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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 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 April 30, 2023

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Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS


Part I – Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets March 31, 2023 (unaudited) and December 31, 2022	3

Consolidated Statements of Income For the Three Months Ended March 31, 2023 and 2022 (unaudited)	4

Consolidated Statements of Comprehensive Income (Loss) For the Three Months Ended March 31, 2023 and 2022 (unaudited)	5

Consolidated Statements of Shareholders’ Equity For the Three Months and Ended March 31, 2023 and 2022 (unaudited)	6

Consolidated Statements of Cash Flows For Three Months Ended March 31, 2023 and 2022 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk	51

Item 4. Controls and Procedures	51

Part II – Other Information

Item 1. Legal Proceedings	52

Item 1A. Risk Factors	52

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3. Defaults Upon Senior Securities	52

Item 4. Mine Safety Disclosures	52

Item 5. Other Information	52

Item 6. Exhibits	52

Signatures	53

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

March 31, 2023 (Unaudited) and December 31, 2022*

(in thousands, except share and per share data)


	March 31,		December 31,
	2023		2022
Assets
Cash and due from banks	$	8,087	$	12,062
Federal funds sold		16,047		4,616
Total cash and cash equivalents		24,134		16,678
Investment securities available for sale, at fair value		135,953		133,853
Restricted stock, at cost		2,190		1,564
Loans held for sale		1,852		2,268
Loans
Outstandings		539,818		538,427
Allowance for credit losses		(3,272)		(3,370)
Deferred costs, net		647		588
Total loans, net		537,193		535,645
Premises and equipment, net		11,806		11,748
Bank owned life insurance		12,866		12,798
Accrued interest receivable		3,574		3,651
Other assets		5,229		5,065
Total Assets	$	734,797	$	723,270

Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing demand	$	254,039	$	255,236
Interest bearing		363,977		369,507
Total deposits		618,016		624,743
Long-term debt - trust preferred securities		8,764		8,764
Subordinated debt, net		5,700		5,692
Federal Home Loan Bank advances		35,000		20,000
Accrued interest payable		212		70
Other liabilities		3,224		2,890
Total liabilities		670,916		662,159

Shareholders’ equity
Common stock, $4 par value, 10,000,000 shares authorized; 1,485,813 shares issued and outstanding at March 31, 2023 and 1,482,790 shares issued and outstanding at December 31, 2022		5,881		5,868
Additional paid-in capital		55,256		55,167
Retained earnings		12,141		10,957
Stock in directors rabbi trust		(595)		(689)
Directors deferred fees obligation		595		689
Accumulated other comprehensive loss		(9,397)		(10,881)
Total shareholders’ equity		63,881		61,111

Total liabilities and shareholders' equity	$	734,797	$	723,270

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three Months Ended March 31, 2023 and 2022

(Unaudited)

(in thousands, except per share data)


	Three Months Ended
	March 31,
	2023		2022
Interest income
Loans	$	6,762	$	5,848
Investment securities		727		394
Federal funds sold		94		26
Total interest income		7,583		6,268

Interest expense
Deposits		624		263
Borrowed funds		594		144
Total interest expense		1,218		407

Net interest income		6,365		5,861
Provision for (recovery of) credit losses		—		(400)
Net interest income after provision for (recovery of) credit losses		6,365		6,261

Noninterest income
Service charges and fees		669		619
Mortgage banking income, net		478		878
Other		109		131
Total noninterest income		1,256		1,628

Noninterest expense
Salaries and benefits		3,448		3,524
Occupancy		311		331
Equipment		285		288
Supplies		49		38
Professional and outside services		812		725
Advertising and marketing		111		112
FDIC insurance premium		50		58
Other operating expense		690		606
Total noninterest expense		5,756		5,682

Income before income tax expense		1,865		2,207
Income tax expense		325		407

Net income	$	1,540	$	1,800

Earnings per share, basic	$	1.04	$	1.24
Earnings per share, diluted	$	1.04	$	1.24

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

Three Months ended March 31, 2023 and 2022

(Unaudited)

(in thousands)


	Three Months Ended
	March 31,
	2023		2022
Net income	$	1,540	$	1,800
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period		1,876		(4,566)
Tax effect		(394)		959
Net change in unrealized holding gains (losses) on securities available for sale, net of tax		1,482		(3,607)

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

Total other comprehensive income (loss)		1,484		(3,605)

Total comprehensive income (loss)	$	3,024	$	(1,805)

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three Months Ended March 31, 2023 and 2022

(Unaudited)

(In thousands)


	Three Months Ended March 31, 2023

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

Balance, December 31, 2022	$	5,868		55,167	$	10,957	$	(689)	$	689	$	(10,881)	$	61,111
Restricted stock redemption		—		—		—		94		(94)		—		—
Vesting of restricted stock		13		(13)		—		—		—		—		—
Stock based compensation		—		102		—		—		—		—		102
Cash dividend declared ($0.16 per share)		—		—		(237)		—		—		—		(237)
Impact of adoption of ASC 326		—		—		(119)		—		—		—		(119)
Net income		—		—		1,540		—		—		—		1,540
Other comprehensive income		—		—		—		—		—		1,484		1,484
Balance, March 31, 2023	$	5,881	$	55,256	$	12,141	$	(595)	$	595	$	(9,397)	$	63,881


	Three Months Ended March 31, 2022

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

Balance, December 31, 2021	$	5,822	$	54,814	$	3,509	$	(730)	$	730	$	(744)	$	63,401
Restricted stock redemption		—		—		—		41		(41)		—		—
Vesting of restricted stock		12		(12)		—		—		—		—		—
Exercise of stock options		1		(1)		—		—		—		—		—
Stock based compensation		—		90		—		—		—		—		90
Cash dividend declared ($0.14 per share)		—		—		(206)		—		—		—		(206)
Net income		—		—		1,800		—		—		—		1,800
Other comprehensive loss		—		—		—		—		—		(3,605)		(3,605)
Balance, March 31, 2022	$	5,835	$	54,891	$	5,103	$	(689)	$	689	$	(4,349)	$	61,480

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2023 and 2022

(Unaudited)

(in thousands)


