—		2
		1,953		234		—		—		2,187
Consumer real estate
Home equity lines		12		(58)		—		58		12
Secured by 1-4 family residential
First deed of trust		123		(11)		—		2		114
Second deed of trust		47		(301)		—		303		49
		182		(370)		—		363		175
Commercial and industrial loans
(except those secured by real estate)		486		(12)		—		59		533
Student loans		65		17		(22)		—		60
Consumer and other		29		16		—		—		45
Unallocated		422		(227)		—		—		195

	$	3,423	$	(400)	$	(22)	$	422	$	3,423

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

Six Months Ended June 30, 2021
Construction and land development
Residential	$	214	$	(148)	$	—	$	—	$	66
Commercial		285		(82)		—		—		203
		499		(230)		—		—		269
Commercial real estate
Owner occupied		1,047		(245)		—		—		802
Non-owner occupied		1,421		(376)		—		14		1,059
Multifamily		47		(12)		—		—		35
Farmland		2		—		—		—		2
		2,517		(633)		—		14		1,898
Consumer real estate
Home equity lines		24		(23)		—		10		11
Secured by 1-4 family residential
First deed of trust		166		(62)		—		9		113
Second deed of trust		79		60		(84)		17		72
		269		(25)		(84)		36		196
Commercial and industrial loans
(except those secured by real estate)		408		(10)		—		24		422
Student loans		87		6		(13)		—		80
Consumer and other		36		18		(18)		—		36
Unallocated		154		374		—		—		528

	$	3,970	$	(500)	$	(115)	$	74	$	3,429


			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.

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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 $400,000 and $500,000 for the six month period ended June 30, 2022 and June 30, 2021, respectively. The recovery of provision for loan loss expense, during the six months ended June 30, 2022 and June 30, 2021, resulted from reductions in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. While variants of the COVID-19 virus and economic challenges due to higher inflation 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 $195,000, $422,000, and $528,000 at June 30, 2022, December 31, 2021, and June 30, 2021, respectively.

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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

Six Months Ended June 30, 2022
Construction and land development
Residential	$	57	$	—	$	57	$	7,026	$	—	$	7,026
Commercial		171		—		171		30,002		—		30,002
		228		—		228		37,028		—		37,028
Commercial real estate
Owner occupied		868		3		865		124,496		4,431		120,065
Non-owner occupied		1,267		—		1,267		151,738		1,083		150,655
Multifamily		50		—		50		17,119		—		17,119
Farmland		2		—		2		916		—		916
		2,187		3		2,184		294,269		5,514		288,755
Consumer real estate
Home equity lines		12		—		12		19,938		300		19,638
Secured by 1-4 family residential
First deed of trust		114		6		108		58,378		1,933		56,445
Second deed of trust		49		19		30		5,653		210		5,443
		175		25		150		83,969		2,443		81,526
Commercial and industrial loans
(except those secured by real estate)		533		—		533		85,119		89		85,030
Student loans		60		—		60		23,413		—		23,413
Consumer and other		240		—		240		3,758		—		3,758

	$	3,423	$	28	$	3,395	$	527,556	$	8,046	$	519,510

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

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Note 6 – Deposits

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


	June 30, 2022				December 31, 2021
	Amount		%		Amount		%

Demand accounts	$	278,260	41.2	%	$	268,804	40.5	%
Interest checking accounts		88,630	13.1	%		89,599	13.5	%
Money market accounts		198,157	29.4	%		187,942	28.3	%
Savings accounts		54,702	8.1	%		54,106	8.1	%
Time deposits of $250,000 and over		5,931	0.9	%		6,977	1.1	%
Other time deposits		48,961	7.3	%		56,620	8.5	%

Total	$	674,641	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 June 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 June 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 June 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 June 30, 2022 or December 31, 2021.

The Company’s unused lines of credit for future borrowings total approximately $76.2 million at June 30, 2022, which consists of $33.4 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 June 30, 2022 was 4.12%. 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 June 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 June 30, 2022 was 3.37%. 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 June 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 $5,676,000 and $5,660,000 at June 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 options outstanding under the Company's stock incentive plans at the indicated dates:


	Six Months Ended June 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		—			—		—		—
Options outstanding, end of period	389	$	25.74	$	9.76	$	—	734	$	25.63	$	9.76	$	—
Options exercisable, end of period	389							734

During the six months ended June 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 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.

The total number of shares underlying non-vested restricted stock was 23,051 and 24,662 at June 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 June 30, 2022 and 2021 was $663,700 and $489,800, respectively. The time-based unrecognized compensation of $427,000 is expected to be recognized over a weighted average period of 1.84 years. For the periods ended June 30, 2022, there were 606 forfeitures of restricted stock and restricted stock units, and no forfeitures for the period ended June 30, 2021.

