Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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 stock, as of the latest practicable date.
1,495,251 shares of common stock, $4.00 par value, outstanding as of April 16, 2024
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, 2024 (unaudited) and December 31, 2023
3
Consolidated Statements of Income For the Three Months Ended March 31, 2024 and 2023 (unaudited)
4
Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2024 and 2023 (unaudited)
5
Consolidated Statements of Shareholders’ Equity For the Three Months and Ended March 31, 2024 and 2023 (unaudited)
6
Consolidated Statements of Cash Flows For Three Months Ended March 31, 2024 and 2023 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk
46
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
47
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
48
Signatures
49
2
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
March 31, 2024 (Unaudited) and December 31, 2023*
(in thousands, except share and per share data)
March 31,
December 31,
2024
2023
Assets
Cash and due from banks
$
13,073
10,383
Federal funds sold
19,323
7,331
Total cash and cash equivalents
32,396
17,714
Investment securities available for sale, at fair value
82,784
105,585
Restricted stock, at cost
2,755
2,985
Loans held for sale
7,019
4,983
Loans
Outstandings
591,338
575,008
Allowance for credit losses
(3,574)
(3,423)
Deferred costs, net
750
803
Total loans, net
588,514
572,388
Premises and equipment, net
11,773
11,760
Bank owned life insurance
13,198
13,120
Accrued interest receivable
3,531
3,827
Other assets
4,902
4,254
Total Assets
746,872
736,616
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing demand
230,118
247,624
Interest bearing
390,151
357,721
Total deposits
620,269
605,345
Long-term debt - trust preferred securities
8,764
Subordinated debt, net
5,700
Federal Home Loan Bank advances
40,000
45,000
Accrued interest payable
406
210
Other liabilities
3,375
4,041
Total liabilities
678,514
669,060
Shareholders’ equity
Common stock, $4 par value, 10,000,000 shares authorized; 1,495,251 shares issued and outstanding at March 31, 2024 and 1,492,879 shares issued and outstanding at December 31, 2023
5,918
5,908
Additional paid-in capital
55,557
55,486
Retained earnings
13,278
11,775
Stock in directors rabbi trust
(439)
(467)
Directors deferred fees obligation
439
467
Accumulated other comprehensive loss
(6,395)
(5,613)
Total shareholders’ equity
68,358
67,556
Total liabilities and shareholders' equity
* Derived from audited consolidated financial statements.
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
Three Months Ended March 31, 2024 and 2023
(Unaudited)
(in thousands, except per share data)
Three Months Ended
Interest income
8,201
6,762
Investment securities
932
727
202
94
Total interest income
9,335
7,583
Interest expense
2,096
624
Borrowed funds
843
594
Total interest expense
2,939
1,218
Net interest income
6,396
6,365
Provision for credit losses
150
—
Net interest income after provision for credit losses
6,246
Noninterest income
Service charges and fees
641
669
Mortgage banking income, net
850
478
Other
113
109
Total noninterest income
1,604
1,256
Noninterest expense
Salaries and benefits
3,464
3,448
Occupancy
332
311
Equipment
278
285
Supplies
Data processing
440
Professional and outside services
418
372
Advertising and marketing
83
111
FDIC insurance premium
92
50
Other operating expense
474
690
Total noninterest expense
5,629
5,756
Income before income tax expense
2,221
1,865
Income tax expense
449
325
Net income
1,772
1,540
Earnings per share, basic
1.19
1.04
Earnings per share, diluted
Consolidated Statements of Comprehensive Income
Three Months ended March 31, 2024 and 2023
(in thousands)
Other comprehensive (loss) income
Unrealized holding (losses) gains arising during the period
(990)
1,876
Tax effect
208
(394)
Net change in unrealized holding (losses) gains on securities available for sale, net of tax
(782)
1,482
Minimum pension adjustment
(1)
Minimum pension adjustment, net of tax
Total other comprehensive (loss) income
1,484
Total comprehensive income
990
3,024
Consolidated Statements of Shareholders' Equity
(In thousands)
Three Months Ended March 31, 2024
Directors
Accumulated
Additional
Stock in
Deferred
Common
Paid-in
Retained
Fees
Comprehensive
Stock
Capital
Earnings
Rabbi Trust
Obligation
Loss
Total
Balance, December 31, 2023
Restricted stock redemption
28
(28)
Vesting of restricted stock
10
(10)
Stock based compensation
81
Cash dividend declared ($0.18 per share)
(269)
Other comprehensive loss
Balance, March 31, 2024
Three Months Ended March 31, 2023
Income (Loss)
Balance, December 31, 2022
5,868
55,167
10,957
(689)
689
(10,881)
61,111
(94)
13
(13)
102