	Three Months Ended
	March 31,
	2023		2022

Cash Flows from Operating Activities
Net income	$	1,540	$	1,800
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		140		133
Amortization of debt issuance costs		8		8
Deferred income taxes		59		85
Recovery of credit losses		—		(400)
Gain on sales of loans held for sale		(611)		(1,211)
Stock compensation expense		102		90
Proceeds from sale of mortgage loans		25,187		43,859
Origination of mortgage loans held for sale		(24,160)		(45,014)
Amortization of premiums and accretion of discounts on securities, net		(39)		66
Increase in bank owned life insurance		(68)		(66)
Net change in:
Interest receivable		77		65
Other assets		(615)		942
Interest payable		142		(4)
Other liabilities		334		(1,692)
Net cash provided by (used in) operating activities		2,096		(1,339)

Cash Flows from Investing Activities
Purchases of available for sale securities		(2,652)		(52,363)
Proceeds from the sale of available for sale securities		—		2,564
Proceeds from maturities, calls and paydowns of available for sale securities		2,467		—
Net (increase) decrease in loans		(1,667)		7,640
Purchases of premises and equipment, net		(198)		(33)
Purchase of restricted stock, net		(626)		(20)
Net cash used in investing activities		(2,676)		(42,212)

Cash Flows from Financing Activities
Cash dividends paid		(237)		(206)
Net (decrease) increase in deposits		(6,727)		19,625
Net increase in other borrowings		15,000		—
Net cash provided by financing activities		8,036		19,419

Net increase (decrease) in cash and cash equivalents		7,456		(24,132)
Cash and cash equivalents, beginning of period		16,678		92,616

Cash and cash equivalents, end of period	$	24,134	$	68,484

Supplemental Disclosure of Cash Flow Information
Cash payments for interest	$	1,076	$	411
Cash payments for taxes	$	168	$	161
Supplemental Schedule of Non-Cash Activities
Unrealized gains (losses) on securities available for sale	$	1,876	$	(4,566)
Right of use assets obtained in exchange for new operating lease liabilities	$	—	$	263
Minimum pension adjustment	$	3	$	3

See accompanying notes to consolidated financial statements.

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Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three Months Ended March 31, 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 month period ended March 31, 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

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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 Topic 326.

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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 (in thousands, except per share data):


	Three Months Ended March 31,
	2023		2022
Numerator
Net income - basic and diluted	$	1,540	$	1,800

Denominator
Weighted average shares outstanding - basic		1,484		1,457
Dilutive effect of common stock options		—		—

Weighted average shares outstanding - diluted		1,484		1,457

Earnings per share - basic	$	1.04	$	1.24
Earnings per share - diluted	$	1.04	$	1.24

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 March 31, 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 March 31, 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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Note 4 – Investment securities available for sale

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

March 31, 2023
U.S. Government agency obligations	$	64,668	$	28	$	(2,995)	$	61,701
Mortgage-backed securities		68,452		38		(7,400)		61,090
Municipals		2,267		—		(613)		1,654
Subordinated debt		12,440		46		(978)		11,508

	$	147,827	$	112	$	(11,986)	$	135,953

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 March 31, 2023 and December 31, 2022, the Company had investment securities with a fair value of $16,498,000 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 months ended March 31, 2023 and 2022.

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Investment securities available for sale that have an unrealized loss position at March 31, 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
March 31, 2023
U.S. Government agency obligations	$	1,931	$	(1)	$	57,514	$	(2,994)	$	59,445	$	(2,995)
Mortgage-backed securities		3,267		(36)		52,223		(7,364)		55,490		(7,400)
Municipals		—		—		1,654		(613)		1,654		(613)
Subordinated debt		2,846		(203)		5,228		(775)		8,074		(978)

	$	8,044	$	(240)	$	116,619	$	(11,746)	$	124,663	$	(11,986)

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 March 31, 2023, there were 68 investments available for sale totaling $124,663,000 that were in a loss position and had an unrealized loss of $11,986,000.

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 March 31, 2023.

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


	Amortized
	Cost		Fair Value

Less than one year	$	29,916	$	29,200
One to five years		35,264		32,982
Five to ten years		16,656		15,429
More than ten years		65,991		58,342

Total	$	147,827	$	135,953

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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 March 31, 2023 is in accordance with ASC 326. All loan information presented prior to March 31, 2023 is in accordance with previous applicable GAAP.

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


	March 31, 2023				December 31, 2022
	Amount		%		Amount		%
Construction and land development
Residential	$	6,259	1.16	%	$	9,727	1.81	%
Commercial		43,167	8.00	%		35,400	6.57	%
		49,426	9.16	%		45,127	8.38	%
Commercial real estate
Owner occupied		117,124	21.70	%		119,643	22.22	%
Non-owner occupied		152,810	28.31	%		153,610	28.53	%
Multifamily		11,585	2.14	%		11,291	2.10	%
Farmland		68	0.01	%		73	0.01	%
		281,587	52.16	%		284,617	52.86	%
Consumer real estate
Home equity lines		17,898	3.32	%		18,421	3.42	%
Secured by 1-4 family residential,
First deed of trust		70,157	13.00	%		67,495	12.54	%
Second deed of trust		8,560	1.58	%		7,764	1.44	%
		96,615	17.90	%		93,680	17.40	%
Commercial and industrial loans
(except those secured by real estate)		87,728	16.25	%		90,348	16.78	%
Guaranteed student loans		20,195	3.74	%		20,617	3.83	%
Consumer and other		4,267	0.79	%		4,038	0.75	%

Total loans		539,818	100.0	%		538,427	100.0	%
Deferred (fees) and costs, net		647				588
Less: allowance for credit losses		(3,272)				(3,370)

	$	537,193			$	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 $30,458,000 and $33,706,000 as of March 31, 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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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):


	March 31,		December 31,
	2023		2022
Consumer real estate
Home equity lines	$	300	$	300
Secured by 1-4 family residential
First deed of trust		164		164
Second deed of trust		107		171
		571		635
Commercial and industrial loans
(except those secured by real estate)		18		19

Total loans	$	589	$	654

The Company recognized $9,000 of interest on nonaccrual loans as of March 31, 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.

