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Village Bank & Trust Financial Corp. - Quarter Report: 2023 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

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.

1,485,813 shares of common stock, $4.00 par value, outstanding as of July 31, 2023

Table of Contents

Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS

Part I – Financial Information

 

Item 1. Financial Statements

 

 

Consolidated Balance Sheets June 30, 2023 (unaudited) and December 31, 2022

3

 

 

Consolidated Statements of Income For the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)

4

 

 

Consolidated Statements of Comprehensive Income (Loss) For the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)

5

 

 

Consolidated Statements of Shareholders’ Equity For the Three and Six Months and Ended June 30, 2023 and 2022 (unaudited)

6

 

 

Consolidated Statements of Cash Flows For Six Months Ended June 30, 2023 and 2022 (unaudited)

8

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

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

40

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

57

 

 

Item 4. Controls and Procedures

57

 

 

Part II – Other Information

 

 

Item 1. Legal Proceedings

58

 

 

Item 1A. Risk Factors

58

 

 

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

58

 

 

Item 3. Defaults Upon Senior Securities

58

 

 

Item 4. Mine Safety Disclosures

58

 

 

Item 5. Other Information

58

 

 

Item 6. Exhibits

58

 

 

Signatures

59

2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

June 30, 2023 (Unaudited) and December 31, 2022*

(in thousands, except share and per share data)

    

June 30, 

    

December 31, 

    

2023

    

2022

Assets

 

  

 

  

Cash and due from banks

$

12,881

$

12,062

Federal funds sold

 

13,101

 

4,616

Total cash and cash equivalents

 

25,982

 

16,678

Investment securities available for sale, at fair value

 

132,235

 

133,853

Restricted stock, at cost

 

2,606

 

1,564

Loans held for sale

 

6,887

 

2,268

Loans

 

 

Outstandings

 

556,170

 

538,427

Allowance for credit losses

 

(3,256)

 

(3,370)

Deferred costs, net

 

746

 

588

Total loans, net

 

553,660

 

535,645

Premises and equipment, net

 

11,890

 

11,748

Bank owned life insurance

 

12,947

 

12,798

Accrued interest receivable

 

3,482

 

3,651

Other assets

 

4,966

 

5,065

Total Assets

$

754,655

$

723,270

Liabilities and Shareholders’ Equity

 

 

Liabilities

 

  

 

  

Deposits

 

  

 

  

Noninterest bearing demand

$

249,059

$

255,236

Interest bearing

 

379,323

 

369,507

Total deposits

 

628,382

 

624,743

Long-term debt - trust preferred securities

 

8,764

 

8,764

Subordinated debt, net

 

5,700

 

5,692

Federal Home Loan Bank advances

 

45,000

 

20,000

Accrued interest payable

 

270

 

70

Other liabilities

 

2,525

 

2,890

Total liabilities

 

690,641

 

662,159

Shareholders’ equity

 

  

 

  

Common stock, $4 par value, 10,000,000 shares authorized; 1,485,813 shares issued and outstanding at June 30, 2023 and 1,482,790 shares issued and outstanding at December 31, 2022

 

5,883

 

5,868

Additional paid-in capital

 

55,420

 

55,167

Retained earnings

 

13,142

 

10,957

Stock in directors rabbi trust

 

(467)

 

(689)

Directors deferred fees obligation

 

467

 

689

Accumulated other comprehensive loss

 

(10,431)

 

(10,881)

Total shareholders’ equity

 

64,014

 

61,111

Total liabilities and shareholders' equity

$

754,655

$

723,270

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

3

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three and Six Months Ended June 30, 2023 and 2022

(Unaudited)

(in thousands, except per share data)

    

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2023

    

2022

2023

    

2022

Interest income

 

  

 

  

  

 

  

Loans

$

7,266

$

6,042

$

14,029

$

11,891

Investment securities

 

719

 

583

 

1,446

 

977

Federal funds sold

 

114

 

106

 

207

 

131

Total interest income

 

8,099

 

6,731

 

15,682

 

12,999

Interest expense

 

  

 

  

 

  

 

  

Deposits

 

1,186

 

252

 

1,810

 

515

Borrowed funds

 

789

 

158

 

1,383

 

303

Total interest expense

 

1,975

 

410

 

3,193

 

818

Net interest income

 

6,124

 

6,321

 

12,489

 

12,181

Provision for (recovery of) credit losses

 

 

 

 

(400)

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

 

6,124

 

6,321

 

12,489

 

12,581

Noninterest income

 

  

 

  

 

  

 

  

Service charges and fees

 

711

 

671

 

1,380

 

1,290

Mortgage banking income, net

 

386

 

1,090

 

864

 

1,969

Gain on sale of Small Business Administration loans

 

 

79

 

 

79

Other

 

124

 

98

 

234

 

229

Total noninterest income

 

1,221

 

1,938

 

2,478

 

3,567

Noninterest expense

 

  

 

  

 

  

 

  

Salaries and benefits

 

3,415

 

3,423

 

6,863

 

6,947

Occupancy

 

307

 

284

 

618

 

614

Equipment

 

280

 

270

 

565

 

558

Supplies

 

35

 

36

 

84

 

74

Professional and outside services

 

838

 

738

 

1,651

 

1,463

Advertising and marketing

 

140

 

92

 

251

 

204

FDIC insurance premium

 

84

 

64

 

134

 

123

Other operating expense

 

733

 

607

 

1,423

 

1,213

Total noninterest expense

 

5,832

 

5,514

 

11,589

 

11,196

Income before income tax expense

 

1,513

 

2,745

 

3,378

 

4,952

Income tax expense

 

274

 

555

 

599

 

962

Net income

$

1,239

$

2,190

$

2,779

$

3,990

Earnings per share, basic

$

0.83

$

1.48

$

1.87

$

2.71

Earnings per share, diluted

$

0.83

$

1.48

$

1.87

$

2.70

See accompanying notes to consolidated financial statements.

4

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

Three and Six Months ended June 30, 2023 and 2022

(Unaudited)

(in thousands)

    

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2023

    

2022

2023

    

2022

Net income

$

1,239

$

2,190

$

2,779

$

3,990

Other comprehensive income (loss)

 

  

 

  

 

  

 

  

Unrealized holding gains (losses) arising during the period

 

(1,312)

 

(4,471)

 

564

 

(9,037)

Tax effect

 

276

 

939

 

(118)

 

1,898

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

 

(1,036)

 

(3,532)

 

446

 

(7,139)

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)

 

(1,034)

 

(3,530)

 

450

 

(7,135)

Total comprehensive income (loss)

$

205

$

(1,340)

$

3,229

$

(3,145)

See accompanying notes to consolidated financial statements.

5

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three and Six Months Ended June 30, 2023 and 2022

(Unaudited)

(In thousands)

Three Months Ended June 30, 2023

Directors

Accumulated

Additional

Stock in

Deferred

Other

Common

Paid-in

Retained

Directors

Fees

Comprehensive

Stock

    

Capital

    

Earnings

    

Rabbi Trust

    

Obligation

    

Income (Loss)

    

Total

Balance, March 31, 2023

$

5,881

55,256

$

12,141

$

(595)

$

595

$

(9,397)

$

63,881

Restricted stock redemption

128

(128)

Vesting of restricted stock

2

(2)

 

 

Stock based compensation

 

 

166

 

 

 

 

 

166

Cash dividend declared ($0.16 per share)

 

 

(238)

 

 

 

 

(238)

Net income

 

 

 

1,239

 

 

 

 

1,239

Other comprehensive loss

 

 

 

 

 

 

(1,034)

 

(1,034)

Balance, June 30, 2023

$

5,883

$

55,420

$

13,142

$

(467)

$

467

$

(10,431)

$

64,014

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

    

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

Six Months Ended June 30, 2023

    

    

    

    

Directors

    

Accumulated

    

Additional

Stock in

Deferred

Other

Common

Paid-in

Retained

Directors

Fees

Comprehensive

Stock

    

Capital

    

Earnings

    

Rabbi Trust

    

Obligation

    

Income (Loss)

    

Total

Balance, December 31, 2022

$

5,868

$

55,167

$

10,957

$

(689)

$

689

$

(10,881)

$

61,111

Restricted stock redemption

222

(222)

Vesting of restricted stock

 

15

 

(15)

 

 

 

 

 

Stock based compensation

 

 

268

 

 

 

 

 

268

Cash dividend declared ($0.32 per share)

(475)

(475)

Impact of adoption of ASC 326

(119)

(119)

Net income

 

 

 

2,779

 

 

 

 

2,779

Other comprehensive income

 

 

 

 

 

 

450

 

450

Balance, June 30, 2023

$

5,883

$

55,420

$

13,142

$

(467)

$

467

$

(10,431)

$

64,014

6

Table of Contents

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 ($0.28 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

See accompanying notes to consolidated financial statements.

7

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2023 and 2022

(Unaudited)

(in thousands)

    

Six Months Ended

June 30, 

    

2023

    

2022

Cash Flows from Operating Activities

 

  

 

  

Net income

$

2,779

$

3,990

Adjustments to reconcile net income to net cash used in operating activities:

 

  

 

  

Depreciation and amortization

 

285

 

271

Amortization of debt issuance costs

8

16

Deferred income taxes

 

76

 

150

Recovery of credit losses

 

 

(400)

Gain on sale of Small Business Administration loans

 

 

(79)

Gain on sales of loans held for sale

(1,269)

(2,668)

Stock compensation expense

 

268

 

210

Proceeds from sale of mortgage loans

 

60,443

 

96,113

Origination of mortgage loans held for sale

 

(63,793)

 

(96,267)

Amortization of premiums and accretion of discounts on securities, net

 

(72)

 

88

Increase in bank owned life insurance

 

(149)

 

(144)

Net change in:

 

 

Interest receivable

 

169

 

(76)

Other assets

 

(91)

 

1,702

Interest payable

 

200

 

(7)

Other liabilities

 

(365)

 

(3,058)

Net cash used in operating activities

 

(1,511)

 

(159)

Cash Flows from Investing Activities

 

  

 

  

Purchases of available for sale securities

 

(2,652)

 

(52,364)

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

 

4,906

 

6,314

Net increase in loans

 

(18,134)

 

(1,627)

Purchases of premises and equipment, net

 

(427)

 

(44)

Purchase of restricted stock, net

 

(1,042)

 

(20)

Net cash used in investing activities

 

(17,349)

 

(47,741)

Cash Flows from Financing Activities

 

  

 

  

Cash dividends paid

(475)

(413)

Net increase in deposits

 

3,639

 

10,593

Net increase in other borrowings

 

25,000

 

Net cash provided by financing activities

 

28,164

 

10,180

Net decrease in cash and cash equivalents

 

9,304

 

(37,720)

Cash and cash equivalents, beginning of period

 

16,678

 

92,616

Cash and cash equivalents, end of period

$

25,982

$

54,896

Supplemental Disclosure of Cash Flow Information

 

  

 

  

Cash payments for interest

$

2,993

$

825

Cash payments for taxes

$

337

$

321

Supplemental Schedule of Non-Cash Activities

 

  

 

  

Unrealized gains (losses) on securities available for sale

$

564

$

(9,037)

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

$

$

263

Minimum pension adjustment

$

6

$

6

See accompanying notes to consolidated financial statements.

8

Table of Contents

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2023 and 2022

(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, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023. 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, 2022 as filed with the Securities and Exchange Commission (“SEC”).

New Accounting Standards Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.  The company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard. This standard is commonly referred to as the current expected credit loss (“CECL”) methodology. As a result of adoption of Accounting Standards of Codification (“ASC”) 326, the Company recorded a net decrease to retained earnings of $119,000, net of taxes, which consisted of adjustments to the allowance for credit losses on loans as well as an adjustment to the Company’s reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its allowance for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of income.  

