Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2024 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-50765 VILLAGE BANK AND TRUST FINANCIAL CORP. (Exact name of registrant as specified in its charter) (State or other jurisdiction of (I.R.S. Employer incorporation or ...

Exhibit 99.1 News Release For Immediate Release VILLAGE BANK AND TRUST FINANCIAL CORP. REPORTS EARNINGS FOR THE FOURTH QUARTER OF 2024 Midlothian, Virginia, January 31, 2025. Village Bank and Trust Financial Corp. (the "Company") (Nasdaq symbol: VBFC), parent company of Village Bank (the "Bank"), today reported unaudited results for the fourth quarter of 2024. Net income for the fourth quarter of 2024 was $1,486,000, or $0.99 per fully diluted share, compared to net income for the fourth quarter of 2023 of ...

[Executive Summary & Company Overview](index=1&type=section&id=Executive%20Summary%20%26%20Company%20Overview) Village Bank and Trust Financial Corp. reported strong Q2 and YTD financial performance, driven by strategic focus on core relationship growth and disciplined funding management [Overall Financial Performance (Q2 and YTD)](index=1&type=section&id=Overall%20Financial%20Performance%20(Q2%20and%20YTD)) Village Bank and Trust Financial Corp. reported increased net income and diluted EPS for both the second quarter and the six months ended June 30, 2024, compared to the prior year periods **Net Income and EPS (Q2 and Six Months Ended June 30, in dollars)** | Metric | Q2 2024 ($) | Q2 2023 ($) | 6 Months 2024 ($) | 6 Months 2023 ($) | | :------------ | :------------ | :------------ | :------------ | :------------ | | Net Income | $1,653,000 | $1,239,000 | $3,425,000 | $2,779,000 | | Diluted EPS | $1.11 | $0.83 | $2.29 | $1.87 | [CEO Commentary and Strategic Focus](index=1&type=section&id=CEO%20Commentary%20and%20Strategic%20Focus) The CEO expressed satisfaction with Q2 performance, highlighting that asset repricing and stabilizing funding costs are supporting the net interest margin, despite a weak mortgage environment. The company's focus remains on core relationship growth, disciplined funding management, and credit quality vigilance - Asset repricing and stabilizing funding costs are supporting **net interest margin**, helping to offset continued weakness in the mortgage environment[19](index=19&type=chunk) - The commercial bank grew loans (excluding student loans) by **2.73%** and deposits by **1.39%** during Q2 2024[3](index=3&type=chunk) - Strategic focus remains on core relationship growth, disciplined management of funding mix and costs, navigating the weak mortgage environment, and remaining vigilant on **credit quality**[3](index=3&type=chunk)[19](index=19&type=chunk) [Segment Performance Analysis](index=1&type=section&id=Segment%20Performance%20Analysis) This section analyzes the distinct financial performance of the Commercial Banking and Mortgage Banking segments, highlighting their respective contributions and challenges [Commercial Banking Segment](index=1&type=section&id=Commercial%20Banking%20Segment) The Commercial Banking Segment showed improved net income for both Q2 and the six months ended June 30, 2024, driven by NIM expansion and controlled expenses, despite an increase in provision for credit losses for the six-month period [Q2 2024 vs Q2 2023 Performance](index=1&type=section&id=Commercial%20Banking%20Segment%20Q2%20Performance) The Commercial Banking Segment achieved increased net income and expanded net interest margin in Q2 2024, with no provision for credit losses **Commercial Banking Segment Q2 Performance (in thousands)** | Metric | Q2 2024 | Q2 2023 | Change (QoQ) | | :---------------------------- | :------ | :------ | :------------ | | Net Income | $1,806 | $1,478 | +$328 (+22.2%)| | Net Interest Margin | 3.75% | 3.52% | +23 bps | | Yield on Earning Assets | 5.60% | 4.66% | +94 bps | | Cost of Int-Bearing Liabilities | 2.95% | 1.86% | +109 bps | | Overall Cost of Funds | 1.93% | 1.17% | +76 bps | | Provision for Credit Losses | $0 | $0 | No change | | Noninterest Income | $881 | $879 | +$2 (+0.2%) |\n| Noninterest Expense | $5,100 | $5,086 | +$14 (+0.3%) | - No provision for credit losses was recorded in Q2 2024, primarily due to a net-recovery of **$107,000** from previously charged-off loans and stable credit quality[24](index=24&type=chunk) [Six Months Ended June 30, 2024 vs 2023 Performance](index=4&type=section&id=Commercial%20Banking%20Segment%20YTD%20Performance) Year-to-date, the Commercial Banking Segment reported higher net income and NIM expansion, with a provision for credit losses driven by loan growth and controlled expenses **Commercial Banking Segment YTD Performance (in thousands)** | Metric | 6 Months 2024 | 6 Months 2023 | Change (YoY) | | :---------------------------- | :------------ | :------------ | :------------ | | Net Income | $3,509 | $3,336 | +$173 (+5.2%) | | Net Interest Margin | 3.73% | 3.66% | +7 bps |\n| Yield on Earning Assets | 5.51% | 4.59% | +92 bps | | Cost of Int-Bearing Liabilities | 2.85% | 1.55% | +130 bps | | Overall Cost of Funds | 1.86% | 0.97% | +89 bps | | Provision for Credit Losses | $150 | $0 | +$150 | | Noninterest Income | $1,676 | $1,701 | -$25 (-1.5%) | | Noninterest Expense | $9,915 | $9,965 | -$50 (-0.5%) | - The provision for credit losses of **$150,000** was driven by loan growth during the period, supported by stable macroeconomic conditions and strong credit quality[9](index=9&type=chunk) - The decrease in noninterest income was driven by lower service and charge fee income[11](index=11&type=chunk) - The decrease in noninterest expense was the result of efforts to control expenses, including reducing fraud losses[12](index=12&type=chunk) [Mortgage Banking Segment](index=1&type=section&id=Mortgage%20Banking%20Segment) The Mortgage Banking Segment continued to experience net losses in both Q2 and the six months ended June 30, 2024, but significantly reduced these losses compared to the prior year, primarily through revenue expansion, expense control, and improved gross margins [Q2 2024 vs Q2 2023 Performance](index=1&type=section&id=Mortgage%20Banking%20Segment%20Q2%20Performance) The Mortgage Banking Segment significantly reduced its net loss in Q2 2024 through revenue expansion, expense control, and improved gross margins **Mortgage Banking Segment Q2 Performance (in thousands)** | Metric | Q2 2024 | Q2 2023 | Change (QoQ) | | :-------- | :------ | :------ | :------------ | | Net Loss | ($153) | ($239) | +$86 (+36.0%) | - The **lower net loss** was a result of efforts to expand revenue opportunities, control expenses, and improve gross margins on loans sold[5](index=5&type=chunk) [Six Months Ended June 30, 2024 vs 2023 Performance](index=5&type=section&id=Mortgage%20Banking%20Segment%20YTD%20Performance) Year-to-date, the Mortgage Banking Segment substantially lowered its net loss, benefiting from fair value adjustments and strategic efforts in revenue and cost management **Mortgage Banking Segment YTD Performance (in thousands)** | Metric | 6 Months 2024 | 6 Months 2023 | Change (YoY) | | :-------- | :------------ | :------------ | :------------- | | Net Loss | ($84) | ($557) | +$473 (+84.9%) | - The **lower loss** was impacted by a **$233,900** increase to net income from fair value adjustments of forward sales commitments and interest rate lock commitments, along with efforts to expand revenue, control expenses, and improve gross margins[13](index=13&type=chunk) [Key Financial Metrics & Trends](index=3&type=section&id=Key%20Financial%20Metrics%20%26%20Trends) This section details key financial metrics and trends, including net interest margin, loan growth, asset quality, deposit movements, and capital adequacy [Net Interest Margin (NIM) and Interest Income/Expense](index=3&type=section&id=Net%20Interest%20Margin%20and%20Interest%20Income%2FExpense) The company experienced NIM expansion for both Q2 and the six months ended June 30, 2024, driven by increased yield on earning assets, though partially offset by rising costs of interest-bearing liabilities. The velocity of increases in funding costs is slowing **NIM and Interest Rate Trends** | Metric | Q2 2024 | Q2 2023 | 6 Months 2024 | 6 Months 2023 | | :----------------------------------- | :------ | :------ | :------------ | :------------ | | Net Interest Margin | 3.75% | 3.52% | 3.73% | 3.66% | | Yield on Earning Assets | 5.60% | 4.66% | 5.51% | 4.59% | | Cost of Interest-Bearing Liabilities | 2.95% | 1.86% | 2.85% | 1.55% | | Overall Cost of Funds | 1.93% | 1.17% | 1.86% | 0.97% | - The increase in yield on earning assets is attributed to an improved earning asset mix and rising interest rates, with continued improvement expected from higher yielding loan growth and amortization of lower yielding assets[2](index=2&type=chunk)[21](index=21&type=chunk) - The increase in overall cost of funds was mitigated by a strong non-interest bearing deposits level, which remained near **37%** of the deposit base[8](index=8&type=chunk)[23](index=23&type=chunk) - While pressure on the funding base is anticipated, the velocity of increases in interest-bearing liability costs is slowing down as of June 30, 2024[7](index=7&type=chunk)[22](index=22&type=chunk) [Noninterest Income and Expense](index=3&type=section&id=Noninterest%20Income%20and%20Expense) Noninterest income for the Commercial Banking Segment remained relatively stable in Q2 2024 but saw a slight decrease for the six-month period due to lower service and charge fee income. Noninterest expenses were well-controlled, showing minimal increase or slight decrease **Commercial Banking Noninterest Income & Expense (in thousands)** | Metric | Q2 2024 | Q2 2023 | 6 Months 2024 | 6 Months 2023 | | :---------------- | :------ | :------ | :------------ | :------------ | | Noninterest Income| $881 | $879 | $1,676 | $1,701 | | Noninterest Expense| $5,100 | $5,086 | $9,915 | $9,965 | - The decrease in noninterest income for the six-month period was driven by lower service and charge fee income[11](index=11&type=chunk) - Expense control efforts, including reducing fraud losses from check and debit card fraud, contributed to the minimal increase or decrease in noninterest expenses[12](index=12&type=chunk)[25](index=25&type=chunk) [Loans and Asset Quality](index=4&type=section&id=Loans%20and%20Asset%20Quality) The company experienced robust loan growth across commercial and consumer/residential portfolios, while maintaining strong asset quality metrics that compare favorably to peers. The allowance for credit losses is deemed sufficient despite economic challenges [Loan Portfolio Composition and Growth](index=5&type=section&id=Loan%20Portfolio%20Composition%20and%20Growth) The company achieved robust growth across its total loan portfolio, particularly in commercial and consumer/residential segments, driven by new and expanded relationships **Loan Portfolio Growth (in thousands)** | Metric | Q2 2024 | Q1 2024 | Change (QoQ) | Q2 2023 | Change (YoY) | | :------------------------- | :--------- | :--------- | :----------- | :--------- | :----------- |\n| Total Loans | $605,408 | $591,338 | +2.38% | $556,170 | +8.85% | | Commercial Loans | $456,522 | $441,329 | +3.44% | $425,254 | +7.35% | | Consumer/Residential Loans | $130,285 | $129,631 | +0.50% | $106,532 | +22.30% | - Commercial loan portfolio growth was driven by building new relationships and expanding core relationships[28](index=28&type=chunk) - Consumer/residential loan growth from Q2 2023 was primarily in purchase money adjustable-rate mortgages and home equity loans[29](index=29&type=chunk) [Asset Quality Metrics and Allowance for Credit Losses](index=4&type=section&id=Asset%20Quality%20Metrics%20and%20Allowance%20for%20Credit%20Losses) The company