Cash dividend declared ($0.16 per share)
(237)
Impact of adoption of ASC 326
(119)
Other comprehensive income
Balance, March 31, 2023
5,881
55,256
12,141
(595)
595
(9,397)
63,881
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization
163
140
Amortization of debt issuance costs
Deferred income taxes
(32)
59
Gain on sales of loans held for sale
(514)
(611)
Stock compensation expense
Proceeds from sale of mortgage loans
19,954
25,187
Origination of mortgage loans held for sale
(21,476)
(24,160)
Amortization of premiums and accretion of discounts on securities, net
(69)
(39)
Increase in bank owned life insurance
(78)
(68)
Net change in:
Interest receivable
296
77
(408)
(615)
Interest payable
196
142
(679)
334
Net cash (used in) provided by operating activities
(644)
Cash Flows from Investing Activities
Purchases of available for sale securities
(2,652)
Proceeds from maturities, calls and paydowns of available for sale securities
21,880
2,467
Net increase in loans
(16,263)
(1,667)
Purchases of premises and equipment, net
(176)
(198)
Purchase of restricted stock, net
230
(626)
Net cash provided by (used in) investing activities
5,671
(2,676)
Cash Flows from Financing Activities
Cash dividends paid
Net increase (decrease) in deposits
14,924
(6,727)
Net (decrease) increase in other borrowings
(5,000)
15,000
Net cash provided by financing activities
9,655
8,036
Net increase in cash and cash equivalents
14,682
7,456
Cash and cash equivalents, beginning of period
16,678
Cash and cash equivalents, end of period
24,134
Supplemental Disclosure of Cash Flow Information
Cash payments for interest
2,743
1,076
Cash payments for taxes
168
Supplemental Schedule of Non-Cash Activities
Unrealized (losses) gains on securities available for sale
Notes to Consolidated Financial Statements
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, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024. 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, 2023 as filed with the Securities and Exchange Commission (“SEC”).
Note 2 – Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of income for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for credit losses and its related provision including collateral dependent loans.
Note 3 – Earnings per common share
The following table presents the basic and diluted earnings per common share computation (dollars in thousands, except per share data):
Three Months Ended March 31,
Numerator
Net income - basic and diluted
Denominator
Weighted average shares outstanding - basic
1,493
Dilutive effect of common stock options
Weighted average shares outstanding - diluted
Earnings per share - basic
Earnings per share - diluted
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 10,252 and 10,658 of the unvested restricted units at March 31, 2024 and 2023, respectively, included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of March 31, 2024 and 2023, 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.
Note 4 – Investment securities available for sale
The amortized cost and fair value of investment securities available for sale as of March 31, 2024 and December 31, 2023 are as follows (in thousands):
Gross
Amortized
Unrealized
Cost
Gains
Losses
Fair Value
March 31, 2024
U.S. Government agency obligations
695
(17)
678
Mortgage-backed securities
75,706
261
(6,060)
69,907
Municipals
2,263
1,652
Subordinated debt
12,202
29
(1,684)
10,547
90,866
290
(8,372)
December 31, 2023
20,690
(75)
20,615
77,275
643
(5,381)
72,537
2,264
(608)
1,656
12,449
30
(1,702)
10,777
112,678
673
(7,766)
The Company had investment securities with a fair value of $575,000 and $24,926,000 pledged to secure borrowings from the Federal Home Loan Bank of Atlanta ("FHLB") at March 31, 2024 and December 31, 2023, respectively.
There were no sales of available for sale securities for the three months ended March 31, 2024 and 2023.
Investment securities available for sale that have an unrealized loss position at March 31, 2024 and December 31, 2023 are detailed below (in thousands):
Securities in a loss
position for less than
position for more than
12 Months
Fair
Value
322
356
(16)
10,224
(100)
31,221
(5,960)
41,445
2,789
(443)
7,060
(1,241)
9,849
13,335
(544)
40,289
(7,828)
53,624
20,289
4,631
(24)
30,311
(5,357)
34,942
4,145
(587)
5,937
(1,115)
10,082
8,776
58,193
(7,155)
66,969
9
As of March 31, 2024, there were 60 investments available for sale totaling $53.6 million that were in a loss position and had an unrealized loss of $8.4 million.
All of the unrealized losses are attributable to increases 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 declines in fair value are 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 has not recorded an allowance for credit losses on these investments at March 31, 2024.