The Company is utilizing a third-party model to tabulate its estimate of current expected credit losses, using a weighted average remaining maturity (“WARM”) methodology. In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics by call report code. The Company’s forecast of estimated expected losses is based on a twelve-month forecast of the national rate of unemployment and external observations of historical loan losses. The Company uses the Federal Open Market Committee’s projection of unemployment for its reasonable and supportable forecasting of current expected credit losses. For the periods beyond the reasonable and supportable forecast period, projections of expected credit losses are based on a reversion to the long-run mean for the national unemployment rate. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes in lending policies and procedures including changes in underwriting standards, and collections, charge-offs, and recovery practices, changes in international, national, regional, and local conditions, changes in the nature and volume of the portfolio and terms of loans, changes in experience, depth, and ability of lending management, changes in the volume and severity of past due loans and other similar conditions, changes in the quality of the organization’s loan review system, changes in the value of underlying collateral for collateral dependent loans, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses. The Company’s CECL implementation process was overseen by the Chief Financial Officer and included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience. During 2022, the Company calculated its current expected credit losses model in parallel to its incurred loss model to further refine the

9

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methodology and model.  In addition, the Company utilized internal personnel who were not involved in the development of the model to perform a comprehensive model validation.

The following table illustrates the impact of ASC 326 adoption:

    

December 31,

    

January 1,

 

January 1,

2022

2023

2023

As Previously Reported

Impact of

As Reported

(Incurred Loss)

CECL Adoption

Under CECL

Assets:

  

  

  

Loans

Construction and land development

 

  

 

  

 

  

Residential

$

79

$

3

$

82

Commercial

 

192

 

34

 

226

 

271

 

37

 

308

Commercial real estate

 

  

 

  

 

  

Owner occupied

 

867

 

(475)

 

392

Non-owner occupied

 

1,289

 

192

 

1,481

Multifamily

 

33

 

7

 

40

Farmland

 

 

 

 

2,189

 

(276)

 

1,913

Consumer real estate

 

  

 

  

 

  

Home equity lines

 

11

 

24

 

35

Secured by 1-4 family residential

 

  

 

 

  

First deed of trust

 

131

 

76

 

207

Second deed of trust

 

43

 

25

 

68

 

185

 

125

 

310

Commercial and industrial loans

 

  

 

 

  

(except those secured by real estate)

 

576

 

1

 

577

Student loans

52

 

 

52

Consumer and other

 

37

 

(5)

 

32

Unallocated

60

(9)

51

Allowance for credit losses

 

3,370

 

(127)

 

3,243

 

 

 

Liabilities

 

  

 

  

 

  

Allowance for credit losses on unfunded credit exposure

 

 

277

 

277

 

 

 

Total Allowance for credit losses

$

3,370

$

150

$

3,520

On January 1, 2023, the Company adopted ASU 2022-02 “Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures,” which removed the recognition and measurement guidance on troubled debt restructurings (“TDRs”) and added disclosures on the financial effect and subsequent performance of certain types of modifications made to borrowers experiencing financial difficulties. Upon adoption of the standard, the Company recorded a reduction of $8,000 in the allowance for credit losses for the impact of changes in methodology used to estimate the allowance for credit losses for non-collateral dependent TDRs. There was no impact to the valuation of loans previously classified as collateral dependent TDRs. The allowance for loan and lease losses for modified loans is determined in a manner consistent with the methodology for loans under ASC 326.

10

Table of Contents

Note 2 – Use of estimates

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

Note 3 – Earnings per common share

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

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2023

    

2022

2023

    

2022

Numerator

 

  

 

  

  

 

  

Net income - basic and diluted

$

1,239

$

2,190

$

2,779

$

3,990

Denominator

 

  

 

  

 

  

 

  

Weighted average shares outstanding - basic

 

1,486

 

1,477

 

1,485

 

1,476

Dilutive effect of common stock options

 

 

 

 

Weighted average shares outstanding - diluted

 

1,486

 

1,477

 

1,485

 

1,476

Earnings per share - basic

$

0.83

$

1.48

$

1.87

$

2.71

Earnings per share - diluted

$

0.83

$

1.48

$

1.87

$

2.70

Applicable guidance requires that outstanding, unvested share-based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

The vesting of 10,658 and 6,264 at June 30, 2023 and 2022, respectively, of the unvested restricted units included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of June 30, 2023 and 2022, it was indeterminable whether these unvested restricted units would vest and as such the underlying shares were excluded from common shares issued and outstanding at such date and were not included in the computation of earnings per share for such period.

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Table of Contents

Note 4 – Investment securities available for sale

The amortized cost and fair value of investment securities available for sale as of June 30, 2023 and December 31, 2022 are as follows (in thousands):

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Cost

Gains

Losses

Fair Value

June 30, 2023

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

64,594

$

3

$

(3,107)

$

61,490

Mortgage-backed securities

 

66,119

 

 

(8,243)

 

57,876

Municipals

2,266

(599)

1,667

Subordinated debt

 

12,442

 

21

 

(1,261)

 

11,202

$

145,421

$

24

$

(13,210)

$

132,235

December 31, 2022

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

64,631

$

5

$

(3,734)

$

60,902

Mortgage-backed securities

 

69,151

 

6

 

(8,597)

 

60,560

Municipals

2,268

(718)

1,550

Subordinated debt

 

11,553

 

29

 

(741)

 

10,841

$

147,603

$

40

$

(13,790)

$

133,853

At June 30, 2023 and December 31, 2022, the Company had investment securities with a fair value of $23,245,000 and $5,613,000, respectively, 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, 2023 and 2022.

12

Table of Contents

Investment securities available for sale that have an unrealized loss position at June 30, 2023 and December 31, 2022 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, 2023

 

  

 

 

  

 

  

U.S. Government agency obligations

$

3,699

$

(39)

$

57,419

$

(3,068)

$

61,118

$

(3,107)

Mortgage-backed securities

8,360

(177)

49,516

(8,066)

57,876

(8,243)

Municipals

1,667

(599)

1,667

(599)

Subordinated debt

 

3,007

 

(243)

 

5,284

 

(1,018)

 

8,291

 

(1,261)

$

15,066

$

(459)

$

113,886

$

(12,751)

$

128,952

$

(13,210)

December 31, 2022

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government agency obligations

$

21,848

$

(723)

$

37,256

$

(3,011)

$

59,104

$

(3,734)

Mortgage-backed securities

 

36,089

 

(3,588)

 

22,549

 

(5,009)

 

58,638

 

(8,597)

Municipals

1,549

(718)

1,549

(718)

Subordinated debt

 

5,305

 

(498)

 

2,007

 

(243)

 

7,312

 

(741)

$

63,242

$

(4,809)

$

63,361

$

(8,981)

$

126,603

$

(13,790)

As of June 30, 2023, there were 72 investments available for sale totaling $128,952,000 that were in a loss position and had an unrealized loss of $13,210,000.

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 impaired at June 30, 2023.

The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2023, by contractual maturity, are as follows (in thousands):

    

Amortized

    

Cost

Fair Value

Less than one year

$

29,937

$

29,410

One to five years

35,240

32,641

Five to ten years

 

16,369

 

14,787

More than ten years

 

63,875

55,397

Total

$

145,421

$

132,235

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Table of Contents

Note 5 – Loans and allowance for credit losses

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 in this Quarterly report.  All information presented as of June 30, 2023 is in accordance with ASC 326.  All loan information presented prior to June 30, 2023 is in accordance with previous applicable GAAP.

Loans classified by type as of June 30, 2023 and December 31, 2022 are as follows (dollars in thousands):

June 30, 2023

December 31, 2022

 

    

Amount

    

%  

    

Amount

    

%

Construction and land development

 

  

 

  

 

  

 

  

Residential

$

7,527

 

1.35

%  

$

9,727

 

1.81

%

Commercial

 

43,411

 

7.81

%  

 

35,400

 

6.57

%

 

50,938

 

9.16

%  

 

45,127

 

8.38

%

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

114,964

 

20.67

%  

 

119,643

 

22.22

%

Non-owner occupied

 

155,139

 

27.89

%  

 

153,610

 

28.53

%

Multifamily

 

12,755

 

2.29

%  

 

11,291

 

2.10

%

Farmland

 

63

 

0.01

%  

 

73

 

0.01

%

 

282,921

 

50.86

%  

 

284,617

 

52.86

%

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

17,335

 

3.12

%  

 

18,421

 

3.42

%

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

First deed of trust

 

79,762

 

14.34

%  

 

67,495

 

12.54

%

Second deed of trust

 

9,435

 

1.70

%  

 

7,764

 

1.44

%

 

106,532

 

19.16

%  

 

93,680

 

17.40

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

91,394

 

16.43

%  

 

90,348

 

16.78

%

Guaranteed student loans

 

20,002

 

3.60

%  

 

20,617

 

3.83

%

Consumer and other

 

4,383

 

0.79

%  

 

4,038

 

0.73

%

Total loans

 

556,170

 

100.0

%  

 

538,427

 

100.0

%

Deferred (fees) and costs, net

 

746

 

 

588

 

Less: allowance for credit losses

 

(3,256)

 

 

(3,370)

 

$

553,660

$

535,645

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

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $36,705,000 and $33,706,000 as of June 30, 2023 and December 31, 2022, 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.

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Table of Contents

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.

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

    

June 30, 

    

December 31, 

2023

2022

Consumer real estate

 

  

 

  

Home equity lines

$

$

300

Secured by 1-4 family residential

 

  

 

  

First deed of trust

 

162

 

164

Second deed of trust

 

107

 

171

 

269

 

635

Commercial and industrial loans

 

  

 

  

(except those secured by real estate)

 

17

 

19

Total loans

$

286

$

654

The Company recognized $13,000 of interest on nonaccrual loans as of June 30, 2023.

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

Risk rated 1 to 4 (Pass) 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 (Special Mention) loans are defined as having potential weaknesses that deserve management’s close attention;
Risk rated 6 (Substandard) 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 (Doubtful) 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.

15

Table of Contents

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

    

Risk Rated

    

Risk Rated

    

Risk Rated

    

Risk Rated

    

Total

14

5

6

7

Loans

December 31, 2022

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

9,727

$

$

$

$

9,727

Commercial

 

32,763

 

2,637

 

 

 

35,400

 

42,490

 

2,637

 

 

 

45,127

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

115,825

 

2,583

 

1,235

 

 

119,643

Non-owner occupied

 

143,458

 

10,152

 

 

 

153,610

Multifamily

 

11,291

 

 

 

 

11,291

Farmland

 

73

 

 

 

 

73

 

270,647

 

12,735

 

1,235

 

 

284,617

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

17,507

 

614

 

300

 

 

18,421

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

66,616

 

407

 

472

 

 

67,495

Second deed of trust

 

7,517

 

72

 

175

 

 

7,764

 

91,640

 

1,093

 

947

 

 

93,680

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

83,848

 

6,481

 

19

 

 

90,348

Guaranteed student loans

 

20,617

 

 

 

 

20,617

Consumer and other

 

4,017

 

 

21

 

 

4,038

 

Total loans

$

513,259

$

22,946

$

2,222

$

$

538,427

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination.  Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below. As of June 30, 2023, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows (in thousands):

  

    

    

    

Revolving-

    

Total

2023

2022

2021

2020

2019

Prior

Revolving

Term

Loans

June 30, 2023

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

Pass

$

1,836

$

5,229

$

347

$

$

$

$

$

$

7,412

Special Mention

115

115

Substandard

Total Residential

$

1,836

$

5,344

$

347

$

$

$

$

$

$

7,527

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Commercial

 

 

 

 

 

 

 

 

 

Pass

2,590

16,432

14,690

249

2,121

3,812

39,894

Special Mention

3,517

3,517

Substandard

Total Commercial

$

2,590

$

16,432

$

14,690

$

249

$

$

5,638

$

3,812

$

$

43,411

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Commercial real estate

 

 

  

 

  

 

  

 

 

 

 

 

  

Owner occupied

 

 

 

 

 

 

 

 

 