maintains strong asset quality with a sufficient allowance for credit losses, benefiting from net recoveries and stable economic conditions in Q2 2024 **Asset Quality Metrics** | Metric | Q2 2024 | Q2 2023 | Peer Group Q1 2024 | | :---------------------------------------------- | :------ | :------ | :----------------- | | Allowance for Credit Losses on Loans/Total Loans| 0.61% | 0.58% | 1.11% | | Nonperforming Loans/Loans | 0.07% | 0.06% | 0.42% | | Net Charge-offs (recoveries) to Average Loans (Annualized) | (0.07%) | 0.00% | 0.05% | | Nonperforming Assets/Bank Total Assets | 0.05% | 0.04% | 0.22% | - The Allowance for Credit Losses (ACL) was **$4.00 million** at June 30, 2024, compared to **$3.53 million** at June 30, 2023[33](index=33&type=chunk) - No provision for credit losses was recorded for Q2 2024 due to a net-recovery of **$107,000** from previously charged-off loans and stable local economic conditions[24](index=24&type=chunk)[36](index=36&type=chunk) - Management believes the current level of allowance for credit losses is **sufficient and appropriate**, despite current economic challenges due to higher inflation and rising interest rates[9](index=9&type=chunk)[34](index=34&type=chunk)[51](index=51&type=chunk) [Deposits](index=7&type=section&id=Deposits) Total deposits showed slight growth quarter-over-quarter and year-over-year. Noninterest-bearing demand deposits increased QoQ but decreased YoY due to customer migration to higher-yielding products, which was partially offset by the strategic addition of brokered time deposits **Deposits Outstanding (in thousands)** | Deposit Type | Q2 2024 | Q1 2024 | Change (QoQ) | Q2 2023 | Change (YoY) | | :------------------------- | :--------- | :--------- | :----------- | :--------- | :----------- | | Total Deposits | $628,912 | $620,269 | +1.39% | $628,382 | +0.08% | | Noninterest-bearing Demand | $236,063 | $230,118 | +2.58% | $249,059 | -5.18% | | Low-cost relationship deposits | $324,344 | $321,617 | +0.85% | $329,311 | -1.51% | | Time Deposits | $68,505 | $68,534 | -0.04% | $50,012 | +36.98% | - Noninterest-bearing demand accounts represented **37.54%** of total deposits in Q2 2024[52](index=52&type=chunk) - The increase in time deposits from Q2 2023 was primarily due to the addition of **$20.0 million** in brokered time deposits at a weighted average rate of **4.89%** to supplement the noninterest-bearing reduction[53](index=53&type=chunk) [Capital Adequacy](index=7&type=section&id=Capital%20Adequacy) The Bank continues to maintain a strong, well-capitalized position, with all regulatory capital ratios exceeding minimum requirements, although some ratios showed a slight decrease from the prior year **Bank Regulatory Capital Ratios** | Ratio | Q2 2024 | Q1 2024 | Q2 2023 | | :------------------- | :------ | :------ | :------ | | Common Equity Tier 1 | 13.44% | 13.51% | 14.36% | | Tier 1 | 13.44% | 13.51% | 14.36% | | Total Capital | 14.06% | 14.13% | 14.96% | | Tier 1 Leverage | 11.33% | 11.36% | 11.18% | - The Bank continues to maintain a **strong, well-capitalized position**[40](index=40&type=chunk) [Shareholders' Equity](index=7&type=section&id=Shareholders'%20Equity) Shareholders' equity increased significantly year-over-year, driven by net income recognition and a substantial decrease in accumulated other comprehensive loss, primarily due to a balance sheet repositioning **Shareholders' Equity (in thousands)** | Metric | June 30, 2024 | June 30, 2023 | Change (YoY) | | :------------------------- | :------------ | :------------ | :-------------- | | Shareholders' Equity | $70,142 | $64,014 | +$6,128 (+9.6%) | | Tangible Common Equity Ratio | 9.38% | 8.48% | +90 bps | - The **$6.128 million** increase in shareholders' equity was primarily due to **$2.564 million** in net income and a **$4.303 million** decrease in accumulated other comprehensive loss, the latter impacted by a balance sheet repositioning in Q3 2023[54](index=54&type=chunk) [Consolidated Financial Highlights](index=5&type=section&id=Consolidated%20Financial%20Highlights) This section provides a comprehensive overview of the company's consolidated financial performance, balance sheet position, and key operational and asset quality ratios [Selected Operating Data](index=11&type=section&id=Selected%20Operating%20Data) This section provides a consolidated overview of the company's quarterly and year-to-date operating results, including interest income and expense, net income, and earnings per share, highlighting overall financial performance trends **Selected Operating Data (in thousands, except per share amounts)** | Metric | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | | :----------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Interest Income | $9,869 | $9,335 | $9,130 | $8,462 | $8,099 | | Interest Expense | $3,259 | $2,939 | $2,445 | $2,348 | $1,975 | | Net Interest Income before Provision | $6,610 | $6,396 | $6,685 | $6,114 | $6,124 | | Provision for Credit Losses | $0 | $150 | $50 | $0 | $0 | | Noninterest Income (loss) | $1,391 | $1,604 | $1,156 | ($3,669) | $1,221 | | Noninterest Expense | $5,939 | $5,629 | $5,697 | $5,752 | $5,832 | | Income (loss) before Income Tax | $2,062 | $2,221 | $2,094 | ($3,307) | $1,513 | | Income Tax Expense (benefit) | $409 | $449 | $402 | ($754) | $274 | | Net Income (loss) | $1,653 | $1,772 | $1,692 | ($2,553) | $1,239 | | Basic EPS | $1.11 | $1.19 | $1.14 | ($1.72) | $0.83 | | Diluted EPS | $1.11 | $1.19 | $1.14 | ($1.72) | $0.83 | **Selected Operating Data (Six Months Ended June 30, in thousands, except per share amounts)** | Metric | 6 Months 2024 | 6 Months 2023 | | :-------------------------------------- | :------------ | :------------ | | Interest Income | $19,204 | $15,682 | | Interest Expense | $6,198 | $3,193 | | Net Interest Income before Provision | $13,006 | $12,489 | | Provision for Credit Losses | $150 | $0 | | Noninterest Income (loss) | $2,994 | $2,478 | | Noninterest Expense | $11,567 | $11,589 | | Income before Income Tax | $4,283 | $3,378 | | Income Tax Expense | $858 | $599 | | Net Income | $3,425 | $2,779 | | Basic EPS | $2.29 | $1.87 | | Diluted EPS | $2.29 | $1.87 | [Balance Sheet Data](index=11&type=section&id=Balance%20Sheet%20Data) This section presents key balance sheet figures over several quarters, including total assets, loans, deposits, and shareholders' equity, providing a snapshot of the company's financial position **Balance Sheet Data (in thousands, except per share amounts)** | Metric | June 30, 2024 | March 31, 2024 | Dec 31, 2023 | Sep 30, 2023 | June 30, 2023 | | :------------------------- | :------------ | :------------- | :----------- | :----------- | :------------ | | Total Assets | $747,726 | $746,872 | $736,616 | $727,504 | $754,655 | | Loans, net | $606,086 | $592,088 | $575,811 | $566,802 | $556,916 | | Deposits | $628,912 | $620,269 | $605,345 | $626,774 | $628,382 | | Borrowings | $44,464 | $54,464 | $59,464 | $34,464 | $59,464 | | Shareholders' Equity | $70,142 | $68,358 | $67,556 | $63,685 | $64,014 | | Book Value per Share | $46.91 | $45.72 | $45.25 | $42.89 | $43.08 | [Performance Ratios](index=5&type=section&id=Performance%20Ratios) The company's performance ratios, including Return on Average Assets (ROAA), Return on Average Equity (ROAE), and Net Interest Margin (NIM), generally improved for Q2 and the six months ended June 30, 2024, reflecting enhanced profitability and efficiency **Consolidated Performance Ratios** | Metric | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | 6 Months 2024 | 6 Months 2023 | | :----------------------- | :------ | :------ | :------ | :------- | :------ | :------------ | :------------ | | Return on Average Assets | 0.88% | 0.97% | 0.91% | (1.36)% | 0.67% | 0.92% | 0.76% | | Return on Average Equity | 9.63% | 10.50% | 10.45% | (15.82)% | 7.70% | 10.06% | 8.81% | | Net Interest Margin | 3.75% | 3.72% | 3.83% | 3.46% | 3.52% | 3.73% | 3.67% | **Commercial Banking Segment Performance Ratios** | Metric | Q2 2024 | Q2 2023 | 6 Months 2024 | 6 Months 2023 | | :-------------------------------- | :------ | :------ | :------------ | :------------ | | Return on Average Equity | 10.52% | 9.19% | 10.30% | 10.58% | | Return on Average Assets | 0.97% | 0.80% | 0.95% | 0.92% | | Net Interest Income to Average Assets | 3.47% | 3.26% | 3.45% | 3.40% | **Mortgage Banking Segment Performance Ratios** | Metric | Q2 2024 | Q2 2023 | 6 Months 2024 | 6 Months 2023 | | :----------------------- | :------ | :------ | :------------ | :------------ | | Return on Average Equity | (0.89)% | (1.49)% | (0.25)% | (1.77)% | | Return on Average Assets | (0.08)% | (0.13)% | (0.02)% | (0.15)% | [Asset Quality Ratios](index=6&type=section&id=Asset%20Quality%20Ratios) The company's asset quality ratios demonstrate strong credit quality, with low nonperforming loan and asset percentages, and an allowance for credit losses that is considered sufficient, comparing favorably to peer averages **Asset Quality Ratios** | Metric | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | Peer Group Q1 2024 | | :---------------------------------------------- | :------ | :------ | :------ | :------ | :------ | :----------------- | | Allowance for Credit Losses on Loans/Total Loans| 0.61% | 0.60% | 0.59% | 0.59% | 0.58% | 1.11% | | Allowance for Credit Losses on Loans/Nonperforming Loans | 950.13% | 1272.03%| 1176.12%| 1120.23%| 1139.05%| 213.34% | | Net Charge-offs (recoveries) to Average Loans (Annualized) | (0.07%) | (0.01%) | 0.00% | (0.11%) | 0.00% | 0.05% | | Nonperforming Loans/Loans (excluding Guaranteed Loans) | 0.07% | 0.05% | 0.06% | 0.06% | 0.06% | 0.42% | | Nonperforming Assets/Bank Total Assets | 0.05% | 0.04% | 0.04% | 0.04% | 0.04% | 0.22% | [Bank Capital Ratios](index=8&type=section&id=Bank%20Capital%20Ratios) The Bank maintains robust capital levels, with all regulatory capital ratios comfortably above the well-capitalized thresholds, demonstrating financial strength and stability **Bank Regulatory Capital Ratios** | Ratio | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | | :------------------- | :------ | :------ | :------ | :------ | :------ | | Common Equity Tier 1 | 13.44% | 13.51% | 13.86% | 13.58% | 14.36% | | Tier 1 | 13.44% | 13.51% | 13.86% | 13.58% | 14.36% | | Total Capital | 14.06% | 14.13% | 14.49% | 14.19% | 14.96% | | Tier 1 Leverage | 11.33% | 11.36% | 11.14% | 10.74% | 11.18% | [Company Information & Forward-Looking Statements](index=9&type=section&id=Company%20Information%20%26%20Forward-Looking%20Statements) This section provides an overview of Village Bank and Trust Financial Corp. and outlines important forward-looking statements and associated risk factors [About Village Bank and Trust Financial Corp.](index=9&type=section&id=About%20Village%20Bank%20and%20Trust%20Financial%20Corp.) Village Bank and Trust Financial Corp. is a Virginia-chartered bank holding company operating through its wholly-owned subsidiary, Village Bank, which provides a full range of financial products and services across nine branch offices in Midlothian, Virginia - Village Bank and Trust Financial Corp. is a bank holding company whose activities consist of investment in its wholly-owned subsidiary, Village Bank[42](index=42&type=chunk)[56](index=56&type=chunk) - Village Bank is a full-service Virginia-chartered community bank headquartered in Midlothian, Virginia, with deposits insured by the Federal Deposit Insurance Corporation (FDIC)[42](index=42&type=chunk) - The Bank has nine branch offices and offers a complete range of financial products and services, including commercial loans, consumer credit, mortgage lending, checking and savings accounts, certificates of deposit, and 24-hour banking[42](index=42&type=chunk) [Forward-Looking Statements and Risk Factors](index=9&type=section&id=Forward-Looking%20Statements%20and%20Risk%20Factors) The report contains forward-looking statements regarding future performance, which are subject to various assumptions, risks, and uncertainties. These risks include changes in interest rates, economic conditions, regulatory environment, cybersecurity, and market conditions, which could cause actual results to differ materially - Forward-looking statements are identified by words such as 'believes,' 'expects,' 'plans,' 'may,' 'will,' 'should,' 'projects,' 'contemplates,' 'anticipates,' 'forecasts,' 'intends' or other words of similar meaning, and are subject to numerous assumptions, risks and uncertainties[43](index=43&type=chunk)[57](index=57&type=chunk) - Key risk factors include changes in assumptions for credit losses, interest rate risks, ability to maintain adequate liquidity, effects of future economic/business/market conditions, legislative and regulatory changes, cybersecurity vulnerabilities, declines in real estate markets, and risks inherent in making loans[44](index=44&type=chunk)[58](index=58&type=chunk)[59](index=59&type=chunk) - Additional factors that could cause actual results to differ materially are discussed in the Company's reports filed with the SEC (Form 10-K, 10-Q, 8-K)[45](index=45&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-Q (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Virginia 16-1694602 ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 For the transition period from ______ to ______ Commission file n ...