The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2024, by contractual maturity, are as follows (in thousands):
Less than one year
One to five years
10,834
10,823
Five to ten years
17,098
15,485
More than ten years
62,934
56,476
Note 5 – Loans and allowance for credit losses
Loans classified by type as of March 31, 2024 and December 31, 2023 are as follows (dollars in thousands):
Amount
%
Construction and land development
Residential
9,077
1.53
10,471
1.82
Commercial
34,437
5.83
37,024
6.44
43,514
7.36
47,495
8.26
Commercial real estate
Owner occupied
121,429
20.53
122,666
21.33
Non-owner occupied
165,508
27.99
154,855
26.93
Multifamily
18,254
3.09
12,743
2.22
Farmland
24
0.00
326
0.06
305,215
51.61
290,590
50.54
Consumer real estate
Home equity lines
21,682
3.67
21,557
3.75
Secured by 1-4 family residential,
First deed of trust
95,994
16.23
95,638
16.63
Second deed of trust
11,955
2.02
11,337
1.97
129,631
21.92
128,532
22.35
Commercial and industrial loans
(except those secured by real estate)
92,600
15.66
86,203
14.99
Guaranteed student loans
15,782
2.67
17,923
3.12
Consumer and other
4,596
0.78
4,265
0.74
Total loans
100.0
Deferred and costs, net
Less: allowance for credit losses
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 $54.8 million and $35.5 million as of March 31, 2024, and December 31, 2023, 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. 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.
11
The following table provides information on nonaccrual loans segregated by type at the dates indicated (in thousands):
Secured by 1-4 family residential
159
160
100
105
259
265
22
26
281
291
There were no individual allowances associated with the total nonaccrual loans of $281,000 and $291,000 at March 31, 2024 and December 31, 2023, respectively, that were considered collateral dependent.
The Company recognized $7,000 of interest on nonaccrual loans outstanding as of March 31, 2024.
Management considers the guidance in Accounting Standards Codification (“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.
12
As of March 31, 2024, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows (in thousands):
Revolving-
2022
2021
2020
Prior
Revolving
Term
Pass
876
5,656
2,206
339
Special Mention
Substandard
Total Residential
Current period gross writeoff
692
6,649
14,193
10,331
224
1,081
1,267
Total Commercial
666
12,518
21,638
19,149
9,276
52,199
574
116,020
200
71
461
4,677
5,409
Total Owner occupied
21,838
19,220
9,737
56,876
6,692
9,425
25,419
28,243
23,337
57,626
9,856
160,598
2,160
2,750
4,910
Total Non-owner occupied
30,403
60,376
5,250
1,300
2,434
542
6,857
1,871
Total Multifamily
Total Farmland
445
21,162
21,607
75
Total Home equity lines
21,237
4,330
32,416
14,608
14,152
8,006
19,985
2,124
95,621
214
Total First deed of trust
20,358
593
4,485
3,088
1,009
388
1,572
522
11,657
88
110
198
Total Second deed of trust
681
1,782
6,036
18,185
15,095
13,837
5,313
5,903
27,757
92,126
34
369
452
Total Commercial and industrial
18,219
5,324
5,963
28,126
Total Guaranteed student loans
242
424
403
107
38
3,360
Total Consumer and other
Total Current period gross writeoff
25,465
91,092
97,295
91,832
47,596
169,121
68,937
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
90 Days and
Past Due
90 Days
Due
Current
Accruing
247
21,435
Secured by 1‑4 family residential
174
95,820
421
129,210
719
375
1,143
91,457
588
342
2,200
3,130
12,652
1,728
391
2,575
4,694
586,644
14
Recorded
30-59 Days
60-89 Days
25
108
21,449
11,304
116
141
128,391
493
2,228
3,411
14,512
734
518
4,286
570,722
Loans greater than 90 days past due consist of student loans that are guaranteed by the DOE which covers approximately 98% of the principal and interest. Accordingly, these loans will not be placed on nonaccrual status and are not considered to be impaired.
Loans 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.
15
Collateral dependent loans are set forth in the following table as of the dates indicated (in thousands):
Unpaid
Principal
Related
Investment
Balance
Allowance
With no related allowance recorded
16
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
March 31, 2023
Average
Interest
Income
Recognized
3,468
496
3,964
300
1,394
103
186
1
263
1,880
23
54
286
5,898
With an allowance recorded
191
86
301
3,659
4,155
1,480
194
1,974
6,199
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, 2024 and March 31, 2023.
17
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 on loans is as follows for the periods indicated (in thousands):
Provision for
Beginning
(Recovery of)
Ending
Credit Losses
Charge-offs
Recoveries
(29)
57
228
(26)
314
(55)
409
437
1,467
129
1,596
44
42
(3)
1,923
2,119
40
(18)
32
293
298
99
(6)
98
432
(20)
428
640
Student loans
55
36
Unallocated
21
3,423
137
20
3,574
18
Impact of
adopting
ASC 326
79
(31)
51
192
264
271
37
315
867
(475)
1,289
(21)
1,460
2,189
(276)
(22)
1,891
(2)
131
76
43
185
125
576
(34)
549
52
63
112
(5)
60
(9)
3,370
(127)
3,272
Loan Losses
Year Ended December 31, 2023
(14)
19
(110)
173
35
(30)
(33)
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.