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


	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1‑4		5		6		7		Loans
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 March 31, 2022, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows:


																Revolving-	Total
	2023		2022		2021		2020			2019		Prior		Revolving		Term	Loans
March 31, 2023
Construction and land development
Residential
Pass	$	180	$	5,485	$	594	$	—	$	—	$	—	$	—	$	—	$	6,259
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Residential	$	180	$	5,485	$	594	$	—	$	—	$	—	$	—	$	—	$	6,259
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial
Pass		1,221		13,278		15,939		255		3,378		5,784		3,312		—		43,167
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Commercial	$	1,221	$	13,278	$	15,939	$	255	$	3,378	$	5,784	$	3,312	$	—	$	43,167
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate
Owner occupied
Pass		576		18,800		26,434		8,740		12,145		46,148		724		—		113,567
Special Mention		—		—		—		—		—		2,322		—		—		2,322
Substandard		—		—		—		—		1,235		—		—		—		1,235
Total Owner occupied	$	576	$	18,800	$	26,434	$	8,740	$	13,380	$	48,470	$	724	$	—	$	117,124
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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																Revolving-	Total
	2023		2022		2021		2020			2019		Prior		Revolving		Term	Loans
Non-owner occupied
Pass		2,493		24,863		25,189		25,737		10,259		51,358		2,838		—		142,737
Special Mention		—		—		2,209		54		—		7,810		—		—		10,073
Substandard		—		—		—		—		—		—		—		—		—
Total Non-owner occupied	$	2,493	$	24,863	$	27,398	$	25,791	$	10,259	$	59,168	$	2,838	$	—	$	152,810
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multifamily
Pass		—		—		2,709		565		901		6,420		990		—		11,585
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Multifamily	$	—	$	—	$	2,709	$	565	$	901	$	6,420	$	990	$	—	$	11,585
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Farmland
Pass		—		—		33		—		—		35		—		—		68
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Farmland	$	—	$	—	$	33	$	—	$	—	$	35	$	—	$	—	$	68
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer real estate
Home equity lines
Pass		—		445		—		—		—		—		16,539		—		16,984
Special Mention		—		—		—		—		—		—		614		—		614
Substandard		—		—		—		—		—		—		300		—		300
Total Home equity lines	$	—	$	445	$	—	$	—	$	—	$	—	$	17,453	$	—	$	17,898
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential
First deed of trust
Pass		5,938		14,734		16,388		9,275		3,465		19,502		—		—		69,302
Special Mention		—		—		—		—		174		488		—		—		662
Substandard		—		—		—		—		—		193		—		—		193
Total First deed of trust	$	5,938	$	14,734	$	16,388	$	9,275	$	3,639	$	20,183	$	—	$	—	$	70,157
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Second deed of trust
Pass		919		3,616		1,054		444		1,332		733		235		—		8,333
Special Mention		—		—		—		—		46		71		—		—		117
Substandard		—		—		—		—		3		107		—		—		110
Total Second deed of trust	$	919	$	3,616	$	1,054	$	444	$	1,381	$	911	$	235	$		$	8,560
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial and industrial loans
(except those secured by real estate)
Pass		6,278		14,717		20,593		6,756		4,314		4,744		23,476		—		80,878
Special Mention		—		4,189		201		—		88		132		2,222		—		6,832
Substandard		—		—		—		—		—		18		—		—		18
Total Commercial and industrial	$	6,278	$	18,906	$	20,794	$	6,756	$	4,402	$	4,894	$	25,698	$	—	$	87,728
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Guaranteed student loans
Pass		—		—		—		—		—		20,195		—		—		20,195
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Guaranteed student loans	$	—	$	—	$	—	$	—	$	—	$	20,195	$	—	$	—	$	20,195
Current period gross writeoff	$	3	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	3
Consumer and other
Pass		297		658		187		100		15		28		2,964		—		4,249
Special Mention		—		—		—		—		18		—		—		—		18
Substandard		—		—		—		—		—		—		—		—		—
Total Consumer and other	$	297	$	658	$	187	$	100	$	33	$	28	$	2,964	$		$	4,267
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Total Current period gross writeoff	$	3	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	3
Total loans	$	17,902	$	100,785	$	111,530	$	51,926	$	37,373	$	166,088	$	54,214	$	—	$	539,818

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


					Greater								Investment >
	30‑59 Days		60‑89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
March 31, 2023
Construction and land development
Residential	$	—	$	—	$	—	$	—	$	6,259	$	6,259	$	—
Commercial		—		—		—		—		43,167		43,167		—
		—		—		—		—		49,426		49,426		—
Commercial real estate
Owner occupied		—		—		—		—		117,124		117,124		—
Non-owner occupied		—		—		—		—		152,810		152,810		—
Multifamily		—		—		—		—		11,585		11,585		—
Farmland		—		—		—		—		68		68		—
		—		—		—		—		281,587		281,587		—
Consumer real estate
Home equity lines		—		—		—		—		17,898		17,898		—
Secured by 1‑4 family residential
First deed of trust		—		—		—		—		70,157		70,157		—
Second deed of trust		—		—		—		—		8,560		8,560		—
		—		—		—		—		96,615		96,615		—
Commercial and industrial loans
(except those secured by real estate)		1,913		—		—		1,913		85,815		87,728		—
Guaranteed student loans		531		533		1,871		2,935		17,260		20,195		1,871
Consumer and other		—		—		—		—		4,267		4,267		—

Total loans	$	2,444	$	533	$	1,871	$	4,848	$	534,970	$	539,818	$	1,871

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													Recorded
					Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
December 31, 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.

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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):


	March 31, 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	$	1,235	$	1,250	$	—	$	4,332	$	4,347	$	—
Non-owner occupied		—		—		—		312		312		—
		1,235		1,250		—		4,644		4,659		—
Consumer real estate
Home equity lines		300		300		—		300		300		—
Secured by 1‑4 family residential
First deed of trust		193		193		—		1,745		1,745		—
Second deed of trust		111		195		—		195		300		—
		604		688		—		2,240		2,345		—
Commercial and industrial loans
(except those secured by real estate)		18		18		—		19		19		—

		1,857		1,956		—		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		1,235		1,250		—		4,583		4,598		2
Non-owner occupied		—		—		—		312		312		—
		1,235		1,250		—		4,895		4,910		2
Consumer real estate
Home equity lines		300		300		—		300		300		—
Secured by 1-4 family residential,
First deed of trust		193		193		—		1,881		1,881		6
Second deed of trust		111		195		—		195		300		—
		604		688		—		2,376		2,481		6
Commercial and industrial loans
(except those secured by real estate)		18		18		—		19		19		—
Consumer and other		—		—		—		21		21		1
	$	1,857	$	1,956	$	—	$	7,311	$	7,431	$	9