Exhibit 99.1 News Release For Immediate Release VILLAGE BANK AND TRUST FINANCIAL CORP. REPORTS EARNINGS FOR THE FIRST QUARTER OF 2024 Midlothian, Virginia, April 26, 2024. Village Bank and Trust Financial Corp. (the "Company") (Nasdaq symbol: VBFC), parent company of Village Bank (the "Bank"), today reported unaudited results for the first quarter of 2024. Net income for the first quarter of 2024 was $1,772,000, or $1.19 per fully diluted share, compared to net income for the first quarter of 2023 of $1,540 ...

PART I [ITEM 1. BUSINESS](index=3&type=section&id=ITEM%201.%20BUSINESS) Village Bank and Trust Financial Corp. operates as a bank holding company through its subsidiary Village Bank and its mortgage arm, offering diverse financial services primarily in Central Virginia - The Company operates as a bank holding company with two main segments: **traditional commercial banking (Village Bank)** and **mortgage banking (Village Bank Mortgage Corporation)**[13](index=13&type=chunk)[14](index=14&type=chunk) - The Bank offers a wide range of banking and related financial services, including **checking, savings, certificates of deposit, commercial, real estate, and consumer loans**, primarily in the **Richmond and Williamsburg, Virginia metropolitan areas**[14](index=14&type=chunk) Revenue Contribution by Segment (2023) | Segment | Revenue (after intercompany eliminations) | | :--------------- | :---------------------------------------- | | Bank | **$36.3 million** | | Mortgage Company | **$2.6 million** | - Key business strategies include building full-service banking relationships with **high-quality local companies and individuals**, growing the **Mortgage Company's profitability**, defending and expanding **Net Interest Margin**, building **non-interest income**, streamlining operations, achieving **excellence in risk management**, and being an **attractive employer**[17](index=17&type=chunk)[19](index=19&type=chunk)[21](index=21&type=chunk) [Business Strategy](index=3&type=section&id=Business%20Strategy) The Company aims for top-quartile shareholder returns through strategic growth, profitability optimization, risk management, and a positive work environment - The Company aims to deliver top-quartile long-term total shareholder returns by focusing on **return on equity**, **sustainable earnings growth**, **low earnings volatility**, and **best-quartile asset quality**[17](index=17&type=chunk) - Strategies include building full-service banking relationships with local companies and individuals, growing the **Mortgage Company's profitability**, optimizing the balance sheet and income statement (e.g., improving **Net Interest Margin**, growing **non-interest income**, improving **efficiency**), achieving **excellence in risk management**, and fostering a positive work environment[17](index=17&type=chunk)[19](index=19&type=chunk)[21](index=21&type=chunk) [Market Area](index=7&type=section&id=Market%20Area) The Company primarily serves the Central Virginia region, including Richmond and Williamsburg metropolitan areas, through its branch network - The Company primarily serves the **Central Virginia region** and the **Richmond and Williamsburg metropolitan statistical areas**, operating from **nine full-service branch banking offices** and **one mortgage loan production office**[22](index=22&type=chunk) [Banking Services](index=7&type=section&id=Banking%20Services) The Bank offers comprehensive deposit and lending services, including commercial, real estate, consumer loans, and various deposit products - Deposit services include **checking, savings, money market, and various time deposits**, offered through branches, drive-up windows, ATMs, customer care, and digital channels[23](index=23&type=chunk) - Lending services encompass **short-to-medium term commercial and personal loans**, **real estate finance**, **commercial business lending** (including **SBA programs**), **commercial real estate acquisition, development, construction, and mortgage lending**, **consumer lending**, **loan participations** (selling and purchasing), and purchasing of **guaranteed student loan portfolios**[24](index=24&type=chunk)[26](index=26&type=chunk) - As of **December 31, 2023**, the legal lending limit for loans to one borrower was **approximately $12,974,000**[27](index=27&type=chunk) [Competition](index=9&type=section&id=Competition) The Company faces intense competition from diverse financial institutions with greater resources in its market areas - The Company faces strong competition from various financial institutions, including **local commercial banks**, **credit unions**, **mortgage banking firms**, **consumer finance companies**, and **financial technology (fintech) companies**, many of which have greater resources and higher lending limits[28](index=28&type=chunk) Deposit Market Share (June 30, 2023) | Location | Market Share | | :----------------------------- | :----------- | | Chesterfield County | **4.28%** | | Hanover County | **5.02%** | | Powhatan County | **10.98%** | | Richmond metropolitan statistical area | **1.13%** | | Henrico County | **1.40%** | | James City County | **0.51%** | [Supervision and Regulation](index=9&type=section&id=Supervision%20and%20Regulation) The Company and Bank are subject to extensive federal and state regulations, including capital adequacy, consumer protection, and anti-money laundering laws - The Company is regulated as a **bank holding company** by the **Federal Reserve** and the **Virginia Bureau of Financial Institutions (BFI)**, while the Bank is regulated by the **FDIC** and **BFI**[32](index=32&type=chunk) - The **Dodd-Frank Act** significantly restructured financial regulation, and the **Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (EGRRCPA)** provided some relief for smaller institutions like the Company, exempting banks with **less than $250 billion in assets** from certain enhanced prudential standards[33](index=33&type=chunk)[36](index=36&type=chunk) - The Bank is classified as **'well capitalized'** as of **December 31, 2023**, with capital ratios exceeding minimum requirements (**Common Equity Tier 1: 13.86%**, **Tier 1 Risk-Based: 13.86%**, **Total Risk-Based: 14.49%**, **Leverage: 11.14%**)[59](index=59&type=chunk) - The Company is subject to various regulations including reporting obligations under **securities laws** (**Exchange Act**, **Sarbanes-Oxley Act**), **Bank Holding Company Act**, **privacy legislation**, **merger and acquisition rules**, **dividend payment limits**, **FDIC insurance and assessments**, **capital adequacy standards (Basel III)**, **prompt corrective action**, restrictions on **affiliate transactions**, **incentive compensation policies**, **anti-money laundering laws**, **OFAC reporting**, **mortgage banking regulations**, **consumer financial protection laws (CRA, CFPB)**, and **cybersecurity regulations**[38](index=38&type=chunk)[39](index=39&type=chunk)[42](index=42&type=chunk)[45](index=45&type=chunk)[46](index=46&type=chunk)[49](index=49&type=chunk)[53](index=53&type=chunk)[57](index=57&type=chunk)[61](index=61&type=chunk)[66](index=66&type=chunk)[69](index=69&type=chunk)[71](index=71&type=chunk)[72](index=72&type=chunk)[77](index=77&type=chunk)[80](index=80&type=chunk)[84](index=84&type=chunk)[85](index=85&type=chunk)[86](index=86&type=chunk) [Employees](index=25&type=section&id=Employees) The Company employs 145 individuals, maintains good employee relations, and adheres to a comprehensive Code of Ethics Employee Count (December 31, 2023) | Employee Type | Count | | :------------ | :---- | | Full-time | **141** | | Part-time | **4** | | Total | **145** | - None of the Company's employees are covered by a **collective bargaining agreement**, and relations are considered good[89](index=89&type=chunk) - The Company has a **Code of Ethics** applicable to directors, officers, and all employees, addressing topics like asset protection, legal compliance, and financial reporting[90](index=90&type=chunk) [Additional Information](index=25&type=section&id=Additional%20Information) The Company files various reports with the SEC, which are publicly available on the SEC's and its own website - The Company files **annual, quarterly, and current reports**, **proxy statements**, and other information with the SEC, available electronically on the **SEC's website** and the Company's website (**http://www.villagebank.com**)[91](index=91&type=chunk)[92](index=92&type=chunk) [ITEM 1A. RISK FACTORS](index=25&type=section&id=ITEM%201A.