The following table presents a breakdown of the provision for credit losses for the periods indicated (in thousands):
Provision for credit losses:
Provision for loans
Provision (recovery) for unfunded commitments
(23)
As of March 31, 2024, the allowance for credit losses was $3.89 million and included an allowance for credit losses on loans of $3.57 million and a reserve for unfunded commitments of $320,000.
The Company recorded a provision for credit losses for loans of $136,700 for the three months ended March 31, 2024, which was the result of loan growth as all credit metrics remained strong compared to year-end 2023. Non-performing loans as a percentage of loans decreased from 0.12% at March 31, 2023 to 0.05% at March 31, 2024.
The Company recorded a provision for credit losses for unfunded commitments of $13,300 for the three months ended March 31, 2024, which was driven by an increase in the total commitments outstanding at March 31, 2024.
The allowance for credit losses on loans to total loans ratio at the Company is 0.60% compared to the peer average of 1.11%, management considers this level of allowance sufficient and appropriate based on the current asset quality and assessment of the Company’s loan portfolio.
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.
Loans were evaluated for credit losses as follows for the periods indicated (in thousands):
Recorded Investment in Loans
Individually
Collectively
95,835
11,855
129,372
92,578
591,057
95,478
11,232
128,267
86,177
574,717
Note 6 – Deposits
Deposits as of March 31, 2024 and December 31, 2023 were as follows (dollars in thousands):
Demand accounts
37.1
40.9
Interest checking accounts
78,739
12.7
76,289
12.6
Money market accounts
207,640
33.5
195,249
32.3
Savings accounts
35,238
5.7
39,633
6.5
Time deposits of $250,000 and over
31,355
5.0
9,145
1.5
Other time deposits
37,179
6.0
37,405
6.2
Note 7 – Borrowings
The Company uses both short-term and long-term borrowings to supplement deposits when they are available at a lower overall cost to the Company or they can be invested at a positive rate of return.
As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $2,414,000 in FHLB stock at March 31, 2024 and $2,644,000 at December 31, 2023, 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 $40,000,000 at March 31, 2024 and $45,000,000 at December 31, 2023.
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, 2024 or December 31, 2023.
The Company’s unused lines of credit for future borrowings total approximately $26.1 million at March 31, 2024, which consists of $3.3 million available from the FHLB based on current pledged assets, $20 million on revolving bank line of credit, and $2.8 million under secured federal funds agreements with third party financial institutions. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank of Richmond or the FHLB above the current lendable collateral value.
Note 8 – Trust preferred securities
During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a floating rate of interest indexed to the London InterBank Offered Rate (“LIBOR”) (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at March 31, 2024 was 7.71%. As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term Secured Overnight Funding Rate (“SOFR”) plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The securities were redeemable at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035. No amounts have been redeemed at March 31, 2024 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, 2024 was 6.96%. As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in 2037. No amounts have been redeemed at March 31, 2024 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, 2024 was 9.05%. As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company is replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The Company may redeem the subordinated notes in whole or in part, on or after March 31, 2023. The subordinated notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior indebtedness, whether secured or unsecured, including claims of depositors and general creditors, and rank equally in right of payment with any unsecured, subordinated indebtedness that the Company may incur in the future. The carrying value of the notes totaled $5,700,000 at March 31, 2024 and December 31, 2023, 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.
The following table summarizes option activity under the Company's stock incentive plans during the indicated periods:
Weighted
Exercise
Intrinsic
Options
Price
Per Share
Options outstanding, beginning of period
25.63
9.76
Granted
Forfeited
Exercised
Options outstanding, end of period
25.28
Options exercisable, end of period
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.
The total number of shares underlying non-vested restricted stock was 26,111 and 26,152 at March 31, 2024 and 2023, 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, 2024 and 2023 was $782,000 and $883,400, respectively. The time-based unrecognized compensation of $558,200 is expected to be recognized over a weighted average period of 2.01 years. For the period ended March 31, 2024, there were no forfeitures of restricted stock.
A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the three months ended March 31, 2024 follows:
Weighted-
Aggregate
Grant-Date
Shares
Fair-Value
31,077
45.93
1,320,773
Vested
(4,179)
52.32
(177,608)
Other (1)
(787)
58.95
(33,448)
26,111
44.52
1,109,718
Stock-based compensation expense was approximately $81,000 and $102,000 for the three months ended March 31, 2024 and 2023, respectively.