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


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

December 31, 2021	23,734	$	37.46	$	1,091,764
Granted	3,341		54.56		153,686
Vested	(4,629)		34.82		(212,934)
Forfeited	(606)		37.08		(27,876)
Other	1,211		32.86		55,706
June 30, 2022	23,051	$	40.23	$	1,060,346

Stock-based compensation expense was approximately $210,000 and $183,000 for the six months ended June 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 June 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	$	58,120	$	—	$	58,120	$	—
Mortgage-backed securities		59,638		—		59,638		—
Municipals		1,705		—		1,705		—
Subordinated debt		12,160		—		10,660		1,500
Loans held for sale		7,963		—		7,963		—
IRLC		406		—		406		—

Financial Liabilities - Recurring
Forward sales commitment		556		—		556		—


	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 June 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).


		June 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	$	22,176	$	22,176	$	12,071	$	12,071
Cash equivalents	Level 2		32,720		32,720		80,545		80,545
Investment securities available for sale	Level 2		130,123		130,123		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		7,963		7,963		5,141		5,141
Loans	Level 3		527,556		515,482		526,457		526,668
Bank owned life insurance	Level 2		12,638		12,638		12,494		12,494
Accrued interest receivable	Level 2		3,321		3,321		3,245		3,245
Interest rate lock commitments	Level 2		406		406		471		471

Financial liabilities
Deposits	Level 2		674,641		674,397		664,048		663,898
Trust preferred securities	Level 2		8,764		8,930		8,764		9,554
Other borrowings	Level 2		5,676		5,676		5,660		5,660
Accrued interest payable	Level 2		61		61		68		68
Forward sales commitment	Level 2		556		556		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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The following table presents segment information as of and for the three and six months ended June 30, 2022 and 2021 (in thousands):


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Three Months Ended June 30, 2022

Revenues
Interest income	$	6,653	$	78	$	—	$	6,731
Gain on sale of loans		—		1,458		—		1,458
Other revenues		893		154		(72)		975
Total revenues		7,546		1,690		(72)		9,164

Expenses
Recovery of provision for loan losses		—		—		—		—
Interest expense		410		—		—		410
Salaries and benefits		2,608		815		—		3,423
Commissions		—		490		—		490
Other expenses		1,851		317		(72)		2,096
Total operating expenses		4,869		1,622		(72)		6,419

Income before income taxes		2,677		68		—		2,745
Income tax expense		540		15		—		555
Net income	$	2,137	$	53	$	—	$	2,190

Total assets	$	761,749	$	18,860	$	(28,012)	$	752,597


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

Revenues
Interest income	$	6,870	$	102	$	—	$	6,972
Gain on sale of loans		—		2,729		—		2,729
Other revenues		733		238		(45)		926
Total revenues		7,603		3,069		(45)		10,627

Expenses
Recovery of provision for loan losses		(500)		—		—		(500)
Interest expense		580		—		—		580
Salaries and benefits		2,496		1,016		—		3,512
Commissions		—		890		—		890
Other expenses		1,791		202		(45)		1,948
Total operating expenses		4,367		2,108		(45)		6,430

Income before income taxes		3,236		961		—		4,197
Income tax expense		701		202		—		903
Net income	$	2,535	$	759	$	—	$	3,294

Total assets	$	717,993	$	19,366	$	(19,427)	$	717,932

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	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Six Months Ended June 30, 2022

Revenues
Interest income	$	12,878	$	121	$	—	$	12,999
Gain on sale of loans		—		2,668		—		2,668
Other revenues		1,687		305		(148)		1,844
Total revenues		14,565		3,094		(148)		17,511

Expenses
Recovery of provision for loan losses		(400)		—		—		(400)
Interest expense		818		—		—		818
Salaries and benefits		5,253		1,694		—		6,947
Commissions		—		946		—		946
Other expenses		3,758		638		(148)		4,248
Total operating expenses		9,429		3,278		(148)		12,559

Income (loss) before income taxes		5,136		(184)		—		4,952
Income tax expense (benefit)		1,000		(38)		—		962
Net income (loss)	$	4,136	$	(146)	$	—	$	3,990

Total assets	$	761,749	$	18,860	$	(28,012)	$	752,597


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Six Months Ended June 30, 2021

Revenues
Interest income	$	13,789	$	237	$	(23)	$	14,003
Gain on sale of loans		—		6,904		—		6,904
Other revenues		1,456		466		(135)		1,787
Total revenues		15,245		7,607		(158)		22,694