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


	For the Three Months Ended				For the Three Months Ended
	March 31, 2023				March 31, 2022
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial real estate
Owner occupied	$	3,468	$	16	$	4,942	$	31
Non-owner occupied		496		—		1,655		17
		3,964		16		6,597		48
Consumer real estate
Home equity lines		300		6		300		—
Secured by 1-4 family residential
First deed of trust		1,394		2		1,850		20
Second deed of trust		186		1		447		3
		1,880		9		2,597		23
Commercial and industrial loans
(except those secured by real estate)		54		1		190		—
		5,898		26		9,384		71

With an allowance recorded
Commercial real estate
Owner occupied		191		—		133		4
		191		—		133		4
Consumer real estate
Secured by 1-4 family residential
First deed of trust		86		—		147		2
Second deed of trust		8		—		40		—
		94		—		187		2

Consumer and other		16		—		—		—
		301		—		320		6

Total
Commercial real estate
Owner occupied		3,659		16		5,075		35
Non-owner occupied		496		—		1,655		17
		4,155		16		6,730		52
Consumer real estate
Home equity lines		300		6		300		—
Secured by 1-4 family residential,
First deed of trust		1,480		2		1,997		22
Second deed of trust		194		1		487		3
		1,974		9		2,784		25
Commercial and industrial loans
(except those secured by real estate)		54		1		190		—
Consumer and other		16		—		—		—
	$	6,199	$	26	$	9,704	$	77

Loan Modifications to Borrowers in Financial Difficulty

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

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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 period 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 March 31, 2023 and 2022.

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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 March 31, 2023
Construction and land development
Residential	$	79	$	3	$	(31)	$	—	$	—	$	51
Commercial		192		34		38		—		—		264
		271		37		7		—		—		315
Commercial real estate
Owner occupied		867		(475)		(1)		—		—		391
Non-owner occupied		1,289		192		(21)		—		—		1,460
Multifamily		33		7		—		—		—		40
Farmland		—		—		—		—		—		—
		2,189		(276)		(22)		—		—		1,891
Consumer real estate
Home equity lines		11		24		(2)		—		—		33
Secured by 1-4 family residential						—
First deed of trust		131		76		6		—		1		214
Second deed of trust		43		25		5		—		2		75
		185		125		9		—		3		322
Commercial and industrial loans
(except those secured by real estate)		576		1		(34)		—		6		549
Student loans		52		—		63		(3)		—		112
Consumer and other		37		(5)		2		—		—		34
Unallocated		60		(9)		(2)		—		—		49

	$	3,370	$	(127)	$	23	$	(3)	$	9	$	3,272

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

Three Months Ended March 31, 2022
Construction and land development
Residential	$	57	$	(11)	$	—	$	—	$	46
Commercial		229		(30)		—		—		199
		286		(41)		—		—		245
Commercial real estate
Owner occupied		833		59		—		—		892
Non-owner occupied		1,083		23		—		—		1,106
Multifamily		35		2		—		—		37
Farmland		2		—		—		—		2
		1,953		84		—		—		2,037
Consumer real estate
Home equity lines		12		(58)		—		58		12
Secured by 1-4 family residential
First deed of trust		123		(6)		—		1		118
Second deed of trust		47		(269)		—		302		80
		182		(333)		—		361		210
Commercial and industrial loans
(except those secured by real estate)		486		(68)		—		28		446
Student loans		65		7		(9)		—		63
Consumer and other		29		6		—		—		35
Unallocated		422		(55)		—		—		367

	$	3,423	$	(400)	$	(9)	$	389	$	3,403


			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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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 three months ended March 31, 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 March 31,
		2023		2022
Provision for credit losses:
Provision (recovery) for loans		$	23	$	(400)
Provision (recovery) for unfunded commitments			(23)		—
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 March 31, 2023, the Allowance for Credit Losses was $3.53 million and included an allowance for credit losses on loans of $3.27 million and a reserve for unfunded commitments of $254,000.

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

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 three month period ended March 31, 2022. The recovery of provision for the three month period ended March 31, 2022 was driven by improving macroeconomic conditions and credit quality remaining strong.

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


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

Three Months Ended March 31, 2023
Construction and land development
Residential	$	51	$	—	$	51	$	6,259	$	—	$	6,259
Commercial		264		—		264		43,167		—		43,167
		315		—		315		49,426		—		49,426
Commercial real estate
Owner occupied		391		—		391		117,124		1,235		115,889
Non-owner occupied		1,460		—		1,460		152,810		—		152,810
Multifamily		40		—		40		11,585		—		11,585
Farmland		—		—		—		68		—		68
		1,891		—		1,891		281,587		1,235		280,352
Consumer real estate
Home equity lines		33		—		33		17,898		300		17,598
Secured by 1-4 family residential
First deed of trust		214		—		214		70,157		193		69,964
Second deed of trust		75		—		75		8,560		111		8,449
		322		—		322		96,615		604		96,011
Commercial and industrial loans
(except those secured by real estate)		549		—		549		87,728		18		87,710
Student loans		112		—		112		20,195		—		20,195
Consumer and other		83		—		83		4,267		—		4,267

	$	3,272	$	—	$	3,272	$	539,818	$	1,857	$	537,961

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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Note 6 – Deposits

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


	March 31, 2023				December 31, 2022
	Amount		%		Amount		%

Demand accounts	$	254,039	41.1	%	$	255,236	40.9	%
Interest checking accounts		80,265	13.0	%		90,252	14.4	%
Money market accounts		186,096	30.1	%		179,036	28.6	%
Savings accounts		51,015	8.3	%		55,695	8.9	%
Time deposits of $250,000 and over		7,595	1.2	%		4,740	0.8	%
Other time deposits		39,006	6.3	%		39,784	6.4	%

Total	$	618,016	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 $1,849,000 in FHLB stock at March 31, 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 $35,000,000 and $20,000,000 at March 31, 2023 and December 31, 2021, 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 March 31, 2023 or December 31, 2022.

The Company’s unused lines of credit for future borrowings total approximately $44.4 million at March 31, 2023, which consists of $1.6 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.

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Note 8 – Trust preferred securities

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a floating rate of interest indexed to the London InterBank Offered Rate (“LIBOR”) (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at March 31, 2023 was 7.18%. The securities were redeemable at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035. No amounts have been redeemed at March 31, 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.