%20RISK%20FACTORS) Investing in the Company's common stock involves inherent risks, including those related to lending activities, market interest rates, business operations, liquidity, regulatory environment, and the common stock itself - An investment in the Company's common stock is subject to various risks that could impair its business and operations, potentially leading to a **decline in stock value**[94](index=94&type=chunk) [Risk Related to the Company's Lending Activities](index=25&type=section&id=Risk%20Related%20to%20the%20Company%27s%20Lending%20Activities) Lending activities expose the Company to credit losses, particularly from real estate concentrations and small business loans, and potential insufficiency of the allowance for credit losses - Credit standards and ongoing credit assessment processes may not prevent significant **credit losses**, and the **allowance for credit losses (ACLL)** may be insufficient, especially with the adoption of **CECL methodology in 2023**, which introduces more **volatility**[95](index=95&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk) - Nonperforming assets, which were **$291,000 (0.04% of total assets)** as of **December 31, 2023**, take significant time to resolve and negatively impact **net income** and **financial condition**[99](index=99&type=chunk) - A high concentration of loans secured by real estate (**81.15% of all loans** as of **December 31, 2023**), particularly **construction and land development loans (8.26%)** and **commercial real estate loans (50.54%)**, exposes the Company to significant risk from downturns in the **local real estate market** and **economic conditions**[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk) - Focusing on **small to mid-sized community-based businesses** increases **credit risk** due to their heightened vulnerability to economic conditions and fewer financial resources[105](index=105&type=chunk) - Reliance on **independent appraisals** for **real estate collateral** carries risk, as estimated values may not be realizable upon foreclosure, and the Company is exposed to **environmental liabilities** for properties it takes title to[106](index=106&type=chunk)[107](index=107&type=chunk) [Risk Related to Market Interest Rates](index=31&type=section&id=Risk%20Related%20to%20Market%20Interest%20Rates) Profitability is vulnerable to interest rate fluctuations, which can compress net interest spreads and impact loan volumes and borrower repayment capacity - The Company's profitability is subject to **interest rate risk**, as changes in market interest rates can reduce **net interest spreads**, affect **loan volume and yields**, and impact borrowers' ability to repay **variable-rate loans**[108](index=108&type=chunk)[110](index=110&type=chunk) [Risks Related to the Company's Business, Industry and Markets](index=33&type=section&id=Risks%20Related%20to%20the%20Company%27s%20Business%2C%20Industry%20and%20Markets) The Company faces risks from intense competition, technological changes, adverse economic conditions, market volatility, and cyclical mortgage banking revenues - **Strong and growing competition** from **traditional financial institutions and fintech companies** could reduce business and market share[111](index=111&type=chunk)[112](index=112&type=chunk) - Consumers increasingly using **alternative financial transaction methods (disintermediation)** could lead to **loss of fee income and customer deposits**[113](index=113&type=chunk) - The Company's profitability depends on its ability to integrate and introduce **new technologies**; failure to do so could adversely affect business[114](index=114&type=chunk) - Changes in **economic conditions**, especially in its market areas, could lead to increased **loan delinquencies**, **problem assets**, decreased demand for services, and **declining collateral values**[115](index=115&type=chunk) - **Market risk**, including fluctuations in **interest rates, equity prices, and credit quality**, can adversely affect asset and liability values, particularly the **investment securities portfolio**[116](index=116&type=chunk) - **Mortgage banking revenue is cyclical and sensitive to interest rates, economic conditions, and housing market slowdowns**, which could significantly reduce income from these activities[117](index=117&type=chunk) [Risk Related to Liquidity](index=34&type=section&id=Risk%20Related%20to%20Liquidity) Liquidity risk stems from funding operations with demand deposits and less liquid assets, exacerbated by market downturns, unrealized losses, and potential deposit outflows - **Liquidity risk** could impair the Company's ability to fund operations, as a substantial portion of liabilities are **demand deposits** while assets are **less liquid loans**. Access to funding could be reduced by **economic downturns**, **difficult credit markets**, or **depositor needs**[118](index=118&type=chunk) - **Unrealized losses in the available-for-sale securities portfolio**, caused by **rising interest rates**, reduce **book capital** and **tangible common equity**, potentially affecting liquidity if securities must be sold at a loss[121](index=121&type=chunk) - In **2023**, the Company executed a securities repositioning strategy, selling **$55.195 million in available-for-sale securities at a pre-tax loss of $4.986 million**, to improve **earnings, interest rate risk protection, and tangible common equity**[122](index=122&type=chunk) - Recent **negative developments in the banking industry** (e.g., **Silicon Valley Bank failures**) have eroded customer confidence, potentially leading to **deposit outflows**, especially from **uninsured deposits (34.62% of total deposits at December 31, 2023)**, impacting **liquidity and capital**[120](index=120&type=chunk)[123](index=123&type=chunk) [Risk Related to the Company's Operations](index=38&type=section&id=Risk%20Related%20to%20the%20Company%27s%20Operations) Operational risks include dependence on key personnel, challenges in growth strategies, reputational damage, fraud, system failures, and reliance on third-party information and vendors - The Company is highly dependent on **key management and business development personnel**; the loss of these individuals could materially affect operations and financial condition[125](index=125&type=chunk) - Inability to successfully implement and manage **growth strategies**, including identifying **attractive markets** or **integrating acquisitions**, could adversely affect results of operations and financial condition[127](index=127&type=chunk)[129](index=129&type=chunk) - Operational risks include **reputational risk**, **legal and compliance risk**, **fraud**, **theft**, **operational errors**, and **failures in computer or communications systems**, which could lead to **financial loss or liability**[130](index=130&type=chunk)[131](index=131&type=chunk)[132](index=132&type=chunk) - The Company's ability to engage in routine funding transactions could be adversely affected by the actions and **commercial soundness of other financial institutions** due to **interdependencies in the financial services industry**[134](index=134&type=chunk) - Failure to maintain **effective internal and disclosure controls** could **harm reputation, operating results, and investor confidence**[135](index=135&type=chunk)[136](index=136&type=chunk) - Reliance on the **accuracy and completeness of information from clients and counterparties**, and on **third-party vendors** for business infrastructure, exposes the Company to risks if this information is misleading or if vendors fail to perform[138](index=138&type=chunk)[139](index=139&type=chunk) - **Information systems are vulnerable to interruptions or security breaches**, which could damage reputation, lead to customer loss, regulatory scrutiny, or civil litigation[140](index=140&type=chunk) [Risk Related to the Company's Regulatory Environment](index=42&type=section&id=Risk%20Related%20to%20the%20Company%27s%20Regulatory%20Environment) Changes in accounting standards and extensive financial regulations, including capital requirements and ESG expectations, can increase costs and restrict operations - Changes in **financial accounting and reporting standards** can materially impact reported financial condition and results of operations, potentially requiring **retroactive application and restatement of prior periods**[141](index=141&type=chunk) - Operating in a **highly regulated industry** means extensive laws and regulations govern operations, corporate governance, executive compensation, and financial accounting; changes or non-compliance can lead to **increased costs, business restrictions, fines, and penalties**[142](index=142&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) - **Regulatory capital standards, particularly Basel III**, may adversely affect **profitability, lending, and dividend payments** by requiring higher capital levels or limiting operations[146](index=146&type=chunk) - Increasing scrutiny and evolving expectations regarding **Environmental, Social, and Governance (ESG) practices** may impose **additional costs, new risks, and impact reputation or stock price**[147](index=147&type=chunk) [Risk Related to the Company's Common Stock](index=44&type=section&id=Risk%20Related%20to%20the%20Company%27s%20Common%20Stock) Risks include thin trading, dividend payment limitations, anti-takeover provisions, significant shareholder influence, and impacts from climate change and external events - The Company's common stock is **thinly traded**, which may **limit shareholders' ability to sell shares** and **increase price volatility**[148](index=148&type=chunk)[150](index=150&type=chunk)[151](index=151&type=chunk) - The ability to pay **dividend payments** is limited by **regulatory restrictions** and the need to maintain **sufficient capital**; failure to meet these requirements or default on **subordinated notes/debt securities** would prohibit dividend payments[152](index=152&type=chunk)[153](index=153&type=chunk) - **Anti-takeover provisions** in **governing documents and Virginia law** could **discourage acquisition attempts**, even if favorable to shareholders[154](index=154&type=chunk) - **Kenneth R. Lehman**, the largest shareholder (**approximately 51.47% ownership as of December 16, 2020**), has **significant influence**, and his interests may not always align with other common stockholders[155](index=155&type=chunk) - If Mr. Lehman acquires **more than 66.67% of outstanding common stock**, it would trigger **accelerated benefits under certain employment and benefit agreements**, leading to **additional compensation expenses**[156](index=156&type=chunk)[157](index=157&type=chunk) - **Climate change and related legislative/regulatory initiatives** may result in **operational changes, increased expenditures**, and direct impacts on **loan collateral values and regional economic activity**[158](index=158&type=chunk)[159](index=159&type=chunk)[161](index=161&type=chunk) - **Severe weather, natural disasters, acts of war or terrorism, and public health issues** could significantly impact **business operations, deposit stability, loan repayment ability, and collateral values**[162](index=162&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=50&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) There are no unresolved staff comments applicable to the Company - **No unresolved staff comments are applicable**[163](index=163&type=chunk) [Item 1C. CYBERSECURITY](index=50&type=section&id=Item%201C.%20CYBERSECURITY) The Company maintains a robust and dynamic cybersecurity framework integrated into its enterprise risk management, utilizing a three-lines-of-defense structure, external partners, and Board oversight to mitigate risks - The Company had **no material cybersecurity incidents in 2023**[164](index=164&type=chunk) [Overview](index=50&type=section&id=Overview) The Company employs a robust framework to mitigate cybersecurity risks through privacy policies, management oversight, technology design, and active monitoring - The Company employs a **robust and dynamic framework** to reduce and mitigate **cybersecurity risk**, which includes exposure to **failures, interruptions, or security breaches from malicious attacks**[163](index=163&type=chunk) - Mitigation strategies involve maintaining **privacy policies, management oversight, accountability structures, technology design, active monitoring**, a **third-party cybersecurity oversight program**, and **Board-level oversight**[166](index=166&type=chunk) [Risk Management and Strategy](index=50&type=section&id=Risk%20Management%20and%20Strategy) Cybersecurity risk management is integrated into the enterprise framework, employing a three-lines-of-defense structure, management expertise, and independent third-party assessments - Cybersecurity risk management is integrated into the **enterprise risk management framework**, utilizing a **three-lines-of-defense structure**, **management expertise**, **Board oversight**, and **outside partners**[165](index=165&type=chunk) - Safeguards include **protecting customer and corporate information**, **programs to mitigate known attacks**, **internal and external vulnerability scanning**, **backup and recovery systems**, and **cybersecurity requirements for third-party service providers**[165](index=165&type=chunk)[167](index=167&type=chunk) - **Independent