Expenses
Recovery of provision for loan losses		(500)		—		—		(500)
Interest expense		1,235		23		(23)		1,235
Salaries and benefits		4,641		2,292		—		6,933
Commissions		—		1,668		—		1,668
Other expenses		3,635		628		(135)		4,128
Total operating expenses		9,011		4,611		(158)		13,464

Income before income taxes		6,234		2,996		—		9,230
Income tax expense		1,410		629		—		2,039
Net income	$	4,824	$	2,367	$	—	$	7,191

Total assets	$	717,993	$	19,366	$	(19,427)	$	717,932

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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 $2,094,000 and $198,000 as of June 30, 2022 and December 31, 2021, respectively (in thousands):


	June 30,		December 31,
	2022		2021

Net unrealized losses on securities	$	(7,856)	$	(717)
Net unrecognized losses on defined benefit plan		(23)		(27)
Total accumulated other comprehensive loss	$	(7,879)	$	(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 June 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 June 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 June 30, 2022 and December 31, 2021.

The capital amounts and ratios at June 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

June 30, 2022
Total capital (to risk- weighted assets) Village Bank	$	81,128	14.52	%	$	58,666	10.50	%	$	55,873	10.00	%

Tier 1 capital (to risk- weighted assets) Village Bank		77,705	13.91	%		47,492	8.50	%		58,666	8.00	%

Leverage ratio (Tier 1 capital to average assets) Village Bank		77,705	10.22	%		30,426	4.00	%		38,032	5.00	%

Common equity tier 1 (to risk- weighted assets) Village Bank		77,705	13.91	%		39,111	7.00	%		36,317	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 June 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):


	June 30,		December 31,
	2022		2021

Undisbursed credit lines	$	98,503	$	103,125
Commitments to extend or originate credit		19,639		18,551
Standby letters of credit		515		4,680

Total commitments to extend credit	$	118,657	$	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 $7.9 million as of June 30, 2022, of which $7.9 million is related to unpaid principal, and totaled $5.1 million as of December 31, 2021, of which $5 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

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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 June 30, 2022, and totaled $406,000, with a notional amount of $19.1 million and total positions of 58 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 June 30, 2022 and 2021. The Company’s IRLCs are classified as Level 2. At June 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 June 30, 2022, and totaled $556,000 with a notional amount of $27.0 million and total positions of 88, 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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standard (ASU 2016-13) that introduced the current expected credit losses (“CECL”) model. The amendments eliminate the accounting guidance for troubled debt restructurings 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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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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These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made. In addition, past results of operations are not necessarily indicative of future results.

General

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

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

Continued Response to COVID-19

We continue to see signs of recovery in both the economy and our customers. With the continued uncertainty around the variants of COVID-19, we continue to take the necessary measures to protect the health and wellbeing of our employees and customers. We remain well positioned to weather the economic uncertainty created by the COVID-19 pandemic.

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at June 30, 2022 and December 31, 2021 and the results of operations for the Company for the three and six months ended June 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 June 30, 2022, the Company had net income of $2,190,000, or $1.48 per fully diluted share, compared to net income of $3,294,000, or $2.24 per fully diluted share, for the same period in 2021. For the six months ended June 30, 2022, the Company had net income of $3,990,000, or $2.71 per fully diluted share, compared to net income of $7,191,000, or $4.90 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.

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Generally, the net interest margin will exceed the net interest spread because a portion of interest earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders’ equity.


	For the Three Months Ended June 30,
	2022			2021			Change

	(dollars in thousands)
Average interest-earning assets	$	709,699		$	667,479		$	42,220
Interest income	$	6,731		$	6,972		$	(241)
Yield on interest-earning assets		3.80	%		4.19	%		(0.39)	%
Average interest-bearing liabilities	$	412,646		$	394,451		$	18,195
Interest expense	$	410		$	580		$	(170)
Cost of interest-bearing liabilities		0.40	%		0.59	%		(0.19)	%
Net interest income	$	6,321		$	6,392		$	(71)
Net interest margin		3.57	%		3.84	%		(0.27)	%

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

●NIM compressed by 27 basis points to 3.57% for the three months ended June 30, 2022 compared to 3.84% for the three months ended June 30, 2021. The compression was driven by the following:

The Commercial Banking Segment recorded SBA fee income, net of deferred costs, of $472,000 for the three months ended June 30, 2022, compared to $1,320,000 for the three months ended June 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 $16,000 for the three months ended June 30, 2022, compared to $348,000 for the three months ended June 30, 2021. Total income associated with PPP loans was $488,000 for the three months ended June 30, 2022 compared to $1,668,000 for the three months ended June 30, 2021.