During the third quarter of 2007, Village Financial Statutory Trust II, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at March 31, 2023 was 6.43%. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in 2037. No amounts have been redeemed at March 31, 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 March 31, 2023 was 8.73%. 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 March 31, 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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The following table summarizes option activity under the Company's stock incentive plans during the indicated periods:


	Three Months Ended March 31,
	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	—		—	$	—			—		—		—
Options outstanding, end of period	14	$	25.28	$	9.76	$	—	734	$	25.63	$	9.76	$	—
Options exercisable, end of period	14							734

During the three months ended March 31, 2023, we granted certain officers time-based restricted shares of common stock. The time-based restricted shares vest ratably over a three year period provided the officer is employed with the Company on the applicable vesting date.

During the three months ended March 31, 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 26,152 and 23,800 at March 31, 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 March 31, 2023 and 2022 was $883,400 and $792,900, respectively. The time-based unrecognized compensation of $536,300 is expected to be recognized over a weighted average period of 2.10 years. For the period ended March 31, 2023, there were no forfeitures, and there were 606 forfeitures of restricted stock and restricted stock units for the period ended March 31, 2022.

A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the three months ended March 31, 2023 follows:


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

December 31, 2022	28,296	$	46.60	$	1,556,280
Granted	370		52.00		20,350
Vested	(3,999)		30.45		(219,945)
Forfeited	—		—		—
Other ⁽¹⁾	1,485		29.00		81,675
March 31, 2023	26,152	$	18.15	$	1,438,360

(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 $102,000 and $90,000 for the three months ended March 31, 2023 and 2022, respectively.

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Note 11 – Fair value

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

Derivative asset/liability – forward sale commitments: Best efforts sale commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to

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the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All of the Company’s forward sale commitments are classified as Level 2.

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


	Fair Value Measurement
	at March 31, 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	$	61,701	$	—	$	61,701	$	—
Mortgage-backed securities		61,090		—		61,090		—
Municipals		1,654		—		1,654		—
Subordinated debt		11,508		—		9,028		2,480
Loans held for sale		1,852		—		1,852		—
IRLC		472		—		472		—

Financial Liabilities - Recurring
Forward sales commitment		534		—		534		—


	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 March 31, 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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		March 31,				December 31,
		2023				2022
	Level in Fair
	Value	Carrying		Estimated		Carrying		Estimated
	Hierarchy	Value		Fair Value		Value		Fair Value
Financial assets
Cash	Level 1	$	8,087	$	8,087	$	12,062	$	12,062
Cash equivalents	Level 2		16,047		16,047		4,616		4,616
Investment securities available for sale	Level 2		133,473		133,473		131,853		131,853
Investment securities available for sale	Level 3		2,480		2,480		2,000		2,000
Federal Home Loan Bank stock	Level 2		1,849		1,849		1,223		1,223
Loans held for sale	Level 2		1,852		1,852		2,268		2,268
Loans	Level 3		539,818		518,267		538,427		521,150
Bank owned life insurance	Level 2		12,866		12,866		12,798		12,798
Accrued interest receivable	Level 2		3,574		3,574		3,651		3,651
Interest rate lock commitments	Level 2		472		472		142		142

Financial liabilities
Deposits	Level 2		618,016		618,042		624,743		625,037
FHLB borrowings	Level 2		35,000		34,935		20,000		20,000
Trust preferred securities	Level 2		8,764		9,063		8,764		7,066
Other borrowings	Level 2		5,700		5,700		5,692		5,692
Accrued interest payable	Level 2		212		212		70		70
Forward sales commitment	Level 2		534		534		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 months ended March 31, 2023 and 2022 (in thousands):


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Three Months Ended March 31, 2023

Revenues
Interest income	$	7,543	$	40	$	—	$	7,583
Gain on sale of loans		—		611		—		611
Other revenues		778		70		(16)		832
Total revenues		8,321		721		(16)		9,026

Expenses
Provision for credit losses		—		—		—		—
Interest expense		1,218		—		—		1,218
Salaries and benefits		2,742		706		—		3,448
Commissions		—		187		—		187
Other expenses		2,094		230		(16)		2,308
Total operating expenses		6,054		1,123		(16)		7,161

Income (loss) before income taxes		2,267		(402)		—		1,865
Income tax expense (benefit)		409		(84)		—		325
Net income (benefit)	$	1,858	$	(318)	$	—	$	1,540

Total assets	$	749,402	$	17,878	$	(32,483)	$	734,797


	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Three Months Ended March 31, 2022

Revenues
Interest income	$	6,225	$	43	$	—	$	6,268
Gain on sale of loans		—		1,211		—		1,211
Other revenues		794		150		(72)		872
Total revenues		7,019		1,404		(72)		8,351

Expenses
Recovery of provision for loan losses		(400)		—		—		(400)
Interest expense		407		—		—		407
Salaries and benefits		2,645		879		—		3,524
Commissions		—		455		—		455
Other expenses		1,908		322		(72)		2,158
Total operating expenses		4,560		1,656		(72)		6,144

Income before income taxes		2,459		(252)		—		2,207
Income tax expense		460		(53)		—		407
Net income	$	1,999	$	(199)	$	—	$	1,800

Total assets	$	774,042	$	18,556	$	(28,181)	$	764,417

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Note 13 – Shareholders’ Equity and Regulatory Matters

Accumulated Other Comprehensive Loss

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred tax benefits of $2,498,000 and $2,892,000 as of March 31, 2023 and December 31, 2022, respectively (in thousands):


	March 31,		December 31,
	2023		2022

Net unrealized losses on securities	$	(9,380)	$	(10,862)
Net unrecognized losses on defined benefit plan		(17)		(19)
Total accumulated other comprehensive loss	$	(9,397)	$	(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”). On August 28, 2018, the Federal Reserve issued an interim final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which was signed into law on May 24, 2018 (the “EGRRCPA”), that expands the applicability of the SBHC Policy Statement to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules"). The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules.

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

The Basel III Capital Rules require banks to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of March 31, 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 March 31, 2023, the Bank exceeded the minimum ratios to be classified as well capitalized.

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On September 17, 2019, the federal bank regulators issued a final rule required by the EGRRCPA that permits qualifying banks and bank holding companies that have less than $10 billion of assets, like the Company and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or “CBLR”). The Bank elected not to opt into the CBLR framework as of March 31, 2023 and December 31, 2022.