Note 11 – Fair value
The Company determines the fair value of its financial instruments based on the requirements established in ASC 820: Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs when measuring fair value. ASC 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.
ASC 820 establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:
Level 1 Inputs — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 Inputs — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 Inputs — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods to determine the fair value of each type of financial instrument:
Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Levels 1 and 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).
Collateral dependent: The Company does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered collateral dependent and an allowance for credit losses is established. The Company measures expected credit losses based on the fair value of the collateral either through the operation of the collateral or the sale of the collateral to include estimated cost to sell. The Company maintains a valuation allowance to the extent that this measure of the collateral dependent loan is less than the recorded investment in the loan. The Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to appraisals are required or if observable inputs are not available, the Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 3.
Loans held for sale: Fair value of the Company's loans held for sale is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company's portfolio of loans held for sale is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.
Derivative asset – interest rate lock commitments (“IRLCs”): The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company's IRLCs are classified as Level 2.
Forward sale commitments: Best efforts sale commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The Company has elected the fair value option on their firm commitments under ASC 825.
The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All of the Company’s forward sale commitments are classified as Level 2.
Assets and liabilities measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized below for the indicated dates (in thousands):
Fair Value Measurement
at March 31, 2024 Using
Quoted Prices
in Active
Significant
Markets for
Observable
Unobservable
Carrying
Identical Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial Assets - Recurring
U.S. Government Agencies
10,047
500
IRLC
Financial Liabilities - Recurring
Forward sales commitment
at December 31, 2023 Using
10,277
506
There were no Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at March 31, 2024 and December 31, 2023.
ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. In accordance with Accounting Standards Update (“ASU”) 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
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).
Level in Fair
Estimated
Hierarchy
Financial assets
Cash
Level 1
Cash equivalents
Level 2
Investment securities available for sale
82,284
105,085
Level 3
Federal Home Loan Bank stock
2,644
567,741
547,935
Interest rate lock commitments
Financial liabilities
620,673
605,226
FHLB borrowings
39,886
44,999
Trust preferred securities
8,969
8,848
Other borrowings
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.
27
The following table presents segment information as of and for the three months ended March 31, 2024 and 2023 (in thousands):
Mortgage
Consolidated
Banking
Eliminations
Totals
Revenues
9,243
909
(59)
Other revenues
795
(41)
754
Total revenues
10,038
1,001
10,939
Expenses
2,785
679
Other expenses
2,030
235
2,165
Total operating expenses
7,904
914
8,718
Income before income taxes
2,134
87
431
1,703
69
Total assets
756,005
16,777
(25,910)
7,543
538
(60)
821
8,364
578
8,882
2,742
706
2,137
274
2,351
6,097
980
7,017
Income (loss) before income taxes
2,267
(402)
Income tax expense (benefit)
(84)
Net income (loss)
1,858
(318)
749,402
17,878
(32,483)
734,797
Note 13 – Shareholders’ Equity and Regulatory Matters
Accumulated Other Comprehensive Loss
The following table presents the change in accumulated other comprehensive loss for the three months ended March 31, 2024 and year ended December 31, 2023 and is summarized as follows, net of tax (dollars in thousands):
Defined
Losses on AFS
Benefit
Securities
Plan
Accumulated other comprehensive loss December 31, 2023
(5,604)
Other comprehensive loss before reclassification
-
Amounts reclassified from AOCI into earnings
Net current period other comprehensive loss
Accumulated other comprehensive loss March 31, 2024
(6,386)
Accumulated other comprehensive loss December 31, 2022
(10,863)
Other comprehensive income before reclassification
1,320
1,329
3,939
Net current period other comprehensive income
5,259
5,268
Regulatory Matters
The Company meets the eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve System’s (“Federal Reserve”) Small Bank Holding Company Policy Statement (the “SBHC Policy Statement”). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules"). The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules.
The Bank is required to comply with the capital adequacy standards established by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC has adopted rules to implement the Basel III Capital Rules. The Basel III Capital Rules establish minimum capital ratios and risk weightings that are applied to many classes of assets held by community banks, including applying higher risk weightings to certain commercial real estate loans.
The Basel III Capital Rules require banks to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of March 31, 2024, 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, 2024, the Bank exceeded the minimum ratios to be classified as well capitalized.