Pass

807

19,922

26,409

7,284

12,471

44,368

535

111,796

Special Mention

1,938

1,938

Substandard

1,230

1,230

Total Owner occupied

$

807

$

19,922

$

26,409

$

7,284

$

13,701

$

46,306

$

535

$

$

114,964

Current period gross writeoff

$

$

$

$

$

$

$

$

$

16

Table of Contents

  

    

    

    

Revolving-

    

Total

2023

2022

2021

2020

2019

Prior

Revolving

Term

Loans

Non-owner occupied

 

 

 

 

 

 

 

 

 

Pass

4,303

25,969

26,261

26,806

10,145

50,424

4,980

148,888

Special Mention

2,201

4,050

6,251

Substandard

Total Non-owner occupied

$

4,303

$

25,969

$

28,462

$

26,806

$

10,145

$

54,474

$

4,980

$

$

155,139

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Multifamily

 

 

 

 

 

 

 

 

 

Pass

1,300

2,641

559

895

6,296

1,064

12,755

Special Mention

Substandard

Total Multifamily

$

1,300

$

$

2,641

$

559

$

895

$

6,296

$

1,064

$

$

12,755

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Farmland

 

 

 

 

 

 

 

 

 

Pass

30

33

63

Special Mention

Substandard

Total Farmland

$

$

$

30

$

$

$

33

$

$

$

63

Current period gross writeoff

$

$

$

$

$

$

$

$

$

 

 

 

 

 

 

 

 

 

Consumer real estate

 

 

  

 

  

 

  

 

 

 

 

 

  

Home equity lines

 

 

 

 

 

 

 

 

 

Pass

446

16,281

16,727

Special Mention

608

608

Substandard

Total Home equity lines

$

$

446

$

$

$

$

$

16,889

$

$

17,335

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Secured by 1-4 family residential

 

 

  

 

  

 

  

 

 

 

 

 

  

First deed of trust

Pass

17,767

13,987

16,130

8,810

3,101

18,480

78,275

Special Mention

173

173

979

1,325

Substandard

162

162

Total First deed of trust

$

17,940

$

13,987

$

16,303

$

8,810

$

3,101

$

19,621

$

$

$

79,762

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Second deed of trust

 

 

 

 

 

 

 

 

 

Pass

2,053

3,524

982

435

1,244

767

260

9,265

Special Mention

46

70

116

Substandard

2

52

54

Total Second deed of trust

$

2,053

$

3,524

$

982

$

435

$

1,292

$

889

$

260

$

$

9,435

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Commercial and industrial loans

  

(except those secured by real estate)

Pass

9,633

13,969

18,773

6,939

3,543

4,460

26,788

84,105

Special Mention

4,097

78

396

125

2,507

7,203

Substandard

17

69

86

Total Commercial and industrial

$

9,633

$

18,066

$

18,851

$

6,939

$

3,939

$

4,602

$

29,364

$

$

91,394

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Guaranteed student loans

 

 

 

 

 

 

 

 

 

Pass

20,002

20,002

Special Mention

Substandard

Total Guaranteed student loans

$

$

$

$

$

$

20,002

$

$

$

20,002

Current period gross writeoff

$

7

$

$

$

$

$

$

$

$

7

Consumer and other

Pass

2,224

532

164

85

27

19

1,314

4,365

Special Mention

18

18

Substandard

Total Consumer and other

$

2,224

$

532

$

164

$

85

$

45

$

19

$

1,314

$

$

4,383

Current period gross writeoff

$

$

$

$

$

$

$

$

$

Total Current period gross writeoff

$

7

$

$

$

$

$

$

$

$

7

Total loans

$

42,686

$

104,222

$

108,879

$

51,167

$

33,118

$

157,880

$

58,218

$

$

556,170

17

Table of Contents

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

Greater

Investment >

3059 Days

6089 Days

Than

Total Past

Total

90 Days and

Past Due

Past Due

90 Days

Due

Current

Loans

Accruing

June 30, 2023

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

$

$

$

$

7,527

$

7,527

$

Commercial

 

 

 

 

 

43,411

 

43,411

 

 

 

 

 

 

50,938

 

50,938

 

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

 

 

114,964

 

114,964

 

Non-owner occupied

 

 

 

 

 

155,139

 

155,139

 

Multifamily

 

 

 

 

 

12,755

 

12,755

 

Farmland

 

 

 

 

 

63

 

63

 

 

 

 

 

 

282,921

 

282,921

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

40

 

 

 

40

 

17,295

 

17,335

 

Secured by 1‑4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

 

 

 

 

79,762

 

79,762

 

Second deed of trust

 

 

 

 

 

9,435

 

9,435

 

 

40

 

 

 

40

 

106,492

 

106,532

 

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

759

 

131

 

742

 

1,632

 

89,762

 

91,394

 

742

Guaranteed student loans

 

1,288

 

311

 

1,978

 

3,577

 

16,425

 

20,002

 

1,978

Consumer and other

 

3

 

 

 

3

 

4,380

 

4,383

 

Total loans

$

2,090

$

442

$

2,720

$

5,252

$

550,918

$

556,170

$

2,720

18

Table of Contents

    

    

    

    

    

    

    

Recorded

Greater

Investment >

30-59 Days

60-89 Days

Than

Total Past

Total

90 Days and

Past Due

Past Due

90 Days

Due

Current

Loans

Accruing

December 31, 2022

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

$

$

$

$

9,727

$

9,727

$

Commercial

 

 

 

 

 

35,400

 

35,400

 

 

 

 

 

 

45,127

 

45,127

 

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

 

 

119,643

 

119,643

 

Non-owner occupied

 

 

 

 

 

153,610

 

153,610

 

Multifamily

 

 

 

 

 

11,291

 

11,291

 

Farmland

 

 

 

 

 

73

 

73

 

 

 

 

 

 

284,617

 

284,617

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

 

50

 

 

50

 

18,371

 

18,421

 

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

 

  

 

  

First deed of trust

 

 

 

 

 

67,495

 

67,495

 

Second deed of trust

 

54

 

 

 

54

 

7,710

 

7,764

 

 

54

 

50

 

 

104

 

93,576

 

93,680

 

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

1,022

 

 

377

 

1,399

 

88,949

 

90,348

 

Guaranteed student loans

 

831

 

390

 

1,725

 

2,946

 

17,671

 

20,617

 

1,725

Consumer and other

 

 

 

 

 

4,038

 

4,038

 

Total loans

$

1,907

$

440

$

2,102

$

4,449

$

533,978

$

538,427

$

1,725

Loans greater than 90 days past due are United States Department of Agriculture loans which carry a 100% guarantee of the principal and interest and 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 collateral dependent.

19

Table of Contents

Loans that are individually evaluated for credit losses are limited to loans that have specific risk characteristics that are not shared by other loans and based on current information and events it is probable the Company will be unable to collect all amounts when due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. The repayment of these loans is expected to be substantially through the operations or the sale of the collateral. The allowance for credit losses on loans that are individually evaluated will be measured based on the fair value of the collateral either through operations or the sale of the collateral. When repayment is expected through the sale of the collateral, the allowance will be based on the fair value of the collateral less estimated costs to sell. Collateral dependent loans, or portions thereof, are charged off when deemed uncollectible. Collateral dependent loans are set forth in the following table as of the dates indicated (in thousands):

June 30, 2023

December 31, 2022

    

    

Unpaid

    

    

    

Unpaid

    

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance

With no related allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

$

1,714

$

1,729

$

$

4,332

$

4,347

$

Non-owner occupied

 

 

 

 

312

 

312

 

 

1,714

 

1,729

 

 

4,644

 

4,659

 

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

 

 

 

300

 

300

 

Secured by 1‑4 family residential

 

 

  

 

  

 

 

  

 

  

First deed of trust

 

162

 

162

 

 

1,745

 

1,745

 

Second deed of trust

 

109

 

193

 

 

195

 

300

 

 

271

 

355

 

 

2,240

 

2,345

 

Commercial and industrial loans

 

  

 

 

  

 

  

 

 

  

(except those secured by real estate)

 

86

 

86

 

 

19

 

19

 

 

2,071

 

2,170

 

 

6,903

 

7,023

 

With an allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

 

 

 

251

 

251

 

2

 

 

 

 

251

 

251

 

2

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

 

 

 

136

 

136

 

6

 

 

 

 

136

 

136

 

6

Consumer and other

21

21

1

 

 

 

 

408

 

408

 

9

Total

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

1,714

 

1,729

 

 

4,583

 

4,598

 

2

Non-owner occupied

 

 

 

 

312

 

312

 

 

1,714

 

1,729

 

 

4,895

 

4,910

 

2

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

 

 

 

300

 

300

 

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

162

 

162

 

 

1,881

 

1,881

 

6

Second deed of trust

 

109

 

193

 

 

195

 

300

 

 

271

 

355

 

 

2,376

 

2,481

 

6

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

86

 

86

 

 

19

 

19

 

Consumer and other

21

21

1

$

2,071

$

2,170

$

$

7,311

$

7,431

$

9

20

Table of Contents

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

For the Three Months Ended

For the Six Months Ended

June 30, 2023

June 30, 2023

    

Average

    

Interest

    

Average

    

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

With no related allowance recorded

 

  

 

  

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

$

1,475

$

92

$

2,854

$

123

Non-owner occupied

 

 

 

 

 

1,475

 

92

 

2,854

 

123

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

150

 

 

225

 

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deed of trust

 

178

 

 

987

 

4

Second deed of trust

 

220

 

1

 

170

 

2

 

548

 

1

 

1,382

 

6

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

52

 

4

 

52

 

5

 

2,075

 

97

 

4,288

 

134

With an allowance recorded

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

 

127

 

 

 

 

127

 

Consumer real estate

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deed of trust

 

 

50

 

Second deed of trust

 

 

 

 

 

 

 

50

 

Consumer and other

 

 

 

16

 

 

 

 

193

 

Total

 

  

 

  

 

  

 

  

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

1,475

 

92

 

2,981

 

123

Non-owner occupied

 

 

 

 

 

1,475

 

92

 

2,981

 

123

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

150

 

 

225

 

Secured by 1-4 family residential,

 

  

 

  

 

  

 

First deed of trust

 

178

 

 

1,037

 

4

Second deed of trust

 

220

 

1

 

170

 

2

 

548

 

1

 

1,432

 

6

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

52

 

4

 

52

 

5

Consumer and other

 

 

 

16

 

$

2,075

$

97

$

4,481

$

134

Loan Modifications to Borrowers in Financial Difficulty

As part of its credit risk management, the Company may modify a loan agreement with a borrower experiencing financial difficulties through a refinancing or restructuring of the borrower’s loan agreement. There were no modified loans identified during the six months ended June 30, 2023.  

21

Table of Contents

Prior Period Troubled Debt Restructuring Disclosures

Prior to adopting the new accounting standard on loan modifications, the Company accounted for modifications of loans to borrowers experiencing financial difficulties as TDRs, when the modification resulted in a concession. The following discussion reflects loans that are considered TDRs prior to January 1, 2023.

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

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

    

    

    

    

Specific

Valuation

Total

Performing

Nonaccrual

Allowance

December 31, 2022

 

  

 

  

 

  

 

  

 

 

 

 

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

$

3,348

$

3,348

$

$

2

Non-owner occupied

 

312

 

312

 

 

 

3,660

 

3,660

 

 

2

Consumer real estate

 

  

 

  

 

  

 

  

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

First deeds of trust

 

1,409

 

1,409

 

 

6

Second deeds of trust

 

75

 

19

 

56

 

 

1,484

 

1,428

 

56

 

6

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

19

 

 

19

 

$

5,163

$

5,088

$

75

$

8

Number of loans

 

24

 

22

 

2

 

3

There were no new TDRs identified for the year ended December 31, 2022.

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 TDRs that were modified as TDRs during the prior 12 month periods ended June 30, 2023 and 2022.