The capital amounts and ratios at March 31, 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

March 31, 2023
Total capital (to risk- weighted assets) Village Bank	$	86,394	15.14	%	$	59,923	10.50	%	$	57,070	10.00	%

Tier 1 capital (to risk- weighted assets) Village Bank		82,868	14.52	%		48,509	8.50	%		45,656	8.00	%

Leverage ratio (Tier 1 capital to average assets) Village Bank		82,868	11.27	%		29,420	4.00	%		36,775	5.00	%

Common equity tier 1 (to risk- weighted assets) Village Bank		82,868	14.52	%		39,949	7.00	%		37,095	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 March 31, 2023 and December 31, 2022, the Company had the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):


	March 31,		December 31,
	2023		2022

Undisbursed credit lines	$	119,405	$	119,454
Commitments to extend or originate credit		16,596		9,899
Standby letters of credit		917		922

Total commitments to extend credit	$	136,918	$	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 $1.9 million as of March 31, 2023, of which $1.8 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 March 31, 2023, and totaled $472,000, with a notional amount of $16.6 million and total positions of 53, 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 March

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31, 2023 and 2022. The Company’s IRLCs are classified as Level 2. At March 31, 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 March 31, 2023, and totaled $534,000 with a notional amount of $18.4 million and total positions of 61 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 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 has a team to assess ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

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

Caution about forward-looking statements

In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include statements regarding profitability, liquidity, allowance for 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 Mortgage Company as a result of the activity in the residential real estate market;

●

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

●

governmental monetary and fiscal policies;

●

geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;

●

changes in accounting policies, rules and practices;

●

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

●

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

●

demand, development and acceptance of new products and services;

●

problems with technology utilized by us;

●

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 March 31, 2023 and December 31, 2022 and the results of operations for the Company for the three months ended March 31, 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 March 31, 2023, the Company had net income of $1,540,000, or $1.04 per fully diluted share, compared to net income of $1,800,000, or $1.24 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 March 31, 2023, the Allowance for Credit Losses was $3.53 million and included an allowance for credit losses on loans of $3.27 million and a reserve for unfunded commitments of $254,000.

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 March 31,
	2023			2022			Change

	(dollars in thousands)
Average interest-earning assets	$	681,553		$	707,429		$	(25,876)
Interest income	$	7,583		$	6,268		$	1,315
Yield on interest-earning assets		4.51	%		3.59	%		0.92	%
Average interest-bearing liabilities	$	406,015		$	407,970		$	(1,955)
Interest expense	$	1,218		$	407		$	811
Cost of interest-bearing liabilities		1.22	%		0.40	%		0.82	%
Net interest income	$	6,365		$	5,861		$	504
Net interest margin		3.79	%		3.36	%		0.43	%

The following are variances of note for the three months ended March 31, 2023 compared to the three months ended March 31, 2022:

●NIM increased by 43 basis points to 3.79% for the three months ended March 31, 2023 compared to 3.36% for the three months ended March 31, 2022. The increase was driven by the following:

o

The yield on average earning assets increased by 92 basis points, 4.51% for the three months ended March 31, 2023 vs. 3.59% for the three months ended March 31, 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.

o

Total U.S. Small Business Administration Paycheck Protection Program (“PPP”) income recorded was $1,800 for the three months ended March 31, 2023 compared to $540,000 for the three months ended March 31, 2022.

o

The cost of interest bearing liabilities increased by 82 basis points to 1.22% for the three months ended March 31, 2023 compared to 0.40% for the three months ended March 31, 2022. The increase in our cost of funds was driven by an increase in the rate paid on variable rate debt, increased borrowings to supplement the deposit outflow experienced at the end of 2022 as well as the slight decrease during the three months ended March 31, 2023, and market pressure on rates on deposit products. Borrowings increased by approximately $35 million from the three months ended March 31, 2022, with a weighted average cost of 4.87% during the three months ended March 31, 2023. The rate paid on money market deposit accounts increased by 78 basis points to 1.00% at March 31, 2023 compared to 0.22% at March 31, 2022.

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


	Three Months Ended March 31, 2023						Three Months Ended March 31, 2022
			Interest						Interest
	Average		Income/		Yield		Average		Income/		Yield
	Balance		Expense		Rate		Balance		Expense		Rate
Loans
Commercial	$	86,007	$	1,218	5.74	%	$	93,511	$	1,159	5.03	%
Real estate - residential		95,272		1,296	5.52	%		91,269		1,071	4.76	%
Real estate - commercial		282,952		3,180	4.56	%		262,212		2,887	4.47	%
Real estate - construction		48,065		623	5.26	%		45,388		407	3.64	%
Student loans		20,482		339	6.71	%		25,511		237	3.77	%
Consumer		4,068		66	6.58	%		3,291		44	5.42	%
Loans net of deferred fees	$	536,846	$	6,722	5.08	%	$	521,182	$	5,805	4.52	%
Loans held for sale		2,553		40	6.35	%		5,007		43	3.48	%
Investment securities		135,011		727	2.18	%		109,600		394	1.46	%
Federal funds and other		7,143		94	5.34	%		71,640		26	0.15	%
Total interest earning assets		681,553		7,583	4.51	%		707,429		6,268	3.59	%
Allowance for loan losses		(3,253)						(3,738)
Cash and due from banks		11,263						14,979
Premises and equipment, net		11,778						11,789
Other assets		23,127						21,319
Total assets	$	724,468					$	751,778

Interest bearing deposits
Interest checking		84,262		62	0.30	%		85,657		26	0.12	%
Money market		180,020		446	1.00	%		191,441		104	0.22	%
Savings		49,473		19	0.16	%		50,297		19	0.15	%
Certificates		47,986		97	0.82	%		66,148		114	0.70	%
Total deposits		361,741		624	0.70	%		393,543		263	0.27	%
Borrowings
Long-term debt - trust
preferred securities		8,786		140	6.46	%		8,764		43	1.99	%
FHLB advances		29,500		347	4.77	%		—		—	—
Subordinated debt, net		5,695		104	7.41	%		5,663		101	7.23	%
Other borrowings		293		3	4.15	%		—		—	—	%
Total interest bearing liabilities		406,015		1,218	1.22	%		407,970		407	0.40	%
Noninterest bearing deposits		252,647						274,830			0.04%
Other liabilities		3,133						5,401
Total liabilities		661,795						688,201
Equity capital		62,673						63,577
Total liabilities and capital	$	724,468					$	751,778


Net interest income before provision for loan losses			$	6,365					$	5,861
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities					3.29	%					3.19	%
Net interest margin (net interest income expressed as a percentage of average earning assets)					3.79	%					3.36	%

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Provision for (recovery of) Credit losses

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

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

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.