The capital amounts and ratios at March 31, 2024 and December 31, 2023 for the Bank are presented in the table below (dollars in thousands):
Minimum Capital
Requirements
Actual
Including Conservation Buffer (1)
To be Well Capitalized
Ratio
Total capital (to risk- weighted assets) Village Bank
88,249
14.13
65,568
10.50
62,446
10.00
Tier 1 capital (to risk- weighted assets) Village Bank
84,355
13.51
53,079
8.50
49,957
8.00
Leverage ratio (Tier 1 capital to average assets) Village Bank
11.36
29,698
4.00
37,122
5.00
Common equity tier 1 (to risk- weighted assets) Village Bank
43,712
7.00
40,590
6.50
86,493
14.49
62,679
59,695
82,764
13.86
50,740
47,756
11.14
29,706
37,133
41,786
38,801
(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.
At March 31, 2024 and December 31, 2023, the Company had the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):
Undisbursed credit lines
137,230
127,918
Commitments to extend or originate credit
11,298
7,463
Standby letters of credit
1,246
1,202
Total commitments to extend credit
149,774
136,583
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Historically, many commitments expire without being drawn upon; therefore, the total commitment amounts shown in the above table are not necessarily indicative of future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include personal or income-producing commercial real estate, accounts receivable, inventory and equipment.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
Concentrations of credit risk – Generally, the Company’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company’s market area. Although the Company is building a diversified loan portfolio, a substantial portion of its clients’ ability to honor contracts is reliant upon the economic stability of the Richmond, Virginia area, including the real estate markets in the area. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding.
Note 15 – Mortgage Banking and Derivatives
Loans held for sale. The Company, through the Bank’s mortgage banking subsidiary, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. The Company’s portfolio of loans held for sale (“LHFS”) is accounted for in accordance with ASC 820 - Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business and totaled $7.0 million as of March 31, 2024, of which $6.9 million is related to unpaid principal, and totaled $5.0 million as of December 31, 2023, of which $4.8 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, 2024, and totaled $293,000, with a notional amount of $11.3 million and total positions of 36, and was reported in “Other Assets” at December 31, 2023, and totaled $271,000 with a notional amount of $7.5 million and total positions of 27. Changes in fair value are recorded as a component of mortgage banking income, net in the Consolidated Income Statement for the period ended March 31, 2024 and 2023. The Company’s IRLCs are classified as Level 2. At March 31, 2024 and December 31, 2023, 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, 2024, and totaled $42,000 with a notional amount of $18.2 million and total positions of 58 and was reported in “Other Liabilities” at December 31, 2023, and totaled $506,000, with a notional amount of $12.3 million and total positions of 47.
Note 16 Recent Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five
31
percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (“CODM”), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.
In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain U.S. Securities and Exchange Commission (“SEC”) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.
In July 2023, the FASB issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB ASC pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
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:
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, 2024 and December 31, 2023 and the results of operations for the Company for the three months ended March 31, 2024 and 2023. 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, 2024, the Company had a net income of $1.77 million, or $1.19 per fully diluted share, compared to net income of $1.54 million, or $1.04 per fully diluted share, for the same period in 2023.
On January 1, 2023, the Commercial Banking Segment adopted the Current Expected Credit Loss (“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.
Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders’ equity. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets (“net interest margin” or “NIM”) is calculated by dividing tax equivalent net interest income by average interest-earning assets.
Generally, the net interest margin will exceed the net interest spread because a portion of interest earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders’ equity.
For the Three Months Ended March 31,
Change
(dollars in thousands)
Average interest-earning assets
692,089
681,553
10,536
1,752
Yield on interest-earning assets
5.42
4.51
0.91
Average interest-bearing liabilities
429,394
406,015
23,379
1,721
Cost of interest-bearing liabilities
2.75
1.22
Net interest margin
3.72
3.79
(0.07)
The following are variances of note for the three months ended March 31, 2024 compared to the three months ended March 31, 2023:
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.
Income/
Yield
Expense
Rate
89,376
1,533
6.90
86,007
5.74
Real estate - residential
128,486
2,031
6.36
95,272
1,296
5.52
Real estate - commercial
294,857
3,484
4.75
282,952
3,180
4.56
Real estate - construction
47,885
676
5.68
48,065
623
5.26
16,878
276
6.58
20,482
6.71
Consumer
4,484
9.78
4,068
66
Loans net of deferred fees
581,966
8,109
5.60
536,846
6,722
5.08
5,681
6.51
2,553
6.35
90,742
4.13
135,011
2.18
Federal funds and other
13,700
5.93
7,143
5.34
Total interest earning assets
Allowance for loan losses
(3,431)
(3,253)
11,406
11,263
11,785
11,778
24,462
23,127
736,311
724,468
Interest bearing deposits
Interest checking
72,753
117
0.65
84,262
62
0.30
Money market
197,764
1,438
2.92
180,020
446
1.00
Savings
34,568
0.16
49,473
Certificates
65,628
526
3.22
47,986
97
0.82
370,713
2,095
2.27
361,741
0.70
Borrowings
Long-term debt - trust
preferred securities
8,789
161
7.37
8,786
6.46
FHLB advances
43,868
545
29,500
347
4.77
135
9.53
5,695
104
7.41
324
4.15
Total interest bearing liabilities
Noninterest bearing deposits
234,295
252,647
4,719
3,133
668,408
661,795
Equity capital
67,903
62,673
Total liabilities and capital
Net interest income before provision for loan losses
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities
3.29
Net interest margin (net interest income expressed as a percentage of average earning assets)
Provision for Credit losses
On January 1, 2023, the Commercial Banking Segment adopted the CECL methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023. 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.