22

Table of Contents

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

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

    

    

Impact of

Provision for

    

    

    

Beginning

adopting

(Recovery of)

Ending

Balance

ASC 326

Credit Losses

Charge-offs

Recoveries

Balance

Three Months Ended June 30, 2023

 

  

 

  

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

  

 

  

 

  

 

  

Residential

$

51

$

$

10

$

$

$

61

Commercial

 

264

 

 

3

 

 

 

267

 

315

 

 

13

 

 

 

328

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

391

 

 

(12)

 

 

 

379

Non-owner occupied

 

1,460

 

 

(84)

 

 

 

1,376

Multifamily

 

40

 

 

 

 

 

40

Farmland

 

 

 

 

 

 

 

1,891

 

 

(96)

 

 

 

1,795

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

33

 

 

30

 

 

 

63

Secured by 1-4 family residential

 

  

 

  

 

 

  

 

  

 

  

First deed of trust

 

214

 

 

5

 

 

 

219

Second deed of trust

 

75

 

 

4

 

 

4

 

83

 

322

 

 

39

 

 

4

 

365

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

549

 

 

118

 

 

6

 

673

Student loans

 

112

 

 

(95)

 

(4)

 

 

13

Consumer and other

 

34

 

 

1

 

 

 

35

Unallocated

 

49

 

 

(2)

 

 

 

47

$

3,272

$

$

(22)

$

(4)

$

10

$

3,256

23

Table of Contents

    

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

    

    

Impact of

Provision for

    

    

    

Beginning

adopting

(Recovery of)

Ending

Balance

ASC 326

Credit Losses

Charge-offs

Recoveries

Balance

Six Months Ended June 30, 2023

 

  

 

  

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

  

 

  

 

  

 

  

Residential

$

79

$

3

$

(21)

$

$

$

61

Commercial

 

192

 

34

 

41

 

 

 

267

 

271

 

37

 

20

 

 

 

328

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

867

 

(475)

 

(13)

 

 

 

379

Non-owner occupied

 

1,289

 

192

 

(105)

 

 

 

1,376

Multifamily

 

33

 

7

 

 

 

 

40

Farmland

 

 

 

 

 

 

 

2,189

 

(276)

 

(118)

 

 

 

1,795

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

11

 

24

 

28

 

 

 

63

Secured by 1-4 family residential

 

  

 

  

 

 

  

 

  

 

  

First deed of trust

 

131

 

76

 

11

 

 

1

 

219

Second deed of trust

 

43

 

25

 

9

 

 

6

 

83

 

185

 

125

 

48

 

 

7

 

365

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

576

 

1

 

84

 

 

12

 

673

Student loans

 

52

 

 

(32)

 

(7)

 

 

13

Consumer and other

 

37

 

(5)

 

3

 

 

 

35

Unallocated

 

60

 

(9)

 

(4)

 

 

 

47

$

3,370

$

(127)

$

1

$

(7)

$

19

$

3,256

24

Table of Contents

    

    

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

    

    

Provision for

    

    

    

Beginning

(Recovery of)

Ending

Balance

Loan Losses

Charge-offs

Recoveries

Balance

Year Ended December 31, 2022

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

57

$

22

$

$

$

79

Commercial

 

229

 

(37)

 

 

 

192

 

286

 

(15)

 

 

 

271

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

833

 

34

 

 

 

867

Non-owner occupied

 

1,083

 

206

 

 

 

1,289

Multifamily

 

35

 

(2)

 

 

 

33

Farmland

 

2

 

(2)

 

 

 

 

1,953

 

236

 

 

 

2,189

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

12

 

(59)

 

 

58

 

11

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

123

 

3

 

 

5

 

131

Second deed of trust

 

47

 

(311)

 

(27)

 

334

 

43

 

182

 

(367)

 

(27)

 

397

 

185

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

486

 

180

 

(157)

 

67

 

576

Student loans

 

65

 

18

 

(31)

 

 

52

Consumer and other

 

29

 

10

 

(2)

 

 

37

Unallocated

 

422

 

(362)

 

 

 

60

$

3,423

$

(300)

$

(217)

$

464

$

3,370

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Table of Contents

Loans are required to be measured at amortized costs and to be presented at the net amount expected to be collected. Off balance sheet credit exposures, including loan commitments, are not recorded on balance sheet, but expected credit losses arising from off balance sheet credit exposures are recorded as a reserve for unfunded commitments and reported in Other Liabilities. Credit losses on available for sale debt securities are accounted for as an allowance for credit losses, which is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value and the amount expected to be collected on the financial assets. The allowance for credit losses on loans, available for sale debt securities and the reserve for unfunded commitments are established through a provision for credit losses charged against earnings. Amounts reported for the six months ended June 30, 2023 are in accordance with ASC 326, whereas amounts reported for periods prior to January 1, 2023 are presented in accordance with previously applicable GAAP.

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

Three Months Ended June 30,

2023

2022

Provision for credit losses:

  

  

Provision (recovery) for loans

$

(22)

$

Provision (recovery) for unfunded commitments

22

Total

$

$

Six Months Ended June 30,

2023

2022

Provision for credit losses:

  

  

Provision (recovery) for loans

$

1

$

(400)

Provision (recovery) for unfunded commitments

(1)

Total

$

$

(400)

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

As of June 30, 2023, the Allowance for Credit Losses was $3.53 million and included an allowance for credit losses on loans of $3.26 million and a reserve for unfunded commitments of $277,000.

The Company recorded a provision for credit losses for loans of $1,000 for the six months ended June 30, 2023, which was the result of loan growth being offset by improved credit metrics as non-performing loans as a percentage of loans decreased from 0.13% at December 31, 2022 to 0.06% at June 30, 2023. The Company recorded a recovery for credit losses for unfunded commitments of $1,000 for the six months ended June 30, 2023, which was driven by a slight decrease in the total balance outstanding at June 30, 2023.

The following information is presented prior to the adoption of ASC 326.

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

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

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Table of Contents

The Company recorded a recovery of provision for loan losses expense of $400,000 for the six month period ended June 30, 2022.  The recovery of provision for the three month period ended June 30, 2022 was driven by improving macroeconomic conditions and credit quality remaining strong.

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

Recorded Investment in Loans

Allowance

Loans

    

Ending

    

    

    

Ending

    

    

 

Balance

 

Individually

 

Collectively

 

Balance

 

Individually

 

Collectively

Six Months Ended June 30, 2023

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

61

$

$

61

$

7,527

$

$

7,527

Commercial

 

267

 

 

267

 

43,411

 

 

43,411

 

328

 

 

328

 

50,938

 

 

50,938

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

379

 

 

379

 

114,964

 

1,714

 

113,250

Non-owner occupied

 

1,376

 

 

1,376

 

155,139

 

 

155,139

Multifamily

 

40

 

 

40

 

12,755

 

 

12,755

Farmland

 

 

 

 

63

 

 

63

 

1,795

 

 

1,795

 

282,921

 

1,714

 

281,207

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

63

 

 

63

 

17,335

 

 

17,335

Secured by 1-4 family residential

 

  

 

  

 

 

 

  

 

  

First deed of trust

 

219

 

 

219

 

79,762

 

162

 

79,600

Second deed of trust

 

83

 

 

83

 

9,435

 

109

 

9,326

 

365

 

 

365

 

106,532

 

271

 

106,261

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

(except those secured by real estate)

 

673

 

 

673

 

91,394

 

86

 

91,308

Student loans

 

13

 

 

13

 

20,002

 

 

20,002

Consumer and other

 

82

 

 

82

 

4,383

 

 

4,383

$

3,256

$

$

3,256

$

556,170

$

2,071

$

554,099

Year Ended December 31, 2022

 

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

 

  

Residential

$

79

$

$

79

$

9,727

$

$

9,727

Commercial

 

192

 

 

192

 

35,400

 

 

35,400

 

271

 

 

271

 

45,127

 

 

45,127

Commercial real estate

 

  

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

867

 

2

 

865

 

119,643

 

4,583

 

115,060

Non-owner occupied

 

1,289

 

 

1,289

 

153,610

 

312

 

153,298

Multifamily

 

33

 

 

33

 

11,291

 

 

11,291

Farmland

 

 

 

 

73

 

 

73

 

2,189

 

2

 

2,187

 

284,617

 

4,895

 

279,722

Consumer real estate

 

  

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

11

 

 

11

 

18,421

 

300

 

18,121

Secured by 1-4 family residential

 

  

 

  

 

 

  

 

  

 

  

First deed of trust

 

131

 

6

 

125

 

67,495

 

1,881

 

65,614

Second deed of trust

 

43

 

 

43

 

7,764

 

195

 

7,569

 

185

 

6

 

179

 

93,680

 

2,376

 

91,304

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

576

 

 

576

 

90,348

 

19

 

90,329

Student loans

 

52

 

 

52

 

20,617

 

 

20,617

Consumer and other

 

97

 

1

 

96

 

4,038

 

21

 

4,017

$

3,370

$

9

$

3,361

$

538,427

$

7,311

$

531,116

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Table of Contents

Note 6 – Deposits

Deposits as of June 30, 2023 and December 31, 2022 were as follows (dollars in thousands):

June 30, 2023

December 31, 2022

 

    

Amount

    

%  

    

Amount

    

%

Demand accounts

$

249,059

 

39.6

%  

$

255,236

 

40.9

%

Interest checking accounts

 

88,330

 

14.1

%  

 

90,252

 

14.4

%

Money market accounts

 

196,603

 

31.3

%  

 

179,036

 

28.6

%

Savings accounts

 

44,378

 

7.0

%  

 

55,695

 

8.9

%

Time deposits of $250,000 and over

 

11,080

 

1.8

%  

 

4,740

 

0.8

%

Other time deposits

 

38,932

 

6.2

%  

 

39,784

 

6.4

%

Total

$

628,382

 

100.0

%  

$

624,743

 

100.0

%

Note 7 – Borrowings

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

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $2,265,000 in FHLB stock at June 30, 2023 and $1,223,000 at December 31, 2022, which is held at cost. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings are secured by the pledge of commercial and 1-4 family residential loans and investment securities. The Company had FHLB advances of $45,000,000 and $20,000,000 at June 30, 2023 and December 31, 2022, respectively.  

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, 2023 or December 31, 2022.

The Company’s unused lines of credit for future borrowings total approximately $45.3 million at June 30, 2023, which consists of $2.5 million available from the FHLB based on current pledged assets, $15 million on revolving bank line of credit, $2.8 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.

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, 2023 was 7.68%. As a result of the announced discontinuation of the 3-month LIBOR on June 30, 2023, the Company is replacing the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The securities 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, 2023 and there are no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

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Table of Contents

During the third quarter of 2007, Village Financial Statutory Trust II, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at June 30, 2023 was 6.93%.  As a result of the announced discontinuation of the 3-month LIBOR on June 30, 2023, the Company is replacing the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in 2037. No amounts have been redeemed at June 30, 2023 and there are no plans to do so. The principal asset of the Trust is $3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

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

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

Note 9 – Subordinated Debt

On March 21, 2018, the Company issued $5,700,000 of fixed-to-floating rate subordinated notes due March 31, 2028 in a private placement. The Company received $5,539,000 in net proceeds after deducting issuance costs. The subordinated notes accrued interest at a fixed rate of 6.50% for the first five years until March 21, 2023. The subordinated notes have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 3.73%) which adjusts and is also payable quarterly. The interest rate at June 30, 2023 was 9.05%. As a result of the announced discontinuation of the 3-month LIBOR on June 30, 2023, the Company is replacing the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The Company may redeem the subordinated notes in whole or in part, on or after March 31, 2023. The subordinated notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior indebtedness, whether secured or unsecured, including claims of depositors and general creditors, and rank equally in right of payment with any unsecured, subordinated indebtedness that the Company may incur in the future. The carrying value of the notes totaled $5,700,000 and $5,692,000 at June 30, 2023 and December 31, 2022, respectively.