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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 38% and 54% for the three month periods ended March 31, 2023 and 2022, respectively. Service charges and fees represent 53% and 38% of net interest income for the three month periods ended March 31, 2023 and 2022, respectively.


	For the Three Months Ended
	March 31,				Change
	2023		2022		$		%

	(dollars in thousands)
Service charges and fees	$	669	$	619	$	50	8.1	%
Mortgage banking income, net		478		878		(400)	(45.6)	%
Other		109		131		(22)	(16.8)	%
Total noninterest income	$	1,256	$	1,628	$	(372)	(22.9)	%

The decrease in noninterest income of $372,000 for the three months ended March 31, 2023, was primarily the result of the $400,000 decrease in mortgage banking income, net, which is a result of decreased loan originations and sales compared to the prior year due the sharp rise in mortgage rates during 2022 and the historically low inventory of homes for sale, and compressed gain on sale margins during the three months ended March 31, 2023. As a result of the sharp drop in origination volume, the Mortgage Banking Segment took steps in 2022 to right size its expense structure to minimize the impact to earnings going forward.

Noninterest expense


	For the Three Months Ended
	March 31,				Change
	2023		2022		$		%

	(dollars in thousands)
Salaries and benefits	$	3,448	$	3,524	$	(76)	(2.2)	%
Occupancy		311		331		(20)	(6.0)	%
Equipment		285		288		(3)	(1.0)	%
Supplies		49		38		11	28.9	%
Professional and outside services		813		725		88	12.1	%
Advertising and marketing		110		112		(2)	(1.8)	%
FDIC insurance premium		50		58		(8)	(13.8)	%
Other operating expense		690		606		84	13.9	%
Total noninterest expense	$	5,756	$	5,682	$	74	1.3	%

The increase in noninterest expense of $74,000 for the three months ended March 31, 2023, was the result of the following:

●The $76,000 decrease in salaries and benefits expense was driven primarily by lower expenses related to the decreased mortgage production for the three months ended March 31, 2023.

●Professional and outside expense increased by $88,000 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 $84,000 primarily as a result of an increase in check and card fraud during the three months ended March 31, 2023.

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Income taxes

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent difference and available tax credits. Income tax expense for the three months ended March 31, 2023 was $325,000 resulting in an effective tax rate of 17.4% compared to $407,000 and 18.4%, 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 March 31, 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 3.7% of the loan portfolio consists of rehabilitated student loans purchased by the Bank from 2014 to 2017 (see discussion following). The Company’s commercial and industrial loan portfolio represents approximately 16.3% 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 March 31, 2023 and December 31, 2022 are as follows (dollars in thousands):


	March 31, 2023				December 31, 2022
	Amount		%		Amount		%
Construction and land development
Residential	$	6,259	1.16	%	$	9,727	1.81	%
Commercial		43,167	8.00	%		35,400	6.57	%
		49,426	9.16	%		45,127	8.38	%
Commercial real estate
Owner occupied		117,124	21.70	%		119,643	22.22	%
Non-owner occupied		152,810	28.31	%		153,610	28.53	%
Multifamily		11,585	2.14	%		11,291	2.10	%
Farmland		68	0.01	%		73	0.01	%
		281,587	52.16	%		284,617	52.86	%
Consumer real estate
Home equity lines		17,898	3.32	%		18,421	3.42	%
Secured by 1-4 family residential,
First deed of trust		70,157	13.00	%		67,495	12.54	%
Second deed of trust		8,560	1.58	%		7,764	1.44	%
		96,615	17.90	%		93,680	17.40	%
Commercial and industrial loans
(except those secured by real estate)		87,728	16.25	%		90,348	16.78	%
Guaranteed student loans		20,195	3.74	%		20,617	3.83	%
Consumer and other		4,267	0.79	%		4,038	0.75	%

Total loans		539,818	100.00	%		538,427	100.00	%
Deferred fees and costs, net		647				588
Less: allowance for loan losses		(3,272)				(3,370)
	$	537,193			$	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

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

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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 dates indicated (dollars in thousands).


				Impact of	Provision for										Ratio of Net
	Beginning			adopting	(Recovery of)						Ending		Average		Charge-offs to
	Balance			ASC 326	Credit Losses		Charge-offs		Recoveries		Balance		Loans		Average Loans
Three Months Ended March 31, 2023
Construction and land development
Residential	$	79	$	3	$	(31)	$	—	$	—	$	51	$	8,065	—	%
Commercial		192		34		38		—		—		264		40,000	—	%
		271		37		7		—		—		315		48,065	—	%
Commercial real estate
Owner occupied		867		(475)		(1)		—		—		391		118,143	—	%
Non-owner occupied		1,289		192		(21)		—		—		1,460		153,154	—	%
Multifamily		33		7		—		—		—		40		11,585	—	%
Farmland		—		—		—		—		—		—		70	—	%
		2,189		(276)		(22)		—		—		1,891		282,952	(0.01)	%
Consumer real estate
Home equity lines		11		24		(2)		—		—		33		18,556	—	%
Secured by 1-4 family residential
First deed of trust		131		76		6		—		1		214		68,019	0.00	%
Second deed of trust		43		25		5		—		2		75		8,697	0.02	%
		185		125		9		—		3		322		95,272	0.01	%
Commercial and industrial loans
(except those secured by real estate)		576		1		(34)		—		6		549		86,007	0.01	%
Student loans		52		—		63		(3)		—		112		20,482	(0.01)	%
Consumer and other		37		(5)		2		—		—		34		4,068	—	%
Unallocated		60		(9)		(2)		—		—		49		—	—	%

	$	3,370		(127)	$	23	$	(3)	$	9	$	3,272		536,846	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		Credit 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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Asset quality

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


	March 31,			December 31,
	2023			2022
Nonaccrual loans	$	589		$	654
Foreclosed properties		—			—
Total nonperforming assets	$	589		$	654

Restructured loans (not included in nonaccrual loans above)	$	4,956		$	5,088

Loans past due 90 days and still accruing ⁽¹⁾	$	1,871		$	1,725

Nonaccrual loans to total loans ⁽²⁾		0.11	%		0.12	%

Nonperforming assets to loans ⁽²⁾		0.11	%		0.12	%

Nonperforming assets to total assets		0.08	%		0.09	%

Allowance for loan losses to
Loans, net of deferred fees and costs		0.61	%		0.63	%
Loans, net of deferred fees and costs (excluding guaranteed loans)		0.63	%		0.65	%
Nonaccrual loans		555.52	%		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 $589,000 at March 31, 2023 compared to $654,000 at December 31, 2022. Nonperforming assets, consisting solely of nonaccrual loans, totaled $589,000 at March 31, 2023, compared to $654,000 at December 31, 2022.