The allowance for credit losses on loans to total loans ratio at the Company is 0.60% compared to the peer average of 1.11%. Management considers this level of allowance sufficient and appropriate based on the current asset quality and assessment of the Company’s loan portfolio.
The provision for credit losses on 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 current economic challenges due to higher inflation and the speed at which interest rates have risen remain a risk to credit quality, we believe our current level of allowance for credit losses is sufficient.
For more financial data and other information about the allowance for credit losses refer to section, “Balance Sheet Analysis” under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Note 5 “Loans and allowance for credit losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.
Noninterest income includes service charges and fees on deposit accounts, fee income related to loan origination, and mortgage banking income, net. The most significant noninterest income item has historically been mortgage banking income, net, representing 53% and 38%, for the three month periods ended March 31, 2024 and 2023, respectively. Service charges and fees represent 40% and 53%, of net interest income for the three month periods ended March 31, 2024 and 2023, respectively.
(4.2)
77.8
3.7
348
27.7
The increase in noninterest income of $348,000 for the three months ended March 31, 2024, was the result of the following:
0.5
6.8
(7)
(2.5)
(0.2)
12.4
(25.2)
84.0
(216)
(31.3)
(2.2)
The decrease in noninterest expense of $127,000 for the three months ended March 31, 2024, was the result of the following:
Income taxes
The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Income tax benefit for the three months ended March 31, 2024, was $449,000, resulting in an effective tax rate of 20.2% compared to income tax expense of $325,000 or 17.4%, for the same period in 2023. The increase in the effective tax rate was primarily related to a decrease in the tax credit received related to state taxes attributed to the Company and the Mortgage Banking Segment as well as the impact of permanent difference related to the cash surrender value on bank owned life insurance. The Bank is not subject to Virginia income taxes, and instead is subject to a franchise tax based on bank capital.
Balance Sheet Analysis
At March 31, 2024 and December 31, 2023, 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.
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 81.0% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 2.7% 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 15.7% 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.
100.00
Deferred fees and costs, net
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.
39
Allowance for Credit losses
On January 1, 2023, the Commercial Banking Segment adopted the CECL methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023 to $3.52 million. The allowance for credit losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.
We monitor and maintain an allowance for credit losses to absorb an estimate of expected losses inherent in the loan portfolio. The following table presents the credit loss experience on loans for the dates indicated (dollars in thousands).
Ratio of Net
(Charge-offs) to
on Loans
Average Loans
10,129
37,756
122,015
157,933
14,673
236
21,777
0.05
94,906
11,803
0.04
0.01
(0.04)
0
8,153
41,328
49,481
119,678
153,506
12,385
183
285,752
18,459
79,584
9,550
0.17
107,593
0.02
86,065
0.20
19,716
(0.15)
4,270
552,877
0.03
Asset quality
The following table summarizes asset quality information at the dates indicated (dollars in thousands):
Nonaccrual loans
Foreclosed properties
Total nonperforming assets
Restructured loans (not included in nonaccrual loans above)
Loans past due 90 days and still accruing (1)
Nonaccrual loans to total loans (2)
Nonperforming assets to loans (2)
Nonperforming assets to total assets
Allowance for credit losses on loans to
Loans, net of deferred fees and costs
0.60
0.59
Loans, net of deferred fees and costs (excluding guaranteed loans)
0.62
0.61
1,271.89
1,176.29
(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 $281,000 at March 31, 2024 compared to $291,000 at December 31, 2023. Nonperforming assets, consisting solely of nonaccrual loans, totaled $281,000 at March 31, 2024, compared to $291,000 at December 31, 2023.
The following table presents an analysis of the changes in nonperforming assets for the three months ended March 31, 2024 (in thousands):
Nonaccrual
OREO
Balance December 31, 2023
Additions
Loans placed back on accrual
Repayments
Balance March 31, 2024
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 three 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
41
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 $281,000 and $291,000 at March 31, 2024 and December 31, 2023, respectively, that were considered individually evaluated.
Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $85,000 and $80,000 for the three months ended March 31, 2024 and 2023, respectively. Student loans totaling $2,200,000 and $2,228,000 at March 31, 2024 and December 31, 2023, 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.
Total deposits increased by $14,924,000, or 2.47%, from December 31, 2023. Variances of note are as follows:
The following table presents the average deposits balance and average rate paid for the dates indicated (dollars in thousands).
Average Balance
Average Cost Rate
249,711
79,744
0.53
197,720
42,559
Less than $250,000
34,854
42,191
3.95
1.49
$250,000 or more
30,774
9,396
2.39
2.94
Total interest bearing deposits
371,610
1.42
605,008
621,321
1.39
0.85
The following table presents (in thousands) the scheduled maturities of time deposits greater than $250,000 which is the maximum FDIC insurance limit.
Months to maturity:
Three or less
3,924
1,268
Over three through six
9,244
3,889
Over six through twelve
17,647
3,449
Over twelve
540
539
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.
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, 2024 was $68,358,000 compared to $67,556,000 at December 31, 2023. The $802,000 increase in shareholders’ equity during the three months ended March 31, 2024, was due primarily to the recognition of net income of $1,772,000 offset by the $782,000 increase in accumulated other comprehensive loss.
The following table presents the composition of regulatory capital and the capital ratios for the Bank at the dates indicated (dollars in thousands):
Tier 1 capital
Total bank equity capital
77,960
77,151
Net unrealized loss on available-for-sale securities
6,385
5,603
Defined benefit postretirement plan
Total Tier 1 capital
Tier 2 capital
3,894
3,729
Tier 2 capital deduction
Total Tier 2 capital
Total risk-based capital
Risk-weighted assets
624,461
596,946
Average assets
742,444
742,655
Capital ratios
Leverage ratio (Tier 1 capital to average assets)
Common equity tier 1 capital ratio (CET 1)
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Equity to total assets
10.46
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, 2024, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $115,180,000, or 15.42% 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, 2024, the Company had approximately $218.5 million in uninsured deposits, which represents 35.30% of total deposits. Total liquidity sources at March 31, 2024 equal $196.4 million, or 89.88% of uninsured deposits.
The Company’s internal policy limits wholesale deposits (i.e., brokered deposits and internet listing services) to 15 percent of total funding, representing $108.5 million of additional availability as of March 31, 2024. The Company had $20.0 million in wholesale deposits as of March 31, 2024, which were brokered deposits with a weighted average rate of 4.89%.
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 $22.8 million for which there were no borrowings against the lines at March 31, 2024 and December 31, 2023.
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, 2024 was $3.3 million, based on the Bank's qualifying collateral available to secure any future borrowings. However, we are able to pledge additional collateral to the FHLB in order to increase our available borrowing capacity up to 25% of assets, which would result in a total remaining credit availability of $143.7 million as of March 31, 2024.
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, 2024, we had commitments to originate $149,774,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at March 31, 2024. Certificates of deposit scheduled to mature in the 12-month period ending March 31, 2025 totaled $61,259,000. 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.
45
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.
The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on Secured Overnight Funding Rate (“SOFR”) for contracts governed by U.S. law that have no or ineffective fallbacks. We have a number of borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. As a result of the announced discontinuation of LIBOR on June 30, 2023, the Company replaced the LIBOR leg of the calculated floating rate for these instruments with the corresponding term SOFR plus the applicable tenor spread adjustment as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System.
This transition did not have a significant impact on the Company’s consolidated financial statements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4 – CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2024. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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, 2023 filed with the SEC on March 22, 2024.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES and USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 – MINE SAFETY DISCLOSURES
ITEM 5 – OTHER INFORMATION
ITEM 6 – EXHIBITS
10.1
Amendment No. 2 to Employment Agreement, dated March 26, 2024, by and between Village Bank and Trust Financial Corp. and Donald M. Kaloski, Jr. (incorporated herein by reference to Exhibit 10.1 of the Current Report).
10.2
Amendment No. 2 to Employment Agreement, dated March 26, 2024, by and between Village Bank and Max C. Morehead, Jr. (incorporated herein by reference to Exhibit 10.2 of the Current Report).
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, 2024 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (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.
Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).
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.
Date:
May 10, 2024
By:
/s/ James E. Hendricks, Jr.
James E. Hendricks, Jr.
President and Chief Executive Officer
/s/ Donald M. Kaloski, Jr.
Donald M. Kaloski, Jr.
Executive Vice President and Chief Financial Officer