The yield on average earning assets compressed by 39 basis points, 3.80% for the three months ended June 30, 2022 vs. 4.19% for the three months ended June 30, 2021, as a result of an $104,385,000 increase in the average balance of liquid assets (i.e. interest bearing due from other institutions and investment securities). The increased level of liquidity was driven by the $96,548,000 reduction in PPP loan balances because of loan forgiveness, which was partially offset by the $72,439,000 growth in total loans, excluding PPP loans, and the $36,557,000 increase in total deposits. This increased level of liquidity will have a negative impact on our net interest margin. However, we believe that through our disciplined risk-based approach to the investment portfolio, deposit pricing, and core loan growth, our balance sheet remains well positioned to capitalize on the rising rate environment.

The cost of interest bearing liabilities dropped by 19 basis points to 0.40% for the three months ended June 30, 2022 compared to 0.59% for the three months ended June 30, 2021, because of the shift in our deposit mix from higher cost time deposits to lower cost relationship deposits. Time deposits decreased $29,654,000, or 35.07%, from the three months ended June 30, 2021, and low cost relationship deposits and non-interest bearing deposits together increased $66,211,000, or 11.96%, from the three months ended June 30, 2021.


	For the Six Months Ended June 30,
	2022			2021			Change

	(dollars in thousands)
Average interest-earning assets	$	708,569		$	663,697		$	44,872
Interest income	$	12,999		$	14,003		$	(1,004)
Yield on interest-earning assets		3.70	%		4.25	%		(0.55)	%
Average interest-bearing liabilities	$	410,326		$	403,497		$	6,829
Interest expense	$	818		$	1,235		$	(417)
Cost of interest-bearing liabilities		0.40	%		0.62	%		(0.22)	%
Net interest income	$	12,181		$	12,768		$	(587)
Net interest margin		3.47	%		3.88	%		(0.41)	%

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

●

NIM compressed by 41 basis points to 3.47% for the six months ended June 30, 2022 compared to 3.88% for the six months ended June 30, 2021. The expansion was driven by the following:

The Commercial Banking Segment recorded SBA fee income, net of deferred costs, of $950,000 for the six months ended June 30, 2022 compared to $2,825,000 for the six months ended June 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 $78,000 for the six months ended June 30, 2022 compared to $728,000 for the six months ended June 30, 2021. Total income associated with PPP loans was $1,028,000 for the six months ended June 30, 2022 compared to $3,553,000 for the six months ended June 30, 2021.

The yield on average earning assets compressed by 55 basis points, 3.70% for the six months ended June 30, 2022 vs. 4.25% for the six months ended June 30, 2021, as a result of an $113,947,000 increase in the average balance of liquid assets (i.e. interest bearing due from other institutions and investment securities). The increased level of liquidity was driven by the $96,548,000 reduction in PPP loan balances because of loan forgiveness, which was partially offset by the $72,439,000 growth in total loans, excluding PPP loans, and the $36,557,000 increase in total deposits. This increased level of liquidity will have a negative impact on our net interest margin. However, we believe that through our disciplined risk-based approach to the investment portfolio, deposit pricing, and core loan growth, our balance sheet remains well positioned to capitalize on the rising rate environment.

The cost of interest bearing liabilities dropped by 22 basis points to 0.40% for the six months ended June 30, 2022 compared to 0.62% for the six months ended June 30, 2021, because of the shift in our deposit mix from higher cost time deposits to lower cost relationship deposits. Time deposits decreased $29,654,000, or 35.07%, from June 30, 2021, and low cost relationship deposits and non-interest bearing deposits together increased $66,211,000, or 11.96%, from June 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 June 30, 2022						Three Months Ended June 30, 2021
			Interest						Interest
	Average		Income/		Yield		Average		Income/		Yield
	Balance		Expense		Rate		Balance		Expense		Rate
Loans
Commercial	$	78,502	$	1,468	7.50	%	$	184,921	$	2,169	4.70	%
Real estate - residential		93,132		770	3.32	%		87,301		1,014	4.66	%
Real estate - commercial		278,317		3,210	4.63	%		234,720		2,727	4.66	%
Real estate - construction		38,688		229	2.37	%		33,475		393	4.71	%
Student loans		24,332		240	3.96	%		28,924		266	3.69	%
Consumer		3,491		46	5.29	%		3,018		44	5.85	%
Loans net of deferred fees	$	516,462	$	5,963	4.63	%	$	572,359	$	6,613	4.63	%
Loans held for sale		7,315		79	4.33	%		13,583		102	3.01	%
Investment securities		136,226		583	1.72	%		45,276		249	2.21	%
Federal funds and other		49,696		106	0.86	%		36,261		8	0.09	%
Total interest earning assets		709,699		6,731	3.80	%		667,479		6,972	4.19	%
Allowance for loan losses		(3,407)						(3,992)
Cash and due from banks		14,865						14,125
Premises and equipment, net		11,682						12,035
Other assets		21,681						24,136
Total assets	$	754,520					$	713,783