The following table presents an analysis of the changes in nonperforming assets for the three months ended March 31, 2023 (in thousands):


	Nonaccrual
	Loans		OREO		Total
Balance December 31, 2022	$	654	$	—	$	654
Additions		—		—		—
Loans placed back on accrual		—		—		—
Repayments		(65)		—		(65)
Charge-offs		—		—		—
Balance March 31, 2023	$	589	$	—	$	589

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

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

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only to the extent cash is received. Interest accruals are resumed on such loans only when in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

There were no individual allowances associated with the total nonaccrual loans of $589,000 and $654,000 at March 31, 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 $80,000 and $88,000 for the three months ended March 31, 2023 and 2022, respectively. Student loans totaling $1,871,000 and $1,725,000 at March 31, 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 March 31, 2023 and December 31, 2022 were as follows (dollars in thousands):


	March 31, 2023				December 31, 2022
	Amount		%		Amount		%
Demand accounts	$	254,039	41.1	%	$	255,236	40.9	%
Interest checking accounts		80,265	13.0	%		90,252	14.4	%
Money market accounts		186,096	30.1	%		179,036	28.7	%
Savings accounts		51,015	8.3	%		55,695	8.9	%
Time deposits of $250,000 and over		7,595	1.2	%		4,740	0.8	%
Other time deposits		39,006	6.3	%		39,784	6.3	%
Total	$	618,016	100.0	%	$	624,743	100.0	%

Total deposits decreased by $6,727,000, or 1.08%, from December 31, 2022. Variances of note are as follows:

●Noninterest bearing demand account balances decreased $1,197,000 from December 31, 2022 and represented 41.1% 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 decreased $7,607,000, or 2.3%, from December 31, 2022. The decrease in these accounts is primarily driven by the same combination of factors as the noninterest bearing demand accounts.

●Time deposits increased by $2,077, or 4.66%, from December 31, 2022. The increase in time deposits during the three months ended March 31, 2023 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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The following table presents the average deposits balance and average rate paid for the dates indicated (dollars in thousands).


	Average Balance				Average Cost Rate

	March 31,		December 31,		March 31,		December 31,
	2023		2022		2023		2022
Noninterest bearing deposits	$	252,647	$	276,742
Interest checking		84,262		87,423	0.30	%	0.12	%
Money market		180,020		192,626	1.00	%	0.27	%
Savings		49,473		51,077	0.16	%	0.15	%
Certificates
Less than $250,000		42,189		53,488	0.81	%	0.61	%
$250,000 or more		5,797		5,964	0.84	%	0.69	%
Total interest bearing deposits		361,741		390,578	0.70	%	0.28	%
Total deposits	$	614,388	$	667,320	0.41	%	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.



	March 31,		December 31,
	2023		2022
Months to maturity:
Three or less	$	1,095	$	480
Over three through six		2,080		1,093
Over six through twelve		2,500		2,630
Over twelve		1,920		537
Total	$	7,595	$	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 March 31, 2023 was $63,881,000 compared to $61,111,000 at December 31, 2022. The $2,770,000 increase in shareholders’ equity during the three months ended March 31, 2023 is due to net income of $1,540,000 and the $1,484,000 decrease in accumulated other comprehensive loss associated with the unrealized holding losses arising in the available for sale investment securities portfolio during the period, which were the result of the movement in interest rates during the three months ended March 31, 2023.

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


	March 31,			December 31,
	2023			2022
Tier 1 capital
Total bank equity capital	$	73,471		$	70,731
Net unrealized loss on available-for-sale securities		9,380			10,862
Defined benefit postretirement plan		17			19
Total Tier 1 capital		82,868			81,612

Tier 2 capital
Allowance for loan losses		3,526			3,370
Tier 2 capital deduction		—			—
Total Tier 2 capital		3,526			3,370

Total risk-based capital		86,394			84,982

Risk-weighted assets	$	570,696		$	573,976

Average assets	$	735,504		$	745,120

Capital ratios
Leverage ratio (Tier 1 capital to average assets)		11.27	%		10.95	%
Common equity tier 1 capital ratio (CET 1)		14.52	%		14.22	%
Tier 1 capital to risk-weighted assets		14.52	%		14.22	%
Total capital to risk-weighted assets		15.14	%		14.81	%
Equity to total assets		10.01	%		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 March 31, 2023, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $160,087,000, or 21.79% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

At March 31, 2023, the Company had approximately $190.0 million in uninsured deposits, which represents 30.73% of total deposits. Total liquidity sources at March 31, 2023 total $180.0 million, or 94.73% 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 March 31, 2023 and December 31, 2022.

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We are also a member of the Federal Home Loan Bank of Atlanta, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at March 31, 2023 was $1.6 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 $145.8 million as of March 31, 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 March 31, 2023, we had commitments to originate $136,918,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at March 31, 2023. Certificates of deposit scheduled to mature in the 12-month period ending March 31, 2024 totaled $29,838,000. 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. Management cannot predict whether or when LIBOR will actually cease to be available or what impact such a transition may have on the Company’s business, financial condition and results of operations.

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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. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected. There continues to be substantial uncertainty as to the ultimate effects of the LIBOR transition, including with respect to the acceptance and use of SOFR and other benchmark rates.

We have a number of loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4 – CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2023. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of March 31, 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.

The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 1 to the consolidated interim financial statements, effective January 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There were no other changes in the Company’s internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s 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

31.1	Certification of Chief Executive Officer

31.2	Certification of Chief Financial Officer

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

101	The following materials from the Village Bank and Trust Financial Corp. Quarterly Report on Form 10-Q for the quarter ended March 31, 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 March 31, 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:	May 12, 2023	By:	/s/ James E. Hendricks, Jr.
		James E. Hendricks, Jr.
		President and Chief Executive Officer

Date:	May 12, 2023	By:	/s/ Donald M. Kaloski, Jr.
		Donald M. Kaloski, Jr.
		Executive Vice President and Chief Financial Officer