third-party service providers** perform **penetration testing and program assessments** for **regulatory compliance and industry guidelines**[166](index=166&type=chunk) [Governance](index=52&type=section&id=Governance) Established governance structures, including an incident response plan, ensure appropriate oversight, threat monitoring, and escalation of cybersecurity risks - **Established governance structures**, including an **incident response plan**, facilitate **appropriate oversight of cybersecurity risk**, enabling **review, management, threat monitoring, and escalation to executive management or the Board**[169](index=169&type=chunk) [Role of the Board of Directors](index=52&type=section&id=Role%20of%20the%20Board%20of%20Directors) The Board oversees the Company's cyber risk profile, strategy, and initiatives, receiving regular reports and engaging with auditors and regulators - The **Board of Directors oversees cyber risk profile, enterprise cyber strategy, and key cyber initiatives**, receiving **regular reports from the Information Security Officer** and engaging with **auditors and regulators**[170](index=170&type=chunk) - The **Board Risk Committee** assists in **risk oversight**, oversees the **enterprise risk management framework**, discusses **major risk exposures**, and receives **quarterly cybersecurity risk summaries**[171](index=171&type=chunk) [Role of Management](index=52&type=section&id=Role%20of%20Management) The cybersecurity risk management program is structured with three lines of defense, involving employees, risk monitoring, and independent internal audit assurance - The cybersecurity risk management program is built on **three lines of defense**: **employees (first line, receiving annual training)**, **second line (evaluates, monitors, and challenges risk mitigation efforts)**, and **Internal Audit (third line, provides independent assurance)**[172](index=172&type=chunk)[173](index=173&type=chunk)[174](index=174&type=chunk)[176](index=176&type=chunk) - The **Chief Risk Officer** is responsible for **implementing the enterprise risk management framework** and **reports directly to the CEO**[172](index=172&type=chunk) - The **Management Risk and Compliance Committee**, led by the second line of defense, governs technology and operational risk tolerances, including **cybersecurity and third-party provider risks**[175](index=175&type=chunk) [ITEM 2. PROPERTIES](index=54&type=section&id=ITEM%202.%20PROPERTIES) The Company's executive and administrative offices, along with the Mortgage Company's principal office, are owned by the Bank in Midlothian, Virginia - The Company's **executive and administrative offices**, and the **Mortgage Company's principal office**, are **owned by the Bank in Midlothian, Virginia**[177](index=177&type=chunk) - The Bank operates **nine full-service branch banking offices in Central Virginia** (Chesterfield, Hanover, Henrico, Powhatan, James City counties, and Richmond city), with **six owned and three leased**[178](index=178&type=chunk) - Properties are **maintained in good operating condition** and are considered **suitable and adequate for operational needs**[179](index=179&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=54&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The Company is a party to various legal proceedings in the ordinary course of business, but as of the report date, there are no pending or threatened proceedings that would materially affect its business - The Company is involved in **various legal proceedings as part of its ordinary operations**[180](index=180&type=chunk) - As of the report date, there are **no pending or threatened legal proceedings that, if determined adversely, would have a material effect on the Company's business, results of operations, or financial position**[180](index=180&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=54&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Mine safety disclosures are not applicable to the Company - **Mine safety disclosures are not applicable**[181](index=181&type=chunk) PART II [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=55&type=section&id=ITEM%205%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The Company's common stock trades on the Nasdaq Capital Market under the symbol "VBFC", with dividends declared and no repurchases in 2023 or 2022 - The Company's common stock trades on the **Nasdaq Capital Market** under the symbol **"VBFC"**[183](index=183&type=chunk) [Market and Dividend Information](index=55&type=section&id=Market%20and%20Dividend%20Information) This section details the Company's common stock trading, historical dividend payments, and factors influencing future dividend declarations Quarterly Cash Dividends Per Common Share | Year | Dividend Per Share | | :--- | :----------------- | | 2023 | **$0.66** | | 2022 | **$0.58** | - Future dividend declarations are subject to **Board approval, operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and market conditions**[185](index=185&type=chunk) [Holders](index=55&type=section&id=Holders) Information on the number of outstanding common shares and record holders as of a specific date is provided Common Stock Holders (March 15, 2024) | Metric | Value | | :---------------------- | :---------- | | Shares Outstanding | **1,492,879** | | Shareholders of Record | **~871** | [Purchases of Equity Securities](index=55&type=section&id=Purchases%20of%20Equity%20Securities) The Company did not engage in any repurchases of its common stock during the reported fiscal years - The Company **did not repurchase any of its common stock during 2023 or 2022**[186](index=186&type=chunk) [ITEM 6. RESERVED](index=55&type=section&id=ITEM%206.%20RESERVED) This item is reserved and contains no information [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=55&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's discussion and analysis of the Company's financial condition and results of operations for the years ended December 31, 2023 and 2022 - The Company's primary source of earnings is **net interest income** and income from **mortgage banking activities**, with principal market risk exposure to **interest rate risk**[191](index=191&type=chunk) - Management's discussion and analysis should be read in conjunction with the **consolidated financial statements and notes**[188](index=188&type=chunk)[195](index=195&type=chunk) [General](index=57&type=section&id=General) The Company's earnings are primarily driven by net interest income and mortgage banking, with interest rate risk as the main market exposure - The Company's primary earnings sources are **net interest income** and **mortgage banking activities**, with **interest rate risk** being the principal market risk exposure[191](index=191&type=chunk) - Assumptions and judgments about loan portfolio collectability are crucial, and incorrect estimates could necessitate additions to the **allowance for credit losses**, negatively impacting **net income**[194](index=194&type=chunk) [Results of Operations](index=59&type=section&id=Results%20of%20Operations) This section analyzes the Company's financial performance, including net income, EPS, and the impact of CECL adoption and securities repositioning Net Income and EPS (2023 vs. 2022) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :----------------- | :----------- | :----------- | :----------- | :----------- | | Net Income | **$1,918,000** | **$8,305,000** | **$(6,387,000)** | **-76.91%** | | Diluted EPS | **$1.29** | **$5.62** | **$(4.33)** | **-77.05%** | - The Company adopted the **CECL methodology on January 1, 2023**, increasing the **allowance for credit losses by $150,000 to $3.52 million**[197](index=197&type=chunk) - A **securities repositioning and balance sheet deleveraging strategy in 2023** involved **selling $55.195 million in available-for-sale securities at a pre-tax loss of $4.986 million**, aiming to improve **earnings per share, net interest margin, return on assets, and tangible common equity**[199](index=199&type=chunk) [Net interest income](index=59&type=section&id=Net%20interest%20income) Analysis of net interest income and margin, detailing factors influencing earning asset yields and the cost of interest-bearing liabilities Net Interest Income and Margin (2023 vs. 2022) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :---------------------- | :----------- | :----------- | :----------- | :----------- | | Net Interest Income | **$25,288,000** | **$25,706,000** | **$(418,000)** | **-1.63%** | | Net Interest Margin (NIM)| **3.65%** | **3.67%** | **-0.02%** | **-0.54%** | - **NIM contracted by two basis points** due to an **88 basis point increase in earning asset yield (to 4.80%)** offset by a **146 basis point increase in the cost of interest-bearing liabilities (to 1.90%)**[203](index=203&type=chunk) - The increase in earning asset yield was driven by an improved earning asset mix and rising interest rates, with further improvement expected from securities portfolio maturities and balance sheet repositioning[203](index=203&type=chunk) - The cost of interest-bearing liabilities increased due to higher rates on variable-rate debt and market pressures on deposit rates, with average borrowings increasing by **$33.2 million at a weighted average cost of 4.65%**[203](index=203&type=chunk) - **Total Paycheck Protection Program (PPP) income decreased significantly from $1,058,000 in 2022 to $9,400 in 2023**[203](index=203&type=chunk) [Provision for (recovery of) credit losses](index=63&type=section&id=Provision%20for%20%28recovery%20of%29%20credit%20losses) This section details the provision for credit losses, including the impact of CECL adoption and changes in the allowance for credit losses - The Company adopted the **CECL methodology on January 1, 2023**, resulting in a **$150,000 increase in the allowance for credit losses**[210](index=210&type=chunk) Allowance for Credit Losses (2023 vs. 2022) | Metric | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Allowance for Credit Losses (End of Period) | **$3.73 million** | **$3.37 million** | | Allowance for Credit Losses on Loans | **$3.42 million** | **$3.37 million** | | Reserve for Unfunded Commitments | **$306,000** | N/A | Provision for Credit Losses (2023 vs. 2022) | Metric | 2023 | 2022 | | :----------------------------------- | :---------- | :---------- | | Provision for Credit Losses for Loans| **$21,000** | **$(300,000)** | | Provision for Unfunded Commitments | **$29,000** | **$0** | | Total Provision (Recovery) | **$50,000** | **$(300,000)** | - The **2023 provision for credit losses on loans ($21,000)** was due to loan growth offset by improved credit metrics (**non-performing loans decreased from 0.12% to 0.05%**) and **$162,000 in net recoveries**[215](index=215&type=chunk) - The **2022 recovery of provision for loan loss expense ($300,000)** resulted from reductions in qualitative factors due to improving economic conditions, better credit metrics, and fewer loan deferrals[219](index=219&type=chunk) [Noninterest income](index=66&type=section&id=Noninterest%20income) Analysis of noninterest income components, highlighting changes in mortgage banking income, service charges, and investment security sales Noninterest Income (2023 vs. 2022) | Category | 2023 ($ thousands) | 2022 ($ thousands) | Change ($ thousands) | Change (%) | | :-------------------------------- | :----------------- | :----------------- | :------------------- | :--------- | | Service charges and fees | **$2,738** | **$2,625** | **$113** | **4.3%** | | Mortgage banking income, net | **$1,690** | **$3,427** | **$(1,737)** | **-50.7%** | | Loss on sale of investment securities | **$(4,986)** | **$0** | **$(4,986)** | **100.0%** | | Gain on sale of SBA loans | **$0** | **$79** | **$(79)** | **-100.0%** | | Other | **$522** | **$471** | **$51** | **10.8%** | | **Total Noninterest Income** | **$(36)** | **$6,602** | **$(6,638)** | **-100.5%** | - The **significant decrease in total noninterest income** was primarily due to a **$4,986,000 loss on sale of investment securities from a balance sheet repositioning strategy**[225](index=225&type=chunk) - **Mortgage banking income, net, decreased by $1,737,000** due to lower mortgage originations and sales, impacted by higher mortgage rates and low housing inventory[225](index=225&type=chunk) - **Service charges and fees increased by $113,000**, driven by higher interchange fee income from increased consumer and business spending[225](index=225&type=chunk) [Noninterest expense](index=66&type=section&id=Noninterest%20expense) This section reviews noninterest expenses, including salaries, benefits, data processing, and professional services, and their year-over-year changes Noninterest Expense (2023 vs. 2022) | Category | 2023 ($ thousands) | 2022 ($ thousands) | Change ($ thousands) | Change (%) | | :---------------------------- | :----------------- | :----------------- | :------------------- | :--------- | | Salaries and benefits | **$13,389** | **$13,768** | **$(379)** | **-2.8%** | | Occupancy | **$1,242** | **$1,216** | **$26** | **2.1%** | | Equipment | **$1,112** | **$1,102** | **$10** | **0.9%** | | Supplies | **$162** | **$158** | **$4** | **2.5%** | | Data processing | **$1,943** | **$1,389** | **$554** | **39.9%** | | Professional and outside services | **$1,598** | **$1,387** | **$211** | **15.2%** | | Advertising and marketing | **$404** | **$386** | **$18** | **4.7%** | | FDIC insurance premium | **$298** | **$237** | **$61** | **25.7%** | | Other operating expense | **$2,889** | **$2,670** | **$219** | **8.2%** | | **Total Noninterest Expense** | **$23,037** | **$22,313** | **$724** | **3.2%** | - **Salaries and benefits decreased by $379,000**, primarily due to lower mortgage production[229](index=229&type=chunk) - **Data processing expenses increased by $554,000** due to the rollout of an updated online and mobile banking platform[229](index=229&type=chunk) - **Professional and outside services increased by $211,000** due to new licensed software, consultant fees, and debit/credit card usage fees[229](index=229&type=chunk) [Income taxes](index=67&type=section&id=Income%20taxes) Analysis of income tax expense and the effective tax rate, including factors contributing to changes in tax burden Income Tax Expense and Effective Tax Rate (2023 vs. 2022) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | | :---------------------- | :----------------- | :----------------- | | Income Tax Expense | **$247** | **$1,990** | | Effective Tax Rate | **11.4%** | **19.3%** | - The **decrease in the effective tax rate** was primarily due to an increase in tax credits related to state taxes attributed to the Company and the mortgage banking segment[228](index=228&type=chunk) [Balance Sheet Analysis](index=68&type=section&id=Balance%20Sheet%20Analysis) This section provides a detailed analysis of the Company's balance sheet components, including investment securities, loans, deposits, and capital resources [Investment securities](index=68&type=section&id=Investment%20securities) Overview of the Company's investment securities portfolio, including classification, composition, and weighted average yields - All **investment securities are classified as available for sale**[230](index=230&type=chunk) Investment Securities Portfolio Composition (December 31, 2023) | Category | Amortized Cost ($ thousands) | Weighted Average Yield | | :----------------------------- | :--------------------------- | :--------------------- | | U.S. Government agency obligations | **$20,690** | **1.60%** | | Mortgage-backed securities | **$77,275** | **3.85%** | | Municipals | **$2,264** | **2.17%** | | Subordinated debt | **$12,449** | **4.94%** | | **Total** | **$112,678** | **3.52%** | [Loans](index=68&type=section&id=Loans) Analysis of the loan portfolio, including quality, composition by type, geographic concentration, and underwriting practices - Management aims to maintain **high loan portfolio quality** through **rigorous underwriting, regular creditworthiness evaluation, and diversification** to minimize concentration risk[233](index=233&type=chunk) - Approximately **81% of all loans are secured by real property in Virginia**, with **commercial and industrial loans representing about 15%** and **rehabilitated student loans about 3%**[234](index=234&type=chunk) Loan Portfolio Composition (December 31, 2023 vs. 2022) | Loan Type | 2023 Amount ($ thousands) | 2023 % | 2022 Amount ($ thousands) | 2022 % | | :------------------------------ | :------------------------ | :----- | :------------------------ | :----- | | Construction and land development | **$47,495** | **8.26%** | **$45,127** | **8.38%** | | Commercial real estate | **$290,590** | **50.54%** | **$284,617** | **52.86%** | | Consumer real estate | **$128,532** | **22.35%** | **$93,680** | **17.40%** | | Commercial and industrial loans | **$86,203** | **14.99%** | **$90,348** | **16.78%** | | Guaranteed student loans | **$17,923** | **3.12%** | **$20,617** | **3.83%** | | Consumer and other | **$4,265** | **0.74%** | **$4,038** | **0.75%** | | **Total Loans** | **$575,008** | **100.00%**| **$538,427** | **100.00%**| [Allowance for Credit losses](index=70&type=section&id=Allowance%20for%20Credit%20losses) Details on the allowance for credit losses, its purpose, CECL methodology, and activity impacting its balance - The **allowance for credit losses** is maintained to absorb expected losses in the loan portfolio, with the Company adopting the **CECL methodology on January 1, 2023**[238](index=238&type=chunk)[210](index=210&type=chunk) Allowance for Credit Losses Activity (2023 vs. 2022) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | | :----------------------------------- | :----------------- | :----------------- | | Beginning Balance | **$3,370** | **$3,423** | | Impact of adopting ASC 326 | **$(127)** | N/A | | Provision for (Recovery of) Credit Losses | **$21** | **$(300)** | | Charge-offs | **$(33)** | **$(217)** | | Recoveries | **$192** | **$464** | | **Ending Balance** | **$3,423** | **$3,370** | - The **2023 provision for credit losses on loans was $21,000**, driven by loan growth offset by improved credit metrics and net recoveries[215](index=215&type=chunk) [Asset quality](index=72&type=section&id=Asset%20quality) Review of asset quality metrics, including nonperforming assets, nonaccrual loans, and their ratios to total assets and loans Asset Quality Information (December 31, 2023 vs. 2022) | Metric | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Nonaccrual loans | **$291,000** | **$654,000** | | Total nonperforming assets | **$291,000** | **$654,000** | | Nonaccrual loans to total loans | **0.05%** | **0.12%** | | Nonperforming assets to loans | **0.05%** | **0.12%** | | Nonperforming assets to total assets | **0.04%** | **0.09%** | | Allowance for credit losses on loans to Loans, net of deferred fees and costs | **0.59%** | **0.63%** | - **Nonperforming assets decreased from $654,000 in 2022 to $291,000 in 2023**, consisting entirely of nonaccrual loans[245](index=245&type=chunk) - **Loans past due 90 days and still accruing totaled $2,228,000 in 2023 and $1,725,000 in 2022**, all of which are rehabilitated student loans with a **98% DOE guarantee**[243](index=243&type=chunk)[250](index=250&type=chunk) [Deposits](index=74&type=section&id=Deposits) Analysis of deposit composition, changes in balances, and strategies for managing deposit costs and maturities Deposit Composition (December 31, 2023 vs. 2022) | Deposit Type | 2023 Amount ($ thousands) | 2023 % | 2022 Amount ($ thousands) | 2022 % | | :---------------------------- | :------------------------ | :----- | :------------------------ | :----- | | Demand accounts | **$247,624** | **40.9%** | **$255,236** | **40.9%** | | Interest checking accounts | **$76,289** | **12.6%** | **$90,252** | **14.4%** | | Money market accounts | **$195,249** | **32.3%** | **$179,036** | **28.7%** | | Savings accounts | **$39,633** | **6.5%** | **$55,695** | **8.9%** | | Time deposits of $250,000 and over | **$9,145** | **1.5%** | **$4,740** | **0.8%** | | Other time deposits | **$37,405** | **6.2%** | **$39,784** | **6.3%** | | **Total** | **$605,345** | **100.0%**| **$624,743** | **100.0%**| - **Total deposits decreased by $19,398,000 (3.10%)** from **December 31, 2022**, primarily due to **decreases in noninterest-bearing demand accounts and low-cost relationship deposits**[252](index=252&type=chunk)[253](index=253&type=chunk)[259](index=259&type=chunk) - **Noninterest-bearing demand accounts decreased by $7,612,000**, driven by consumers and businesses drawing down balances due to inflation, tax payments, and investments in higher-yielding products[253](index=253&type=chunk)[254](index=254&type=chunk) - **Time deposits increased by $2,026,000 (4.55%)**, reflecting a strategy to lock in lower-cost time deposits with shorter maturities[259](index=259&type=chunk) [Borrowings](index=76&type=section&id=Borrowings) Overview of the Company's borrowing activities, including FHLB advances and other funding sources, used to supplement deposits - **Borrowings are used to supplement deposits for funding or liability duration needs**[258](index=258&type=chunk) [Off-balance sheet arrangements](index=76&type=section&id=Off-balance%20sheet%20arrangements) Description of off-balance sheet financial instruments, such as credit commitments and letters of credit, and their associated risks - The Company uses **off-balance sheet financial instruments**, such as **commitments to extend credit and standby letters of credit**, to meet customer financing needs and manage interest rate risk[259](index=259&type=chunk) [Capital resources](index=77&type=section&id=Capital%20resources) Analysis of shareholders' equity and regulatory capital ratios, highlighting factors influencing capital adequacy and changes in equity Shareholders' Equity (2023 vs. 2022) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | Change ($ thousands) | | :----------------- | :----------------- | :----------------- | :------------------- | | Shareholders' Equity | **$67,556** | **$61,111** | **$6,445** | - The **increase in shareholders' equity was primarily due to net income of $1,918,000 and a $5,268,000 decrease in accumulated other comprehensive loss**, resulting from the balance sheet repositioning and improved valuations on available-for-sale securities[261](index=261&type=chunk) Bank Capital Ratios (December 31, 2023 vs. 2022) | Capital Ratio | 2023 | 2022 | | :--------------------------------- | :------ | :------ | | Leverage ratio | **11.14%** | **10.95%** | | Common equity tier 1 capital ratio | **13.86%** | **14.22%** | | Tier 1 capital to risk-weighted assets | **13.86%** | **14.22%** | | Total capital to risk-weighted assets | **14.49%** | **14.81%** | | Equity to total assets | **10.50%** | **9.78%** | [Liquidity](index=79&type=section&id=Liquidity) Assessment of the Company's liquidity position, including liquid assets, uninsured deposits, and available funding sources Liquid Assets (2023 vs. 2022) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | | :----------------------------------- | :----------------- | :----------------- | | Liquid Assets (Cash, Cash Equivalents, AFS Securities) | **$123,299** | **$150,531** | | % of Total Assets | **16.74%** | **20.81%** | - At **December 31, 2023**, uninsured deposits were approximately **$209.1 million (34.62% of total deposits)**, with total liquidity sources covering **71.5%** of uninsured deposits[266](index=266&type=chunk) - The Company had **$149.5 million in total liquidity sources** at **December 31, 2023**, and an **additional $110.5 million in wholesale deposit availability**, providing **124.3% coverage** for uninsured deposits[266](index=266&type=chunk)[267](index=267&type=chunk) - The Company maintains **federal funds lines of credit ($22.8 million unused at December 31, 2023)** and **FHLB borrowing capacity ($3.4 million unused at December 31, 2023**, with potential to increase by pledging additional collateral)[268](index=268&type=chunk)[269](index=269&type=chunk) [Interest Rate Sensitivity](index=79&type=section&id=Interest%20Rate%20Sensitivity) Management's approach to monitoring and managing interest rate sensitivity to optimize net interest margin and mitigate risk - Management monitors interest rate sensitivity by considering expected cash flows from portfolios and repricing of assets/liabilities to maximize and stabilize net interest margin[272](index=272&type=chunk) - The sale of fixed-rate loans is intended to protect against precipitous changes in interest rates[274](index=274&type=chunk) [Impact of inflation and changing prices](index=81&type=section&id=Impact%20of%20inflation%20and%20changing%20prices) Discussion on how inflation affects operating costs and the greater impact of interest rate changes on the Company's financial condition - Inflation primarily affects the Company through increased operating costs, but changes in interest rates have a far greater impact on financial condition[277](index=277&type=chunk) [LIBOR and Other Benchmark Rates](index=81&type=section&id=LIBOR%20and%20Other%20Benchmark%20Rates) Details on the transition from LIBOR to SOFR for borrowings and financial instruments, and its impact on the Company - Following the **discontinuation of LIBOR on June 30, 2023**, the Company replaced LIBOR with the **corresponding term SOFR plus an applicable tenor spread adjustment** for its borrowings and financial instruments[278](index=278&type=chunk)[279](index=279&type=chunk) - This transition did **not have a significant impact** on the Company's consolidated financial statements[280](index=280&type=chunk) [Critical Accounting Policies and Estimates](index=81&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Overview of key accounting policies and estimates, particularly the highly subjective allowance for credit losses, and their reliance on management judgment - The Company's financial statements rely on management's estimates and assumptions, particularly for the **allowance for credit losses**, which is highly subjective and susceptible to significant revision[281](index=281&type=chunk)[282](index=282&type=chunk)[286](index=286&type=chunk) - The **allowance for credit losses** includes allowances for loans, unfunded commitments, and securities, measured using a **WARM methodology** and considering qualitative adjustment factors[284](index=284&type=chunk)[287](index=287&type=chunk)[289](index=289&type=chunk)[290](index=290&type=chunk) [New accounting standards](index=84&type=section&id=New%20accounting%20standards) Information on recent accounting pronouncements and their potential effects on the Company's financial statements - Information regarding recent accounting pronouncements and their effect on the Company is detailed in **Note 1 of the Consolidated Financial Statements**[293](index=293&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=84&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This item is not applicable to the Company - **Quantitative and qualitative disclosures about market risk are not applicable**[294](index=294&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=84&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents the Company's audited consolidated financial statements for the years ended December 31, 2023 and 2022, along with related footnotes - The **consolidated financial statements and related footnotes are presented**, including the **Report of Independent Registered Public Accounting Firm**[295](index=295&type=chunk)[298](index=298&type=chunk) - The Company **changed its method of accounting for the allowance for credit losses in 2023** due to the **adoption of ASU 2016-13 (CECL)**[299](index=299&type=chunk) [Report of Independent Registered Public Accounting Firm](index=85&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) This report provides the auditor's opinion on the consolidated financial statements and highlights critical audit matters, such as the allowance for credit losses - **Yount, Hyde & Barbour, P.C.** provided an **unqualified opinion** on the **consolidated financial statements** for **December 31, 2023 and 2022**, stating they present fairly the financial position, results of operations, and cash flows in conformity with **GAAP**[298](index=298&type=chunk) - The audit identified the **estimation of the Allowance for Credit Losses – Loans Collectively Evaluated for Losses** as a **critical audit matter** due to its complexity and subjectivity, requiring extensive auditor judgment[304](index=304&type=chunk)[305](index=305&type=chunk)[308](index=308&type=chunk) [Consolidated Balance Sheets](index=90&type=section&id=Consolidated%20Balance%20Sheets) Presents a snapshot of the Company's assets, liabilities, and equity at specific points in time, reflecting its financial position Consolidated Balance Sheet Highlights (December 31, 2023 vs. 2022) | Asset/Liability/Equity | 2023 ($ thousands) | 2022 ($ thousands) | | :------------------------------- | :----------------- | :----------------- | | Total Assets | **$736,616** | **$723,270** | | Total Deposits | **$605,345** | **$624,743** | | Federal Home Loan Bank advances | **$45,000** | **$20,000** | | Total Liabilities | **$669,060** | **$662,159** | | Total Shareholders' Equity | **$67,556** | **$61,111** | [Consolidated Statements of Income](index=91&type=section&id=Consolidated%20Statements%20of%20Income) Details the Company's revenues, expenses, and net income over a period, illustrating its operational profitability Consolidated Statements of Income Highlights (2023 vs. 2022) | Income/Expense Item | 2023 ($ thousands) | 2022 ($ thousands) | | :------------------------------- | :----------------- | :----------------- | | Total Interest Income | **$33,274** | **$27,487** | | Total Interest Expense | **$7,986** | **$1,781** | | Net Interest Income | **$25,288** | **$25,706** | | Provision for (recovery of) credit losses | **$50** | **$(300)** | | Total Noninterest Income (Loss) | **$(36)** | **$6,602** | | Total Noninterest Expense | **$23,037** | **$22,313** | | Income before income tax expense | **$2,165** | **$10,295** | | Income tax expense | **$247** | **$1,990** | | Net Income | **$1,918** | **$8,305** | | Earnings per share, diluted | **$1.29** | **$5.62** | [Consolidated Statements of Comprehensive Income (Loss)](index=92&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) Reports net income and other comprehensive income items, such as unrealized gains/losses on securities, to show total comprehensive income Consolidated Statements of Comprehensive Income (Loss) Highlights (2023 vs. 2022) | Item | 2023 ($ thousands) | 2022 ($ thousands) | | :----------------------------------------- | :----------------- | :----------------- | | Net income | **$1,918** | **$8,305** | | Net change in unrealized holding gains (losses) on securities available for sale, net of tax | **$1,320** | **$(10,146)** | | Reclassification for gains included in net income, net of tax | **$3,939** | **$0** | | Minimum pension adjustment, net of tax | **$9** | **$9** | | Total other comprehensive income (loss) | **$5,268** | **$(10,137)** | | Total comprehensive income (loss) | **$7,186** | **$(1,832)** | [Consolidated Statements of Shareholders' Equity](index=93&type=section&id=Consolidated%20Statements%20of%20Shareholders%27%20Equity) Outlines changes in the Company's equity accounts, including common stock, retained earnings, and accumulated other comprehensive loss Consolidated Statements of Shareholders' Equity Highlights (December 31, 2023 vs. 2022) | Item | 2023 ($ thousands) | 2022 ($ thousands) | | :--------------------------------- | :----------------- | :----------------- | | Common Stock | **$5,908** | **$5,868** | | Additional Paid-in Capital | **$55,486** | **$55,167** | | Retained Earnings | **$11,775** | **$10,957** | | Accumulated Other Comprehensive Loss | **$(5,613)** | **$(10,881)** | | **Total Shareholders' Equity** | **$67,556** | **$61,111** | - **Shareholders' equity increased by $6,445,000 in 2023**, primarily due to **net income and a decrease in accumulated other comprehensive loss**[261](index=261&type=chunk) [Consolidated Statements of Cash Flows](index=94&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Summarizes cash inflows and outflows from operating, investing, and financing activities, showing changes in cash and cash equivalents Consolidated Statements of Cash Flows Highlights (2023 vs. 2022) | Cash Flow Activity | 2023 ($ thousands) | 2022 ($ thousands) | | :--------------------------------- | :----------------- | :----------------- | | Net cash provided by operating activities | **$4,957** | **$10,269** | | Net cash used in investing activities | **$(8,542)** | **$(66,063)** | | Net cash provided by (used in) financing activities | **$4,621** | **$(20,144)** | | Net increase (decrease) in cash and cash equivalents | **$1,036** | **$(75,938)** | | Cash and cash equivalents, end of period | **$17,714** | **$16,678** | [Notes to Consolidated Financial Statements](index=95&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Provides detailed explanations and supplementary information for items presented in the consolidated financial statements [Note 1. Summary of Significant Accounting Policies](index=95&type=section&id=Note%201.%20Summary%20of%20Significant%20Accounting%20Policies) Outlines the Company's key accounting principles, including GAAP conformity, estimates, CECL adoption, and segment reporting - The Company's **accounting policies conform to GAAP and banking industry practices**, with financial position and results affected by **management's estimates and assumptions**[326](index=326&type=chunk)[281](index=281&type=chunk) - The Company adopted **ASU 2016-13 (CECL) on January 1, 2023**, resulting in a **net decrease to retained earnings of $119,000, net of taxes**, and now uses a **WARM methodology for estimating expected credit losses**[331](index=331&type=chunk)[332](index=332&type=chunk) - The Company also adopted **ASU 2022-02, removing TDR recognition and measurement guidance**, resulting in an **$8,000 reduction in the allowance for credit losses**[337](index=337&type=chunk) - **Debt securities are classified as held to maturity, available for sale, or trading**; currently, the **Company only holds available for sale securities**, **valued at fair value with changes reported in other comprehensive income**[339](index=339&type=chunk)[340](index=340&type=chunk) - **Mortgage banking activities involve originating residential mortgage loans for sale**, with **loans held for sale and interest rate lock commitments (IRLCs) accounted for at fair value**[343](index=343&type=chunk)[344](index=344&type=chunk) - **Loans are stated at principal outstanding, net of unearned income**, with origination fees and costs deferred and amortized[347](index=347&type=chunk) - The **allowance for credit losses is a valuation allowance for expected credit losses on loans, unfunded commitments, and securities**, established through a provision for credit losses[360](index=360&type=chunk)[361](index=361&type=chunk) - The Company has **two reportable segments: traditional commercial banking and mortgage banking**, with intercompany transactions eliminated in consolidation[379](index=379&type=chunk)[380](index=380&type=chunk) - Recent accounting pronouncements (**ASU 2023-09, 2023-07, 2023-06, 2023-03, 2022-06, 2020-04, 2021-01**) are being assessed for their impact, with most not expected to have a material effect[381](index=381&type=chunk)[385](index=385&type=chunk)[386](index=386&type=chunk)[387](index=387&type=chunk)[388](index=388&type=chunk)[391](index=391&type=chunk) [Note 2. Investment Securities Available for Sale](index=114&type=section&id=Note%202.%20Investment%20Securities%20Available%20for%20Sale) Details the composition, fair value, and unrealized gains/losses of the Company's available-for-sale investment securities portfolio Investment Securities Available for Sale (December 31, 2023 vs. 2022) | Category | 2023 Amortized Cost ($ thousands) | 2023 Fair Value ($ thousands) | 2022 Amortized Cost ($ thousands) | 2022 Fair Value ($ thousands) | | :----------------------------- | :-------------------------------- | :---------------------------- | :-------------------------------- | :---------------------------- | | U.S. Government agency obligations | **$20,690** | **$20,615** | **$64,631** | **$60,902** | | Mortgage-backed securities | **$77,275** | **$72