Interest bearing deposits
Interest checking		89,989		28	0.12	%		75,782		25	0.13	%
Money market		195,941		107	0.22	%		171,266		119	0.28	%
Savings		50,402		19	0.15	%		40,290		16	0.16	%
Certificates		61,887		98	0.64	%		90,263		272	1.21	%
Total deposits		398,219		252	0.25	%		377,601		432	0.46	%
Borrowings
Long-term debt - trust
preferred securities		8,764		57	2.61	%		8,764		44	2.01	%
Subordinated debt, net		5,663		101	7.15	%		5,638		101	7.19	%
Other borrowings		—		—	—	%		2,448		3	—	%
Total interest bearing liabilities		412,646		410	0.40	%		394,451		580	0.59	%
Noninterest bearing deposits		277,395						252,214
Other liabilities		3,480						9,145
Total liabilities		693,521						655,810
Equity capital		60,999						57,973
Total liabilities and capital	$	754,520					$	713,783


Net interest income before provision for loan losses			$	6,321					$	6,392
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities					3.40	%					3.60	%
Net interest margin (net interest income expressed as a percentage of average earning assets)					3.57	%					3.84	%

Table of Contents


	Six Months Ended June 30, 2022						Six Months Ended June 30, 2021
			Interest						Interest
	Average		Income/		Yield		Average		Income/		Yield
	Balance		Expense		Rate		Balance		Expense		Rate
Loans
Commercial	$	85,965	$	2,627	6.16	%	$	192,795	$	4,480	4.69	%
Real estate - residential		92,205		1,841	4.03	%		86,637		2,014	4.69	%
Real estate - commercial		270,309		6,097	4.55	%		233,146		5,405	4.68	%
Real estate - construction		42,020		636	3.05	%		31,764		732	4.65	%
Student loans		24,918		477	3.86	%		29,215		536	3.70	%
Consumer		3,391		91	5.41	%		3,063		90	5.93	%
Loans net of deferred fees	$	518,808	$	11,769	4.57	%	$	576,620	$	13,257	4.64	%
Loans held for sale		6,167		122	3.99	%		17,430		237	2.74	%
Investment securities		122,987		977	1.60	%		43,791		499	2.30	%
Federal funds and other		60,607		131	0.44	%		25,856		10	0.08	%
Total interest earning assets		708,569		12,999	3.70	%		663,697		14,003	4.25	%
Allowance for loan losses		(3,571)						(3,985)
Cash and due from banks		12,117						12,945
Premises and equipment, net		11,735						11,954
Other assets		24,543						26,100
Total assets	$	753,393					$	710,711

Interest bearing deposits
Interest checking		87,835		54	0.12	%		73,675		49	0.13	%
Money market		193,704		211	0.22	%		166,433		256	0.31	%
Savings		50,350		39	0.16	%		39,107		31	0.16	%
Certificates		64,006		211	0.66	%		98,477		589	1.21	%
Total deposits		395,895		515	0.26	%		377,692		925	0.49	%
Borrowings
Long-term debt - trust
preferred securities		8,764		101	2.32	%		8,764		88	2.02	%
Subordinated debt, net		5,667		202	7.19	%		5,634		201	7.19	%
Other borrowings		—		—	—	%		11,407		21	0.37	%
Total interest bearing liabilities		410,326		818	0.40	%		403,497		1,235	0.62	%
Noninterest bearing deposits		276,121						240,311
Other liabilities		4,666						10,726
Total liabilities		691,113						654,534
Equity capital		62,280						56,177
Total liabilities and capital	$	753,393					$	710,711


Net interest income before provision for loan losses			$	12,181					$	12,768
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities					3.30	%					3.63	%
Net interest margin (net interest income expressed as a percentage of average earning assets)					3.47	%					3.88	%

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.

Table of Contents

The Company did not record a provision for loan loss expense for the three months ended June 30, 2022, compared to a recovery of provision for loan loss expense of $500,000 for the three months ended June 30, 2021. The lack of a provision expense for the three months ended June 30, 2022 was due to stable asset quality. The recovery of provision for loan loss expense, during the three months ended June 30, 2021, resulted from a reduction in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals.