Note 10 – Stock incentive plan

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

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Table of Contents

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

Six Months Ended June 30, 

2023

2022

    

    

Weighted

    

    

    

    

Weighted

    

    

Average

Average

Exercise

Fair Value

Intrinsic

Exercise

Fair Value

Intrinsic

Options

Price

Per Share

Value

Options

Price

Per Share

Value

Options outstanding, beginning of period

 

14

$

25.28

$

9.76

 

734

$

25.63

$

9.76

 

Granted

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Exercised

 

 

$

 

(345)

 

25.50

 

 

Options outstanding, end of period

 

14

$

25.28

$

9.76

$

389

$

25.74

$

9.76

$

Options exercisable, end of period

 

14

 

  

 

  

389

 

  

 

  

During the six months ended June 30, 2023, we granted certain officers time-based restricted shares of common stock. The time-based restricted shares vest ratably over a three year period provided the officer is employed with the Company on the applicable vesting date.  

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 a performance target 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 25,752 and 23,051 at June 30, 2023 and 2022, 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, 2023 and 2022 was $885,700 and $663,700, respectively. The time-based unrecognized compensation of $538,600 is expected to be recognized over a weighted average period of 1.85 years. For the period ended June 30, 2023, there were no forfeitures, and there were 606 forfeitures of restricted stock and restricted stock units for the period ended June 30, 2022.

A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the six months ended June 30, 2023 follows:

    

    

Weighted-

    

Average

Aggregate

Grant-Date

Intrinsic

Shares

Fair-Value

Value

December 31, 2022

 

28,296

$

46.60

$

1,222,387

Granted

 

370

 

52.00

 

15,984

Vested

 

(4,399)

 

31.86

 

(190,037)

Forfeited

Other (1)

 

1,485

 

29.00

 

64,152

June 30, 2023

 

25,752

$

48.19

$

1,112,486

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

Stock-based compensation expense was approximately $268,000 and $210,000 for the six months ended June 30, 2023 and 2022, respectively.

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Table of Contents

Note 11 – Fair value

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

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

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

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

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

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

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

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

Loans held for sale: Fair value of the Company's loans held for sale is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company's portfolio of loans held for sale is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

Derivative asset – interest rate lock commitments (“IRLCs”): The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company's IRLCs are classified as Level 2.

Forward sale commitments: Best efforts sale commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The Company has elected the fair value option on their firm commitments under ASC 825.  

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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, 2023 Using

    

    

Quoted Prices

    

    

in Active

Other

Significant

Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets - Recurring

U.S. Government Agencies

$

61,490

$

$

61,490

$

Mortgage-backed securities

 

57,876

 

57,876

 

Municipals

1,667

1,667

Subordinated debt

 

11,202

 

 

9,154

 

2,048

Loans held for sale

6,887

6,887

IRLC

205

205

Financial Liabilities - Recurring

Forward sales commitment

370

370

Fair Value Measurement

at December 31, 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

U.S. Government Agencies

$

60,902

$

$

60,902

$

Mortgage-backed securities

 

60,560

 

 

60,560

 

Municipals

1,550

1,550

Subordinated debt

 

10,841

 

 

8,841

 

2,000

Loans held for sale

2,268

2,268

IRLC

142

142

Financial Liabilities - Recurring

Forward sales commitment

207

207

There were no Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at June 30, 2023 and December 31, 2022.

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 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).

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Table of Contents

June 30, 

December 31, 

2023

2022

    

Level in Fair

    

    

    

    

Value

Carrying

Estimated

Carrying

Estimated

Hierarchy

Value

Fair Value

Value

Fair Value

Financial assets

 

  

 

  

 

  

 

  

 

  

Cash

 

Level 1

$

12,881

$

12,881

$

12,062

$

12,062

Cash equivalents

 

Level 2

 

13,101

 

13,101

 

4,616

 

4,616

Investment securities available for sale

 

Level 2

 

130,187

 

130,187

 

131,853

 

131,853

Investment securities available for sale

 

Level 3

 

2,048

 

2,048

 

2,000

 

2,000

Federal Home Loan Bank stock

 

Level 2

 

2,265

 

2,265

 

1,223

 

1,223

Loans held for sale

 

Level 2

 

6,887

 

6,887

 

2,268

 

2,268

Loans

 

Level 3

 

556,170

 

524,518

 

538,427

 

521,150

Bank owned life insurance

 

Level 2

 

12,947

 

12,947

 

12,798

 

12,798

Accrued interest receivable

 

Level 2

 

3,482

 

3,482

 

3,651

 

3,651

Interest rate lock commitments

Level 2

205

205

142

142

Financial liabilities

 

  

 

  

 

  

 

  

 

  

Deposits

 

Level 2

 

628,382

 

627,547

 

624,743

 

625,037

FHLB borrowings

 

Level 2

 

45,000

 

44,799

 

20,000

 

20,000

Trust preferred securities

 

Level 2

 

8,764

 

9,059

 

8,764

 

7,066

Other borrowings

 

Level 2

 

5,700

 

5,700

 

5,692

 

5,692

Accrued interest payable

 

Level 2

 

270

 

270

 

70

 

70

Forward sales commitment

Level 2

370

370

207

207

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, 2023 and 2022 (in thousands):

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Three Months Ended June 30, 2023

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

7,998

$

101

$

$

8,099

Mortgage banking income, net

 

 

610

 

(224)

 

386

Other revenues

 

878

 

 

(43)

 

835

Total revenues

 

8,876

 

711

 

(267)

 

9,320

Expenses

 

  

 

  

 

  

 

  

Recovery of provision for credit losses

Interest expense

 

1,975

 

 

 

1,975

Salaries and benefits

 

2,694

 

721

 

 

3,415

Other expenses

 

2,391

 

293

 

(267)

 

2,417

Total operating expenses

 

7,060

 

1,014

 

(267)

 

7,807

Income (loss) before income taxes

1,816

(303)

1,513

Income tax expense (benefit)

338

(64)

274

Net income (benefit)

$

1,478

$

(239)

$

$

1,239

Total assets

$

764,034

$

17,856

$

(27,235)

$

754,655

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Three Months Ended June 30, 2022

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

6,653

$

78

$

$

6,731

Mortgage banking income, net

 

 

1,122

 

(32)

 

1,090

Other revenues

 

893

 

 

(45)

 

848

Total revenues

 

7,546

 

1,200

 

(77)

 

8,669

Expenses

 

  

 

  

 

  

 

  

Recovery of provision for loan losses

Interest expense

 

410

 

 

 

410

Salaries and benefits

 

2,608

 

815

 

 

3,423

Other expenses

 

1,851

 

317

 

(77)

 

2,091

Total operating expenses

 

4,869

 

1,132

 

(77)

 

5,924

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

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Table of Contents

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Six Months Ended June 30, 2023

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

15,541

$

141

$

$

15,682

Mortgage banking income, net

 

 

1,148

 

(284)

 

864

Other revenues

 

1,700

 

 

(86)

 

1,614

Total revenues

 

17,241

 

1,289

 

(370)

 

18,160

Expenses

 

  

 

  

 

  

 

  

Recovery of provision for credit losses

Interest expense

 

3,193

 

 

 

3,193

Salaries and benefits

 

5,436

 

1,427

 

 

6,863

Other expenses

 

4,529

 

567

 

(370)

 

4,726

Total operating expenses

 

13,158

 

1,994

 

(370)

 

14,782

Income (loss) before income taxes

4,083

(705)

3,378

Income tax expense (benefit)

747

(148)

599

Net income (loss)

$

3,336

$

(557)

$

$

2,779

Total assets

$

764,034

$

17,856

$

(27,235)

$

754,655

    

Commercial

    

Mortgage

    

    

Consolidated

Banking

Banking

Eliminations

Totals

Six Months Ended June 30, 2022

 

  

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

  

Interest income

$

12,878

$

121

$

$

12,999

Mortgage banking income, net

 

 

2,027

 

(58)

 

1,969

Other revenues

 

1,687

 

 

(89)

 

1,598

Total revenues

 

14,565

 

2,148

 

(147)

 

16,566

Expenses

 

  

 

  

 

  

 

  

Recovery of provision for loan losses

(400)

(400)

Interest expense

 

818

 

 

 

818

Salaries and benefits

 

5,253

 

1,694

 

 

6,947

Commissions

 

 

 

 

Other expenses

 

3,758

 

638

 

(147)

 

4,249

Total operating expenses

 

9,429

 

2,332

 

(147)

 

11,614

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

Capital expenditures

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Table of Contents

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 $2,773,000 and $2,892,000 as of June 30, 2023 and December 31, 2022, respectively (in thousands):

June 30,

December 31,

2023

    

2022

Net unrealized losses on securities

$

(10,417)

$

(10,862)

Net unrecognized losses on defined benefit plan

 

(14)

 

(19)

Total accumulated other comprehensive loss

$

(10,431)

$

(10,881)

Regulatory Matters

The Company meets the eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve System’s (“Federal Reserve”) Small Bank Holding Company Policy Statement (the “SBHC Policy Statement”).  Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules").  The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules.

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

The Basel III Capital Rules require banks to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).  The capital conservation buffer is designed to absorb losses during periods of economic stress.  Banking organizations with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of June 30, 2023, 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, 2023, the Bank exceeded the minimum ratios to be classified as well capitalized.

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The capital amounts and ratios at June 30, 2023 and December 31, 2022 for the Bank are presented in the table below (dollars in thousands):

Minimum Capital

 

Requirements

Actual

Including Conservation Buffer (1)

To be Well Capitalized

    

Amount

    

Ratio

Amount

    

Ratio

Amount

    

Ratio

June 30, 2023

 

  

 

  

 

  

 

  

 

  

 

  

Total capital (to risk- weighted assets) Village Bank

$

87,561

 

14.97

%  

$

61,436

 

10.50

%  

$

58,510

 

10.00

%

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

 

84,028

 

14.36

%  

 

49,734

 

8.50

%  

 

61,436

 

8.00

%

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

 

84,028

 

11.18

%  

 

30,053

 

4.00

%  

 

37,566

 

5.00

%

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

 

84,028

 

14.36

%  

 

40,957

 

7.00

%  

 

38,032

 

6.50

%

December 31, 2022

 

  

 

  

 

  

 

  

 

  

 

  

Total capital (to risk- weighted assets) Village Bank

$

84,982

 

14.81

%  

$

60,267

 

10.50

%  

$

57,398

 

10.00

%

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

 

81,612

 

14.22

%  

 

48,788

 

8.50

%  

 

45,918

 

8.00

%

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

 

81,612

 

10.95

%  

 

29,805

 

4.00

%  

 

37,256

 

5.00

%

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

 

81,612

 

14.22

%  

 

40,178

 

7.00

%  

 

37,308

 

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, 2023 and December 31, 2022, the Company had the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

    

June 30, 

    

December 31, 

2023

2022

Undisbursed credit lines

$

121,237

$

119,454

Commitments to extend or originate credit

 

11,206

 

9,899

Standby letters of credit

 

1,164

 

922

Total commitments to extend credit

$

133,607

$

130,275

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 $6.9 million as of June 30, 2023, of which $6.8 million is related to unpaid principal, and totaled $2.3 million as of December 31, 2022, of which $2.2 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

Interest Rate Lock Commitments and Forward Sales Commitments. The Company, through the Bank’s mortgage banking subsidiary, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments. Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment). The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation.  The Company determines the fair value of IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at June 30, 2023, and totaled $205,000, with a notional amount of $11.2 million and total positions of 40, and was reported in “Other Assets” at December 31, 2022, and totaled $142,000 with a notional amount of $9.9 million and total positions of 31. Changes in fair value are recorded as a component of mortgage banking income, net in the Consolidated Income Statement for the period ended June

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30, 2023 and 2022. The Company’s IRLCs are classified as Level 2. At June 30, 2023 and December 31, 2022, 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, 2023, and totaled $370,000 with a notional amount of $18.0 million and total positions of 62 and was reported in “Other Liabilities” at December 31, 2022, and totaled $207,000, with a notional amount of $12.1 million and total positions of 38.

Note 16 Recent Accounting Pronouncements

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

In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (‘LIBOR”) would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023.

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

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 does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

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

Caution about forward-looking statements

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

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

changes in assumptions underlying the establishment of allowances for credit losses, and other estimates;
the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;
the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged;
the effects of future economic, business and market conditions;
legislative and regulatory changes, including the Dodd-Frank Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;
our inability to maintain our regulatory capital position;
the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions despite security measures implemented by the Company;
changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions with which we do business;
risks inherent in making loans such as repayment risks and fluctuating collateral values;
changes in operations of the Village Bank Mortgage Corporation as a result of the activity in the residential real estate market;
exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;
governmental monetary and fiscal policies;
geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;
changes in accounting policies, rules and practices;
reliance on our management team, including our ability to attract and retain key personnel;
competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
demand, development and acceptance of new products and services;
problems with technology utilized by us;
the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events;
the impact of the COVID-19 pandemic, including the adverse impact on our business and operations and on our customers;
changing trends in customer profiles and behavior; and
other factors described from time to time in our reports filed with the SEC.

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

General

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

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

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at June 30, 2023 and December 31, 2022 and the results of operations for the Company for the three and six months ended June 30, 2023 and 2022. 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, 2023, the Company had net income of $1,239,000, or $0.83 per fully diluted share, compared to net income of $2,190,000, or $1.48 per fully diluted share, for the same period in 2022. For the six months ended June 30, 2023, the Company had net income of $2,779,000 or $1.87 per fully diluted share, compared to net income of $3,990,000 or $2.70 per fully diluted share, for the same period in 2022.

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

As of June 30, 2023, the Allowance for Credit Losses was $3.53 million and included an allowance for credit losses on loans of $3.26 million and a reserve for unfunded commitments of $277,000.

Net interest income

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders’ equity. Net interest spread is the difference between the

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average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets (“net interest margin” or “NIM”) is calculated by dividing tax equivalent net interest income by average interest-earning assets.

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

For the Three Months Ended June 30, 

 

    

2023

    

2022

    

Change

 

 

(dollars in thousands)

Average interest-earning assets

$

697,114

$

709,699

 

$

(12,585)

Interest income

$

8,099

$

6,731

 

$

1,368

Yield on interest-earning assets

 

4.66

%

 

3.80

%

0.86

%

Average interest-bearing liabilities

$

426,333

$

412,646

 

$

13,687

Interest expense

$

1,975

$

410

 

$

1,565

Cost of interest-bearing liabilities

 

1.86

%

 

0.40

%

1.46

%

Net interest income

$

6,124

$

6,321

 

$

(197)

Net interest margin

 

3.52

%

 

3.57

%

(0.05)

%

The following are variances of note for the three months ended June 30, 2023 compared to the three months ended June 30, 2022:

NIM compressed by 5 basis points to 3.52% for the three months ended June 30, 2023 compared to 3.57% for the three months ended June 30, 2022. The compression was driven by the following:
oThe yield on our earning assets increased by 86 basis points, 4.66% as of the three months ended June 30, 2023 compared to 3.80% as of the three months ended June 30, 2022. The increase in our yield on earning assets continues to be a result of improvement in our earning asset mix as well as the impact of the rise in interest rates during 2022 and 2023. We expect to see continued improvement in the yield on earning assets as a portion of our securities portfolio continues to mature over the next several quarters and those lower yielding assets will either be re-deployed in higher earning assets or used to paydown high cost borrowings.

oTotal U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) income recorded by the Commercial Banking Segment was $2,000 for the three months ended June 30, 2023 compared to $488,000 for the three months ended June 30, 2022.  

oThe cost of interest bearing liabilities increased by 146 basis points to 1.86% for the three months ended June 30, 2023 compared to 0.40% for the three months ended June 30, 2022. The increase in our cost of interest bearing liabilities continues to be driven by an increase in the rate paid on variable rate debt and market pressures on deposit rates. FHLB Advances increased by $45 million, from the three months ended June 30, 2022, with a weighted average cost of 4.73% during the three months ended June 30, 2023. The rate paid on money market deposit accounts increased 157 basis points to 1.79% for the three months ended June 30, 2023 compared to 0.22% for the three months ended June 30, 2022. While we expect there will be continued pressure on our funding base, we anticipate the velocity of those increases to be lower than experienced through the first half of 2023.

oWhile the rate paid on interest bearing liabilities increased by 146 basis points for the three months ended June 30, 2023, overall cost of funds increased by 93 basis points, 1.17% for the three months ended June 30, 2023 vs. 0.24% for the three months ended June 30, 2022. The lower increase in cost of funds was driven by our strong non-interest bearing deposits level, which remained near 40% of our deposit base.

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Table of Contents

For the Six Months Ended June 30, 

 

    

2023

    

2022

    

Change

 

 

(dollars in thousands)

Average interest-earning assets

$

689,068

$

708,569

 

$

(19,501)

Interest income

$

15,682

$

12,999

 

$

2,683

Yield on interest-earning assets

 

4.59

%

 

3.70

%

0.89

%

Average interest-bearing liabilities

$

416,218

$

410,326

 

$

5,892

Interest expense

$

3,193

$

818

 

$

2,375

Cost of interest-bearing liabilities

 

1.55

%

 

0.40

%

1.15

%

Net interest income

$

12,489

$

12,181

 

$

308

Net interest margin

 

3.66

%

 

3.47

%

0.19

%

The following are variances of note for the six months ended June 30, 2023 compared to the six months ended June 30, 2022:

NIM expanded by 19 basis points to 3.66% for the six months ended June 30, 2023 compared to 3.47% for the six months ended June 30, 2022. The expansion was driven by the following:

oThe yield on our earning assets increased by 89 basis points, 4.59% as of the six months ended June 30, 2023 compared to 3.70% as of the six months ended June 30, 2022. The increase in our yield on earning assets continues to be a result of improvement in our earning asset mix as well as the impact of the rise in interest rates during 2022 and 2023. We expect to see continued improvement in the yield on earning assets as a portion of our securities portfolio continues to mature over the next several quarters and those lower yielding assets will either be re-deployed in higher earning assets or used to paydown high cost borrowings.

oTotal PPP income recorded by the Commercial Banking Segment was $4,000 for the six months ended June 30, 2023 compared to $1,028,000 for the six months ended June 30, 2022.

oThe cost of interest bearing liabilities increased by 115 basis points to 1.55% for the six months ended June 30, 2023 compared to 0.40% for the six months ended June 30, 2022. The increase in our cost of funds was driven by an increase in the rate paid on variable rate debt and market pressures on deposit rates. FHLB Advances increased by $35 million, from the six months ended June 30, 2022, with a weighted average cost of 4.72% during the six months ended June 30, 2023. The rate paid on money market deposit accounts increased 120 basis points to 1.42% for the six months ended June 30, 2023 compared to 0.22% for the six months ended June 30, 2022. While we expect there will be continued pressure on our funding base, we anticipate the velocity of those increases to be lower than experienced through the first half of 2023.

oWhile the rate paid on interest bearing liabilities increased by 115 basis points for the six months ended June 30, 2023, overall cost of funds increased by 73 basis points, 0.97% for the six months ended June 30, 2023 vs. 0.24% for the six months ended June 30, 2022. The lower increase in cost of funds was driven by our strong non-interest bearing deposits level, which remained near 40% of our deposit base.

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Table of Contents

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

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

 

Interest

Interest

 

Average

Income/

Yield

Average

Income/

Yield

 

    

Balance

    

Expense

    

Rate

    

Balance

    

Expense

    

Rate

Loans

 

 

Commercial

$

91,462

$

1,369

6.00

%

$

78,502

$

1,468

7.50

%

Real estate - residential

101,222

1,448

5.74

%

93,132

770

3.32

%

Real estate - commercial

282,440

3,381

4.80

%

278,317

3,210

4.63

%

Real estate - construction

48,153

528

4.40

%

38,688

229

2.37

%

Student loans

20,149

360

7.17

%

24,332

240

3.96

%

Consumer

4,317

80

7.43

%

3,491

46

5.29

%

Loans net of deferred fees

547,743

7,166

5.25

%

516,462

5,963

4.63

%

Loans held for sale

 

7,072

 

100

 

5.67

%

 

7,315

 

79

 

4.33

%

Investment securities

 

134,770

 

719

 

2.14

%

 

136,226

 

583

 

1.72

%

Federal funds and other

 

7,529

 

114

 

6.07

%

 

49,696

 

106

 

0.86

%

Total interest earning assets

 

697,114

 

8,099

 

4.66

%

 

709,699

 

6,731

 

3.80

%

Allowance for loan losses

 

(3,276)

 

  

 

  

 

(3,407)

 

  

 

  

Cash and due from banks

 

11,908

 

  

 

  

 

14,865

 

  

 

  

Premises and equipment, net

 

11,851

 

  

 

  

 

11,682

 

  

 

  

Other assets

 

23,410

 

  

 

  

 

21,681

 

  

 

  

Total assets

$

741,007

 

  

 

  

$

754,520

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest bearing deposits

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

$

79,881

$

102

 

0.51

%

$

89,989

$

28

 

0.12

%

Money market

 

192,170

 

860

 

1.79

%

 

195,941

 

107

 

0.22

%

Savings

 

43,675

 

17

 

0.16

%

 

50,402

 

19

 

0.15

%

Certificates

 

53,075

 

207

 

1.56

%

 

61,887

 

98

 

0.64

%

Total deposits

 

368,801

 

1,186

 

1.29

%

 

398,219

 

252

 

0.25

%

Borrowings

 

 

 

 

 

 

Long-term debt - trust

preferred securities

8,764

146

6.68

%

8,764

57

2.61

%

FHLB advances

42,802

512

4.73

%

Subordinated debt, net

5,700

128

9.01

%

5,663

101

7.15

%

Other borrowings

266

3

4.52

%

%

Total interest bearing liabilities

 

426,333

 

1,975

 

1.86

%

 

412,646

 

410

 

0.40

%

Noninterest bearing deposits

 

246,741

 

  

 

 

277,395

 

  

 

Other liabilities

 

3,415

 

  

 

 

3,480

 

  

 

  

Total liabilities

 

676,489

 

  

 

  

 

693,521

 

  

 

  

Equity capital

 

64,518

 

  

 

  

 

60,999

 

  

 

  

Total liabilities and capital

$

741,007

 

  

 

  

$

754,520

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net interest income before provision for loan losses

 

$

6,124

 

  

 

  

$

6,321

 

  

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

 

  

 

  

 

2.80

%

 

  

 

  

 

3.40

%

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

 

  

 

  

 

3.52

%

 

 

  

 

3.57

%

44

Table of Contents

Six Months Ended June 30, 2023

Six Months Ended June 30, 2022

Interest

Interest

Average

Income/

Yield

Average

Income/

Yield

    

Balance

    

Expense

    

Rate

    

Balance

    

Expense

    

Rate

Loans

 

 

Commercial

$

89,419

$

2,588

5.84

%

$

85,965

$

2,627

6.16

%

Real estate - residential

97,892

2,744

5.65

%

92,205

1,841

4.03

%

Real estate - commercial

282,439

6,561

4.68

%

270,309

6,097

4.55

%

Real estate - construction

48,109

1,151

4.82

%

42,020

636

3.05

%

Student loans

20,315

699

6.94

%

24,918

477

3.86

%

Consumer

4,150

146

7.09

%

3,391

91

5.41

%

Loans net of deferred fees

542,324

13,889

5.16

%

518,808

11,769

4.57

%

Loans held for sale

 

4,517

 

140

 

6.25

%

 

6,167

 

122

 

3.99

%

Investment securities

 

134,890

 

1,446

 

2.16

%

 

122,987

 

977

 

1.60

%

Federal funds and other

 

7,337

 

207

 

5.69

%

 