The Company recorded a recovery of provision for loan loss expense of $400,000 and $500,000 for the six months ended June 30, 2022 and June 30, 2021, respectively. The recovery of provision for loan loss expense, during the six months ended June 30, 2022 and June 30, 2021, resulted from reductions in the qualitative factors driven by improving economic factors, improved credit metrics, and reductions in loan deferrals. While variants of the COVID-19 virus and economic challenges due to higher inflation 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 81% for the three month periods ended June 30, 2022 and 2021, respectively, and 55% and 81% for the six month periods ended June 30, 2022 and 2021, respectively.


	For the Three Months Ended
	June 30,				Change
	2022		2021		$		%

	(dollars in thousands)
Service charges and fees	$	671	$	595	$	76	12.8	%
Mortgage banking income, net		1,090		2,165		(1,075)	(49.7)	%
Gain on sale of SBA loans		79		—		79	100.0	%
Other		98		92		6	6.5	%
Total noninterest income	$	1,938	$	2,852	$	(914)	(32.0)	%

The decrease in noninterest income of $914,000 for the three months ended June 30, 2022, was the result of the following:

●The $76,000 increase in service charges and fees was driven by strong consumer and business spending during the three months ended June 30, 2022.

●The $1,075,000 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 six months ended June 30, 2022, the historically low inventory of homes for sale, and compressed gain on sale margins during the three months ended June 30, 2022.

●The Company began selling the guaranteed strip on SBA loans again during the three months ended June 30, 2022, and recognized a gain of $79,000 for the period, compared to no sales for the same period in 2021.


	For the Six Months Ended
	June 30,				Change
	2022		2021		$		%

	(dollars in thousands)
Service charges and fees	$	1,290	$	1,131	$	159	14.1	%
Mortgage banking income, net		1,969		5,656		(3,687)	(65.2)	%
Gain on sale of SBA loans		79		—		79	100.0	%
Other		229		236		(7)	(3.0)	%
Total noninterest income	$	3,567	$	7,023	$	(3,456)	(49.2)	%

Table of Contents

The decrease in noninterest income of $3,456,000 for the six months ended June 30, 2022, was the result of the following:

●The $159,000 increase in service charges and fees was driven by strong consumer and business spending during the six months ended June 30, 2022.

●The $3,687,000 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 six months ended June 30, 2022, the historically low inventory of homes for sale, and compressed gain on sale margins during the six months ended June 30, 2022.

●The Company began selling the guaranteed strip on SBA loans again during the six months ended June 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
	June 30,				Change
	2022		2021		$		%

	(dollars in thousands)
Salaries and benefits	$	3,423	$	3,512	$	(89)	(2.5)	%
Occupancy		284		281		3	1.1	%
Equipment		270		264		6	2.3	%
Supplies		36		48		(12)	(25.0)	%
Professional and outside services		738		667		71	10.6	%
Advertising and marketing		92		130		(38)	(29.2)	%
Foreclosed assets, net		—		(8)		8	(100.0)	%
FDIC insurance premium		64		38		26	68.4	%
Other operating expense		607		615		(8)	(1.3)	%
Total noninterest expense	$	5,514	$	5,547	$	(33)	(0.6)	%

The decrease in noninterest expense of $33,000 for the three months ended June 30, 2022, was the result of the following:

●The $89,000 decrease in salaries and benefits expense was driven primarily by lower expenses related to the decreased mortgage production for the three months ended June 30, 2022, which was offset partially by the deferral of $88,900 in salary and benefits costs during the three months ended June 30, 2021 associated primarily with the volume of PPP loan origination during that period.

●Professional and outside services expenses increased by $71,000 primarily due to higher expenses associated with data processing as a result of account growth.

●Advertising and marketing expense decreased by $38,000 as a result of decreased marketing efforts during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.


	For the Six Months Ended
	June 30,				Change
	2022		2021		$		%

	(dollars in thousands)
Salaries and benefits	$	6,947	$	6,933	$	14	0.2	%
Occupancy		614		634		(20)	(3.2)	%
Equipment		558		521		37	7.1	%
Supplies		74		89		(15)	(16.9)	%
Professional and outside services		1,463		1,358		105	7.7	%
Advertising and marketing		204		247		(43)	(17.4)	%
Foreclosed assets, net		—		(8)		8	(100.0)	%
FDIC insurance premium		123		104		19	18.3	%
Other operating expense		1,213		1,183		30	2.5	%
Total noninterest expense	$	11,196	$	11,061	$	135	1.2	%

Table of Contents

The increase in noninterest expense of $135,000 for the six months ended June 30, 2022, was the result of the following:

●While salaries and benefits expense were consistent with prior year, the following are fluctuations of note from period to period:

Lower expenses related to the decreased mortgage production for the six months ended June 30, 2022.

The deferral of $580,000 in salary and benefits costs during the six months ended June 30, 2021 associated with the volume of PPP loan origination during that period.