60,607

 

131

 

0.44

%

Total interest earning assets

 

689,068

 

15,682

 

4.59

%

 

708,569

 

12,999

 

3.70

%

Allowance for loan losses

 

(3,264)

 

 

  

 

(3,571)

 

  

 

  

Cash and due from banks

 

11,588

 

  

 

  

 

12,117

 

  

 

  

Premises and equipment, net

 

11,815

 

  

 

  

 

11,735

 

  

 

  

Other assets

 

23,578

 

  

 

  

 

24,543

 

  

 

  

Total assets

$

732,785

 

  

 

  

$

753,393

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest bearing deposits

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

$

82,059

$

164

 

0.40

%

$

87,835

$

54

 

0.12

%

Money market

 

186,129

 

1,307

 

1.42

%

 

193,704

 

211

 

0.22

%

Savings

 

46,558

 

36

 

0.16

%

 

50,350

 

39

 

0.16

%

Certificates

 

50,544

 

303

 

1.21

%

 

64,006

 

211

 

0.66

%

Total deposits

 

365,290

 

1,810

 

1.00

%

 

395,895

 

515

 

0.26

%

Borrowings

 

 

 

 

 

 

Long-term debt - trust

preferred securities

8,764

286

6.58

%

8,764

101

2.32

%

FHLB advances

36,188

859

4.72

%

Subordinated debt, net

5,697

232

8.21

%

5,667

202

7.19

%

Other borrowings

279

6

4.34

%

%

Total interest bearing liabilities

 

416,218

 

3,193

 

1.55

%

 

410,326

 

818

 

0.40

%

Noninterest bearing deposits

 

249,677

 

  

 

0.59%

 

276,121

 

  

 

  

Other liabilities

 

3,289

 

  

 

  

 

4,666

 

  

 

  

Total liabilities

 

669,184

 

  

 

  

 

691,113

 

  

 

  

Equity capital

 

63,601

 

  

 

  

 

62,280

 

  

 

  

Total liabilities and capital

$

732,785

 

  

 

  

$

753,393

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net interest income before provision for loan losses

 

  

$

12,489

 

  

 

  

$

12,181

 

  

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

 

  

 

  

 

3.04

%

 

  

 

  

 

3.30

%

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

 

  

 

  

 

3.66

%

 

  

 

  

 

3.47

%

45

Table of Contents

Provision for (recovery of) Credit losses

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

As of June 30, 2023, the Allowance for Credit Losses was $3.53 million and included an allowance for credit losses on loans of $3.26 million and a reserve for unfunded commitments of $277,000.

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

The Company recorded a recovery of credit losses for loans of $22,000 for the three months ended June 30, 2023, which was due to improved credit metrics as non-performing loans as a percentage of loans decreased from 0.12% at March 31, 2023 to 0.06% at June 30, 2023. The Company recorded a provision for credit losses for unfunded commitments of $22,000 for the three months ended June 30, 2023, which was driven by an increase in the total balance outstanding at June 30, 2023.

The Company recorded a provision for credit losses for loans of $1,000 for the six months ended June 30, 2023, which was the result of loan growth being offset by improved credit metrics as non-performing loans as a percentage of loans decreased from 0.13% at December 31, 2022 to 0.06% at June 30, 2023. The Company recorded a recovery for credit losses for unfunded commitments of $1,000 for the six months ended June 30, 2023, which was driven by a slight decrease in the total balance outstanding at June 30, 2023.

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

The following information is presented prior to the adoption of ASC 326.

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

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

The Company recorded a recovery of provision for loan losses expense of $400,000 for the six month period ended June 30, 2022.  The recovery of provision for the six month period ended June 30, 2022 was driven by improving macroeconomic conditions and credit quality remaining strong.

46

Table of Contents

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

Noninterest income

Noninterest income includes service charges and fees on deposit accounts, fee income related to loan origination, mortgage banking income, net, and gains and losses on securities available for sale. The most significant noninterest income item has historically been mortgage banking income, net, representing 31% and 35% for the three month periods ended June 30, 2023 and 2022, respectively.  Service charges and fees represent 58% and 35% of net interest income for the three month periods ended June 30, 2023 and 2022, respectively.

For the Three Months Ended

 

June 30, 

Change

 

    

2023

    

2022

    

$

    

%

 

 

(dollars in thousands)

Service charges and fees

$

711

$

671

$

40

6.0

%

Mortgage banking income, net

 

386

 

1,090

 

(704)

(64.6)

%

Gain on sale of SBA loans

79

(79)

100.0

%

Other

 

124

 

98

 

26

26.5

%

Total noninterest income

$

1,221

$

1,938

$

(717)

(37.0)

%

The decrease in noninterest income of $717,000 for the three months ended June 30, 2023, was the result of the following:

The $40,000 increase in service charges and fees was driven by strong consumer and business spending during the three months ended June 30, 2023.
The $704,000 decrease in mortgage banking income, net was the result of lower mortgage originations of $39,736,000 for the three months ended June 30, 2023, down 22.66% from $51,378,000 for the three months ended June 30, 2022. The drop in mortgage originations during the three months ended June 30, 2023 continues to be the result of the sharp rise in mortgage rates during 2022, continued rise in 2023 and the historically low inventory of homes for sale. As a result of the sharp drop in origination volume, the Mortgage Banking Segment took steps in 2022 and 2023 to right size its expense structure to minimize the impact to earnings going forward.
The gain on sale of SBA loans decreased as a result of the Company making the strategic decision to hold on to new SBA production for the three months ended June 30, 2023 as the premiums associated with the sale of the guaranteed strips did not warrant selling the guaranteed strips.  

For the Six Months Ended

 

June 30, 

Change

 

    

2023

    

2022

    

$

    

%

 

 

(dollars in thousands)

Service charges and fees

$

1,380

$

1,290

$

90

7.0

%

Mortgage banking income, net

 

864

 

1,969

 

(1,105)

(56.1)

%

Gain on sale of SBA loans

 

 

79

 

(79)

100.0

%

Other

 

234

 

229

 

5

2.2

%

Total noninterest income

$

2,478

$

3,567

$

(1,089)

(30.5)

%

The decrease in noninterest income of $1,089,000 for the six months ended June 30, 2023, was the result of the following:

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Table of Contents

The $90,000 increase in service charges and fees was driven by strong consumer and business spending during the six months ended June 30, 2023.
The $1,105,000 decrease in mortgage banking income, net was the result of lower mortgage originations $63,793,000 for the six months ended June 30, 2023, down 38.27% from $96,267,000 for the six months ended June 30, 2022. The drop in mortgage originations during the six months ended June 30, 2023 continues to be the result of the sharp rise in mortgage rates during 2022, continued rise in 2023 and the historically low inventory of homes for sale. As a result of the sharp drop in origination volume, the Mortgage Banking Segment took steps in 2022 and 2023 to right size its expense structure to minimize the impact to earnings going forward.
The gain on sale of SBA loans decreased as a result of the Company making the strategic decision to hold on to new SBA production for the three months ended June 30, 2023 as the premiums associated with the sale of the guaranteed strips did not warrant selling the guaranteed strips.

Noninterest expense

For the Three Months Ended

 

June 30, 

Change

 

    

2023

    

2022

    

$

    

%

 

 

(dollars in thousands)

Salaries and benefits

$

3,415

$

3,423

$

(8)

(0.2)

%

Occupancy

 

307

 

284

 

23

8.1

%

Equipment

 

280

 

270

 

10

3.7

%

Supplies

 

35

 

36

 

(1)

(2.8)

%

Professional and outside services

 

838

 

738

 

100

13.6

%

Advertising and marketing

 

140

 

92

 

48

52.2

%

FDIC insurance premium

 

84

 

64

 

20

31.3

%

Other operating expense

 

733

 

607

 

126

20.8

%

Total noninterest expense

$

5,832

$

5,514

$

318

5.8

%

The increase in noninterest expense of $318,000 for the three months ended June 30, 2023, was the result of the following:

Professional and outside expense increased by $100,000 as a result of increased costs associated data processing and the rollout of our updated online and mobile banking platform during the latter half of 2022.
Other operating expense increased $126,000 primarily as a result of an increase in check and card fraud during the three months ended June 30, 2023.

For the Six Months Ended

 

June 30, 

Change

 

    

2023

    

2022

    

$

    

%

 

 

(dollars in thousands)

Salaries and benefits

$

6,863

$

6,947

$

(84)

(1.2)

%

Occupancy

 

618

 

614

 

4

0.7

%

Equipment

 

565

 

558

 

7

1.3

%

Supplies

 

84

 

74

 

10

13.5

%

Professional and outside services

 

1,651

 

1,463

 

188

12.9

%

Advertising and marketing

 

251

 

204

 

47

23.0

%

FDIC insurance premium

 

134

 

123

 

11

8.9

%

Other operating expense

 

1,423

 

1,213

 

210

17.3

%

Total noninterest expense

$

11,589

$

11,196

$

393

3.5

%

48

Table of Contents

The increase in noninterest expense of $393,000 for the six months ended June 30, 2023, was the result of the following:

The $84,000 decrease in salaries and benefits expense was driven primarily by lower expenses related to the decreased mortgage production for the six months ended June 30, 2023.
Professional and outside expense increased by $188,000 as a result of increased costs associated data processing and the rollout of our updated online and mobile banking platform during the latter half of 2022.
Other operating expense increased $210,000 primarily as a result of an increase in check and card fraud during the six months ended June 30, 2023.

Income taxes

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Income tax expense for the three and six months ended June 30, 2023 was $274,000 and $599,000, respectively, resulting in an effective tax rate of 18.1% and 17.7%, respectively compared to $555,000 and $962,000, or 20.2% and 19.4%, respectively, for the same period in 2022. 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, 2023 and December 31, 2022, 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 79.2% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 3.6% 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 16.4% 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.

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Loans classified by type as of June 30, 2023 and December 31, 2022 are as follows (dollars in thousands):

June 30, 2023

December 31, 2022

 

    

Amount

    

%

    

Amount

    

%

 

Construction and land development

  

  

  

  

 

Residential

$

7,527

 

1.35

%  

$

9,727

 

1.81

%

Commercial

 

43,411

 

7.81

%  

 

35,400

 

6.57

%

 

50,938

 

9.16

%  

 

45,127

 

8.38

%

Commercial real estate

 

  

 

  

 

  

 

  

Owner occupied

 

114,964

 

20.67

%  

 

119,643

 

22.22

%

Non-owner occupied

 

155,139

 

27.89

%  

 

153,610

 

28.53

%

Multifamily

 

12,755

 

2.29

%  

 

11,291

 

2.10

%

Farmland

 

63

 

0.01

%  

 

73

 

0.01

%

 

282,921

 

50.86

%  

 

284,617

 

52.86

%

Consumer real estate

 

  

 

  

 

  

 

  

Home equity lines

 

17,335

 

3.12

%  

 

18,421

 

3.42

%

Secured by 1-4 family residential,

 

  

 

  

 

  

 

  

First deed of trust

 

79,762

 

14.34

%  

 

67,495

 

12.54

%

Second deed of trust

 

9,435

 

1.70

%  

 

7,764

 

1.44

%

 

106,532

 

19.16

%  

 

93,680

 

17.40

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

91,394

 

16.43

%  

 

90,348

 

16.78

%

Guaranteed student loans

 

20,002

 

3.60

%  

 

20,617

 

3.83

%

Consumer and other

 

4,383

 

0.79

%  

 

4,038

 

0.73

%

 

 

 

 

Total loans

 

556,170

 

100.00

%  

 

538,427

 

100.00

%

Deferred fees and costs, net

 

746

 

 

588

 

Less: allowance for loan losses

 

(3,256)

 

 

(3,370)

 

$

553,660

 

  

$

535,645

 

  

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

Allowance for Credit losses

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

As of June 30, 2023, the Allowance for Credit Losses was $3.53 million and included an allowance for credit losses on loans of $3.26 million and a reserve for unfunded commitments of $277,000.