●Professional and outside services expenses increased by $105,000 primarily due to higher expenses associated with data processing as a result of account growth.

●Advertising and marketing expense decreased by $43,000 as a result of decreased marketing efforts during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Income taxes

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent difference and available tax credits. Income tax expense for the three and six months ended June 30, 2022 was $555,000 and $962,000, respectively resulting in an effective tax rate of 20.2% and 19.4%, respectively, compared to $903,000 and $2,039,000, or 21.5% and 22.1%, 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 June 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 78.7% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 4.4% 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 16.1% of all loans. Loans in this category are typically made to individuals and small and medium-sized businesses, and range between $250,000 and $2.5 million. Based on underwriting standards, commercial and industrial loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory, and real property. The collateral securing any loan may depend on the type of loan and may vary in value based on market conditions. The remainder of our loan portfolio is in consumer loans which represent less than 1% of the total.

Table of Contents

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


	June 30, 2022				December 31, 2021
	Amount		%		Amount		%
Construction and land development
Residential	$	7,026	1.33	%	$	6,805	1.29	%
Commercial		30,002	5.69	%		42,344	8.05	%
		37,028	7.02	%		49,149	9.34	%
Commercial real estate
Owner occupied		124,496	23.61	%		113,108	21.48	%
Non-owner occupied		151,738	28.76	%		129,786	24.65	%
Multifamily		17,119	3.24	%		11,666	2.21	%
Farmland		916	0.17	%		977	0.19	%
		294,269	55.78	%		255,537	48.54	%
Consumer real estate
Home equity lines		19,938	3.78	%		17,977	3.41	%
Secured by 1-4 family residential,
First deed of trust		58,378	11.07	%		62,277	11.83	%
Second deed of trust		5,653	1.07	%		12,118	2.31	%
		83,969	15.92	%		92,372	17.55	%
Commercial and industrial loans
(except those secured by real estate)		85,119	16.13	%		100,421	19.07	%
Guaranteed student loans		23,413	4.44	%		25,975	4.93	%
Consumer and other		3,758	0.71	%		3,003	0.57	%

Total loans		527,556	100.00	%		526,457	100.00	%
Deferred fees and costs, net		574				(433)
Less: allowance for loan losses		(3,423)				(3,423)
	$	524,707			$	522,601

PPP loans included in commercial and industrial loans in the above table were $1,069,000 and $32,601,000 as of June 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.

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
Six Months Ended June 30, 2022
Construction and land development
Residential	$	57	$	—	$	—	$	—	$	57	$	6,275	—	%
Commercial		229		(58)		—		—		171		35,745	—	%
		286		(58)		—		—		228		42,020	—	%
Commercial real estate
Owner occupied		833		35		—		—		868		121,014	—	%
Non-owner occupied		1,083		184		—		—		1,267		134,839	—	%
Multifamily		35		15		—		—		50		13,547	—	%
Farmland		2		—		—		—		2		909	—	%
		1,953		234		—		—		2,187		270,309	—
Consumer real estate
Home equity lines		12		(58)		—		58		12		19,028	0.30	%
Secured by 1-4 family residential
First deed of trust		123		(11)		—		2		114		59,730	—	%
Second deed of trust		47		(301)		—		303		49		13,448	2.25	%
		182		(370)		—		363		175		92,206	0.39	%
Commercial and industrial loans
(except those secured by real estate)		486		(12)		—		59		533		85,965	0.07	%
Student loans		65		17		(22)		—		60		24,918	(0.09)	%
Consumer and other		29		16		—		—		45		3,390	—	%
Unallocated		422		(227)		—		—		195		—	—	%

	$	3,423	$	(400)	$	(22)	$	422	$	3,423	$	518,808	0.08	%

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)	%

Table of Contents

Asset quality

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


	June 30,			December 31,
	2022			2021
Nonaccrual loans	$	1,219		$	1,359
Foreclosed properties		—			—
Total nonperforming assets	$	1,219		$	1,359

Restructured loans (not included in nonaccrual loans above)	$	5,257		$	5,734

Loans past due 90 days and still accruing ⁽¹⁾	$	1,638		$	1,961

Nonaccrual loans to total loans ⁽²⁾		0.23	%		0.26	%

Nonperforming assets to loans ⁽²⁾		0.23	%		0.26	%

Nonperforming assets to total assets		0.16	%		0.18	%

Allowance for loan losses to
Loans, net of deferred fees and costs		0.65	%		0.65	%
Loans, net of deferred fees and costs (excluding guaranteed loans)		0.68	%		0.69	%
Nonaccrual loans		280.80	%		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 $1,219,000 at June 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 six months ended June 30, 2022 (in thousands):


	Nonaccrual
	Loans		OREO		Total
Balance December 31, 2021	$	1,359	$	—	$	1,359
Additions		162		—		162
Loans placed back on accrual		—		—		—
Repayments		—		—		—
Charge-offs		(302)		—		(302)
Sales		—		—		—
Balance June 30, 2022	$	1,219	$	—	$	1,219

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 six 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 $1,219,000 and $1,359,000 at June 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 $93,000 and $91,000 for the six months ended June 30, 2022 and 2021, respectively. Student loans totaling $1,638,000 and $1,961,000 at June 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 June 30, 2022 and December 31, 2021 were as follows (dollars in thousands):


	June 30, 2022				December 31, 2021
	Amount		%		Amount		%
Demand accounts	$	278,260	41.2	%	$	268,804	40.5	%
Interest checking accounts		88,630	13.1	%		89,599	13.5	%
Money market accounts		198,157	29.4	%		187,942	28.3	%
Savings accounts		54,702	8.1	%		54,106	8.1	%
Time deposits of $250,000 and over		5,931	0.9	%		6,977	1.1	%
Other time deposits		48,961	7.3	%		56,620	8.5	%
Total	$	674,641	100.0	%	$	664,048	100.0	%

Total deposits increased by $10,593,000, or 1.60%, from December 31, 2021. Variances of note are as follows:

●Noninterest bearing demand account balances increased $9,456,000 from December 31, 2021, and represented 41.2% 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 $9,842,000, or 2.97%, 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 $8,705,000, or 13.69%, 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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The following table presents the average deposits balance and average rate paid for the dates indicated (dollars in thousands).


	Average Balance				Average Cost Rate
	Six Months Ended				Six Months Ended
	June 30,		December 31,		June 30,		December 31,
	2022		2021		2022		2021
Noninterest bearing deposits	$	276,121	$	254,481
Interest checking		87,835		77,665	0.12	%	0.14	%
Money market		193,704		175,313	0.22	%	0.26	%
Savings		50,350		41,135	0.16	%	0.16	%
Certificates
Less than $250,000		57,119		74,515	0.65	%	1.10	%
$250,000 or more		6,887		12,254	0.79	%	0.99	%
Total interest bearing deposits		395,895		380,882	0.40	%	0.41	%
Total deposits	$	672,016	$	635,363	0.24	%	0.25	%

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



	June 30,		December 31,
	2022		2021
Months to maturity:
Three or less	$	2,732	$	2,458
Over three through six		549		938
Over six through twelve		256		2,785
Over twelve		2,394		796
Total	$	5,931	$	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 June 30, 2022 was $60,053,000 compared to $63,401,000 at December 31, 2021. The $3,348,000 decrease in shareholders’ equity during the six months ended June 30, 2022 is primarily due to the $7,135,000 increase in accumulated other comprehensive loss associated with the unrealized holding losses arising during the period, which were the result of the movement in interest rates during the six months ended June 30, 2022. The increase in the holding losses was partially offset by the net income of $3,990,000 during the six months ended June 30, 2022.

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


	June 30,			December 31,
	2022			2021
Tier 1 capital
Total bank equity capital	$	69,826		$	73,380
Net unrealized loss on available-for-sale securities		7,856			717
Defined benefit postretirement plan		23			27
Total Tier 1 capital		77,705			74,124

Tier 2 capital
Allowance for loan losses		3,423			3,423
Tier 2 capital deduction		—			—
Total Tier 2 capital		3,423			3,423

Total risk-based capital		81,128			77,547

Risk-weighted assets	$	558,728		$	531,225

Average assets	$	760,645		$	751,708

Capital ratios
Leverage ratio (Tier 1 capital to average assets)		10.22	%		9.86	%
Common equity tier 1 capital ratio (CET 1)		13.91	%		14.01	%
Tier 1 capital to risk-weighted assets		13.91	%		14.01	%
Total capital to risk-weighted assets		14.52	%		14.66	%
Equity to total assets		9.29	%		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 June 30, 2022, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $186,519,000, or 24.78% 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 June 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 June 30, 2022 was $33.4 million, based on the Bank's

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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 June 30, 2022, we had commitments to originate $118,657,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at June 30, 2022. Certificates of deposit scheduled to mature in the 12-month period ending June 30, 2022 totaled $34,230,000. 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 June 30, 2022. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of June 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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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 June 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 June 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:	August 11, 2022	By:	/s/ James E. Hendricks, Jr.
		James E. Hendricks, Jr.
		President and Chief Executive Officer

Date:	August 11, 2022	By:	/s/ Donald M. Kaloski, Jr.
		Donald M. Kaloski, Jr.
		Executive Vice President and Chief Financial Officer