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Table of Contents

We monitor and maintain an allowance for credit losses to absorb current expected loss in the loan portfolio. The following table presents the loan loss experience for the period indicated (dollars in thousands).

    

    

Provision for

    

    

    

 

Impact of

(Recovery of)

Ratio of Net

Beginning

adopting

Credit Losses

Ending

Average

Charge-offs to

Balance

ASC 326

on Loans

Charge-offs

Recoveries

Balance

Loans

Average Loans

Six Months Ended June 30, 2023

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

79

$

3

$

(21)

$

$

$

61

$

7,412

%

Commercial

 

192

34

 

41

 

 

 

267

40,697

%

 

271

37

 

20

 

 

 

328

48,109

%

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

867

(475)

 

(13)

 

 

 

379

117,558

%

Non-owner occupied

 

1,289

192

 

(105)

 

 

 

1,376

152,879

%

Multifamily

 

33

7

 

 

 

 

40

11,920

%

Farmland

 

 

 

 

 

82

%

 

2,189

(276)

 

(118)

 

 

 

1,795

282,439

(0.04)

%

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

11

24

 

28

 

 

 

63

17,985

%

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

131

76

 

11

 

 

1

 

219

71,410

0.00

%

Second deed of trust

 

43

25

 

9

 

 

6

 

83

8,497

0.07

%

 

185

125

 

48

 

 

7

 

365

97,892

0.05

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

576

1

 

84

 

 

12

 

673

89,419

0.01

%

Student loans

 

52

 

(32)

 

(7)

 

 

13

20,315

(0.03)

%

Consumer and other

 

37

(5)

 

3

 

 

 

35

4,150

%

Unallocated

 

60

(9)

 

(4)

 

 

 

47

%

$

3,370

$

(127)

$

1

$

(7)

$

19

$

3,256

$

542,324

0.00

%

The following table summarizes the activity in the Allowance for Loan and Lease Losses prior to the adoption of ASC 326 (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

Year Ended December 31, 2022

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

  

 

  

 

  

 

  

 

  

Residential

$

57

$

22

$

$

$

79

$

7,269

%

Commercial

 

229

 

(37)

 

 

 

192

33,767

%

 

286

 

(15)

 

 

 

271

41,036

%

Commercial real estate

 

  

 

  

 

  

 

  

 

  

Owner occupied

 

833

 

34

 

 

 

867

121,507

%

Non-owner occupied

 

1,083

 

206

 

 

 

1,289

143,941

%

Multifamily

 

35

 

(2)

 

 

 

33

13,409

%

Farmland

 

2

 

(2)

 

 

 

656

%

 

1,953

 

236

 

 

 

2,189

279,513

%

Consumer real estate

 

  

 

  

 

  

 

  

 

  

Home equity lines

 

12

 

(59)

 

 

58

 

11

19,371

0.30

%

Secured by 1-4 family residential

 

  

 

  

 

  

 

  

 

  

First deed of trust

 

123

 

3

 

 

5

 

131

62,214

0.01

%

Second deed of trust

 

47

 

(311)

 

(27)

 

334

 

43

10,044

3.06

%

 

182

 

(367)

 

(27)

 

397

 

185

91,629

0.40

%

Commercial and industrial loans

 

  

 

  

 

  

 

  

 

  

(except those secured by real estate)

 

486

 

180

 

(157)

 

67

 

576

87,882

(0.10)

%

Student loans

 

65

 

18

 

(31)

 

 

52

23,601

(0.13)

%

Consumer and other

 

29

 

10

 

(2)

 

 

37

3,709

(0.05)

%

Unallocated

 

422

 

(362)

 

 

 

60

%

$

3,423

$

(300)

$

(217)

$

464

$

3,370

$

527,370

0.05

%

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Table of Contents

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

Asset quality

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

June 30, 

December 31, 

 

    

2023

    

2022

 

Nonaccrual loans

$

286

$

654

Foreclosed properties

 

 

Total nonperforming assets

$

286

$

654

 

  

 

  

Restructured loans (not included in nonaccrual loans above)

$

$

5,088

 

  

 

  

Loans past due 90 days and still accruing (1)

$

1,978

$

1,725

 

  

 

  

Nonaccrual loans to total loans (2)

0.05

%

0.12

%

Nonperforming assets to loans (2)

 

0.05

%  

 

0.12

%

 

  

 

  

Nonperforming assets to total assets

 

0.04

%  

 

0.09

%

 

  

 

  

Allowance for credit losses on loans to

 

 

Loans, net of deferred fees and costs

0.58

%  

0.63

%  

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

0.61

%  

0.65

%  

Nonaccrual loans

1,138.46

%  

515.29

%  

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

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

Nonperforming assets totaled $286,000 at June 30, 2023 compared to $654,000 at December 31, 2022.  Nonperforming assets, consisting solely of nonaccrual loans, totaled $286,000 at June 30, 2023, compared to $654,000 at December 31, 2022.

The following table presents an analysis of the changes in nonperforming assets for the six months ended June 30, 2023 (in thousands):

    

Nonaccrual

    

    

Loans

OREO

Total

Balance December 31, 2022

$

654

$

$

654

Additions

 

 

 

Loans placed back on accrual

 

(300)

 

 

(300)

Repayments

 

(68)

 

 

(68)

Charge-offs

 

 

 

Balance June 30, 2023

$

286

$

$

286

Nonperforming restructured loans are included in nonaccrual loans. Until a nonperforming restructured loan has performed in accordance with its restructured terms for a minimum of nine months, it will remain on nonaccrual status.

Interest is accrued on outstanding loan principal balances, unless the Company considers collection to be doubtful. Commercial and unsecured consumer loans are designated as non-accrual when the Company considers collection of expected principal and interest

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Table of Contents

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

There were no individual allowances associated with the total nonaccrual loans of $286,000 and $654,000 at June 30, 2023 and December 31, 2022, respectively, that were considered individually evaluated.

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $79,000 and $93,000 for the six months ended June 30, 2023 and 2022, respectively. Student loans totaling $1,978,000 and $1,725,000 at June 30, 2023 and December 31, 2022, respectively, were past due 90 days or more and interest was still being accrued as principal and interest on such loans have a 98% guarantee by the DOE.  The 2% not covered by the DOE guarantee is provided for in the allowance for credit losses.

Deposits

Deposits as of June 30, 2023 and December 31, 2022 were as follows (dollars in thousands):

June 30, 2023

December 31, 2022

 

    

Amount

    

%

    

Amount

    

%

 

Demand accounts

$

249,059

39.6

%  

$

255,236

40.9

%

Interest checking accounts

 

88,330

 

14.0

%

90,252

 

14.4

%

Money market accounts

 

196,603

 

31.3

%

179,036

 

28.7

%

Savings accounts

 

44,378

 

7.1

%

55,695

 

8.9

%

Time deposits of $250,000 and over

 

11,080

 

1.8

%

4,740

 

0.8

%

Other time deposits

 

38,932

 

6.2

%

39,784

 

6.3

%

Total

$

628,382

 

100.0

%

$

624,743

 

100.0

%

Total deposits increased by $3,639,000, or 0.58%, from December 31, 2022. Variances of note are as follows:

Noninterest bearing demand account balances decreased $6,177,000, or 2.42%, from December 31, 2022 and represented 39.6% of total deposits compared to 40.9% as of December 31, 2022. The decrease in noninterest bearing demand accounts was driven by a combination of consumers and businesses drawing down balances due to increased pressure from high inflation as well as investing in higher yielding products.
Low cost relationship deposits (i.e. interest checking, money market, and savings) balances increased $4,328,000, or 1.33%, from December 31, 2022. The growth in low cost relationship deposits from December 31, 2022 was a result of core relationship growth as well as seasonal growth in customer accounts.
Time deposits increased by $5,488,000 or 12.33%, from December 31, 2022. The increase in time deposits the period was driven by an effort to lock in accounts at lower rates to offset the impact of rising interest expense on the money market demand accounts.

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Table of Contents

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

    

Average Balance

    

Average Cost Rate

    

June 30,

December 31,

June 30,

December 31,

2023

2022

 

2023

2022

Noninterest bearing deposits

$

246,741

$

276,742

Interest checking

79,881

87,423

 

0.40

%

 

0.12

%

Money market

 

192,170

 

192,626

 

1.42

%

 

0.27

%

Savings

 

43,675

 

51,077

 

0.16

%

 

0.15

%

Certificates

 

 

 

Less than $250,000

45,003

53,488

1.88

%

0.61

%

$250,000 or more

8,072

5,964

4.57

%

0.69

%

Total interest bearing deposits

368,801

390,578

1.00

%

0.28

%

Total deposits

$

615,542

$

667,320

 

0.59

%

 

0.16

%

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

    

    

June 30,

December 31,

2023

2022

 

Months to maturity:

Three or less

$

2,084

$

480

 

Over three through six

 

3,794

 

1,093

 

Over six through twelve

 

2,644

 

2,630

 

Over twelve

 

2,558

 

537

 

Total

$

11,080

$

4,740

 

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, 2023 was $64,014,000 compared to $61,111,000 at December 31, 2022. The $2,903,000 increase in shareholders’ equity during the six months ended June 30, 2023 was due primarily to net income of $2,779,000.

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Table of Contents

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

June 30, 

December 31, 

 

    

2023

    

2022

 

Tier 1 capital

 

  

 

  

Total bank equity capital

$

73,597

$

70,731

Net unrealized loss on available-for-sale securities

 

10,417

10,862

Defined benefit postretirement plan

 

14

19

Total Tier 1 capital

 

84,028

81,612

 

  

  

Tier 2 capital

 

  

  

Allowance for credit losses

 

3,533

3,370

Tier 2 capital deduction

 

Total Tier 2 capital

 

3,533

3,370

 

  

  

Total risk-based capital

 

87,561

84,982

 

  

  

Risk-weighted assets

$

585,100

$

573,976

 

  

 

  

Average assets

$

751,319

$

745,120

 

  

 

  

Capital ratios

 

  

 

  

Leverage ratio (Tier 1 capital to average assets)

 

11.18

%  

 

10.95

%

Common equity tier 1 capital ratio (CET 1)

 

14.36

%  

 

14.22

%

Tier 1 capital to risk-weighted assets

 

14.36

%  

 

14.22

%

Total capital to risk-weighted assets

 

14.97

%  

 

14.81

%

Equity to total assets

 

9.76

%  

 

9.78

%

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, 2023, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $158,217,000, or 20.97% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

At June 30, 2023, the Company had approximately $198.0 million in uninsured deposits, which represents 31.53% of total deposits. Total liquidity sources at June 30, 2023 total $179.5 million, or 90.66% of uninsured deposits.

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 three federal funds lines of credit with correspondent banks totaling $17.8 million for which there were no borrowings against the lines at June 30, 2023 and December 31, 2022.

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Table of Contents

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, 2023 was $3.5 million, based on the Bank's qualifying collateral available to secure any future borrowings. However, we are able to pledge additional collateral to the FHLB in order to increase our available borrowing capacity up to 25% of assets, or which would result in a total remaining credit availability of $138.5 million as of June 30, 2023.

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, 2023, we had commitments to originate $133,607,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at June 30, 2023. Certificates of deposit scheduled to mature in the 12-month period ending June 30, 2024 totaled $35,825,000. 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

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

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

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4 – CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2023. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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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, 2022 filed with the SEC on March 20, 2023.

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

3.2

Amended and Restated Bylaws of Village Bank and Trust Financial Corp. (incorporated herein by reference to Exhibit 3.2 of the Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 23, 2023).

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, 2023 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, 2023, 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, 2023

By:

/s/ James E. Hendricks, Jr.

James E. Hendricks, Jr.

President and Chief Executive Officer

Date:

August 11, 2023

By:

/s/ Donald M. Kaloski, Jr.

Donald M. Kaloski, Jr.

Executive Vice President and Chief Financial Officer

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