PART I – FINANCIAL INFORMATION [ITEM 1 – FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201%20%E2%80%93%20FINANCIAL%20STATEMENTS) This section presents the unaudited consolidated financial statements of Village Bank and Trust Financial Corp. and its subsidiary for the periods ended September 30, 2023, and December 31, 2022, including balance sheets, statements of operations, comprehensive income (loss), shareholders' equity, and cash flows, along with accompanying notes detailing accounting policies, estimates, and specific financial instrument information [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | **Assets** | | | | | | Total cash and cash equivalents | $19,331 | $16,678 | $2,653 | 15.91% | | Investment securities available for sale, at fair value | $104,046 | $133,853 | $(29,807) | -22.27% | | Total loans, net | $563,449 | $535,645 | $27,804 | 5.19% | | Total Assets | $727,504 | $723,270 | $4,234 | 0.59% | | **Liabilities** | | | | | | Total deposits | $626,774 | $624,743 | $2,031 | 0.33% | | Total liabilities | $663,819 | $662,159 | $1,660 | 0.25% | | **Shareholders' Equity** | | | | | | Total shareholders' equity | $63,685 | $61,111 | $2,574 | 4.21% | | Total liabilities and shareholders' equity | $727,504 | $723,270 | $4,234 | 0.59% | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) This statement reports the company's revenues, expenses, and net income (loss) over specific periods, reflecting operational performance | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total interest income | $8,462 | $6,955 | $24,144 | $19,954 | | Total interest expense | $2,348 | $420 | $5,541 | $1,238 | | Net interest income | $6,114 | $6,535 | $18,603 | $18,716 | | Provision for (recovery of) credit losses | $0 | $100 | $0 | $(300) | | Total noninterest income (loss) | $(3,669) | $1,750 | $(1,191) | $5,317 | | Total noninterest expense | $5,752 | $5,524 | $17,341 | $16,720 | | Income (loss) before income tax expense (benefit) | $(3,307) | $2,661 | $71 | $7,613 | | Income tax expense (benefit) | $(754) | $508 | $(155) | $1,470 | | Net income (loss) | $(2,553) | $2,153 | $226 | $6,143 | | Earnings (loss) per share, basic | $(1.72) | $1.46 | $0.15 | $4.16 | | Earnings (loss) per share, diluted | $(1.72) | $1.46 | $0.15 | $4.16 | [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This statement presents net income (loss) and other comprehensive income (loss) items, such as unrealized gains or losses on available-for-sale securities, for the reporting periods | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income (loss) | $(2,553) | $2,153 | $226 | $6,143 | | Total other comprehensive income (loss) | $2,371 | $(3,689) | $2,821 | $(10,824) | | Total comprehensive income (loss) | $(182) | $(1,536) | $3,047 | $(4,681) | [Consolidated Statements of Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) This statement details changes in shareholders' equity components, including common stock, additional paid-in capital, retained earnings, and accumulated other comprehensive loss | Metric | Balance, Dec 31, 2022 (in thousands) | Net income (loss) (in thousands) | Other comprehensive income (in thousands) | Cash dividend declared (in thousands) | Balance, Sep 30, 2023 (in thousands) | | :-------------------------------- | :----------------------------------- | :------------------------------- | :---------------------------------------- | :------------------------------------ | :----------------------------------- | | Common Stock | $5,868 | — | — | — | $5,894 | | Additional Paid-in Capital | $55,167 | — | — | — | $55,499 | | Retained Earnings | $10,957 | $226 | — | $(712) | $10,352 | | Accumulated Other Comprehensive Loss | $(10,881) | — | $2,821 | — | $(8,060) | | Total Shareholders' Equity | $61,111 | $226 | $2,821 | $(712) | $63,685 | - Total shareholders' equity increased by **$2,574,000** from December 31, 2022, to September 30, 2023, primarily due to a decrease in accumulated other comprehensive loss and net income[203](index=203&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement categorizes cash inflows and outflows from operating, investing, and financing activities, providing insights into liquidity and solvency | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $1,523 | $5,329 | | Net cash provided by (used in) investing activities | $(189) | $(68,915) | | Net cash provided by financing activities | $1,319 | $3,151 | | Net increase (decrease) in cash and cash equivalents | $2,653 | $(60,435) | | Cash and cash equivalents, end of period | $19,331 | $32,181 | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide detailed explanations and supplementary information about the accounting policies, estimates, and specific financial instrument data presented in the financial statements [Note 1 – Principles of presentation](index=9&type=section&id=Note%201%20%E2%80%93%20Principles%20of%20presentation) This note outlines the basis of financial statement preparation, including significant accounting policies and the impact of new accounting pronouncements - The Company adopted ASU 2016-13 (CECL methodology) on January 1, 2023, resulting in a net decrease to retained earnings of **$119,000**, net of taxes. This included adjustments to the allowance for credit losses on loans and a reserve for unfunded loan commitments[31](index=31&type=chunk) - The CECL methodology uses a weighted average remaining maturity (WARM) approach, segmenting the loan portfolio by risk characteristics and forecasting expected losses based on a twelve-month unemployment rate projection from the Federal Open Market Committee[32](index=32&type=chunk) Impact of ASC 326 Adoption on Allowance for Credit Losses (in thousands) | Metric | Dec 31, 2022 (As Previously Reported) | Impact of CECL Adoption | Jan 1, 2023 (As Reported Under CECL) | | :------------------------------------------ | :------------------------------------ | :---------------------- | :----------------------------------- | | Allowance for credit losses (Loans) | $3,370 | $(127) | $3,243 | | Allowance for credit losses on unfunded credit exposure | $0 | $277 | $277 | | Total Allowance for credit losses | $3,370 | $150 | $3,520 | - The Company also adopted ASU 2022-02, removing troubled debt restructuring (TDR) recognition guidance and reducing the allowance for credit losses by **$8,000** for non-collateral dependent TDRs[35](index=35&type=chunk) [Note 2 – Use of estimates](index=11&type=section&id=Note%202%20%E2%80%93%20Use%20of%20estimates) This note explains that financial statement preparation requires management to make estimates and assumptions that affect reported amounts and disclosures - The preparation of financial statements requires management to make estimates and assumptions, particularly for the allowance for credit losses and related provision, including collateral-dependent loans, which could differ significantly from actual results[36](index=36&type=chunk) [Note 3 – Earnings per common share](index=12&type=section&id=Note%203%20%E2%80%93%20Earnings%20per%20common%20share) This note provides details on the calculation of basic and diluted earnings per common share, including the components used in the computation Earnings (Loss) Per Share (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) - basic and diluted | $(2,553) | $2,153 | $226 | $6,143 | | Weighted average shares outstanding - basic | 1,485 | 1,476 | 1,485 | 1,475 | | Earnings (Loss) per share - basic | $(1.72) | $1.46 | $0.15 | $4.16 | | Earnings (Loss) per share - diluted | $(1.72) | $1.46 | $0.15 | $4.16 | - Unvested restricted units dependent on performance criteria (**10,658** at Sep 30, 2023, and **5,514** at Sep 30, 2022) were excluded from EPS computation as their vesting was indeterminable[38](index=38&type=chunk) [Note 4 – Investment securities available for sale](index=12&type=section&id=Note%204%20%E2%80%93%20Investment%20securities%20available%20for%20sale) This note details the composition, fair value, and unrealized gains or losses of investment securities classified as available for sale Investment Securities Available for Sale (in thousands) | Category | Sep 30, 2023 (Fair Value) | Dec 31, 2022 (Fair Value) | Change | | :------------------------------ | :-------------------------- | :-------------------------- | :------- | | U.S. Government agency obligations | $20,449 | $60,902 | $(40,453) | | Mortgage-backed securities | $71,591 | $60,560 | $11,031 | | Municipals | $1,543 | $1,550 | $(7) | | Subordinated debt | $10,463 | $10,841 | $(378) | | Total | $104,046 | $133,853 | $(29,807) | - The Company executed a securities repositioning strategy, selling **$55,195,000** of available-for-sale securities at a pre-tax loss of **$4,986,000**. Proceeds were used to reduce FHLB borrowings by **$15.0 million** and reinvested in higher-yielding securities (**5.48%** weighted average yield)[40](index=40&type=chunk) - As of September 30, 2023, **62** investments totaling **$76,826,000** were in an unrealized loss position of **$10,209,000**, primarily due to interest rate movements, not credit deterioration. The Company does not consider these impaired[41](index=41&type=chunk)[42](index=42&type=chunk) [Note 5 – Loans and allowance for credit losses](index=15&type=section&id=Note%205%20%E2%80%93%20Loans%20and%20allowance%20for%20credit%20losses) This note provides a breakdown of the loan portfolio by type and details the methodology and changes in the allowance for credit losses - The Company adopted ASC 326 (CECL methodology) on January 1, 2023, for measuring expected credit losses on financial assets at amortized cost, including loans[44](index=44&type=chunk) Loans Classified by Type (in thousands) | Loan Type | Sep 30, 2023 (Amount) | Sep 30, 2023 (%) | Dec 31, 2022 (Amount) | Dec 31, 2022 (%) | | :------------------------------------------ | :---------------------- | :--------------- | :---------------------- | :--------------- | | Construction and land development | $56,260 | 9.94% | $45,127 | 8.38% | | Commercial real estate | $286,281 | 50.57% | $284,617 | 52.86% | | Consumer real estate | $117,014 | 20.67% | $93,680 | 17.40% | | Commercial and industrial loans | $83,045 | 14.67% | $90,348 | 16.78% | | Guaranteed student loans | $18,923 | 3.34% | $20,617 | 3.83% | | Consumer and other | $4,578 | 0.81% | $4,038 | 0.75% | | Total loans | $566,101 | 100.00% | $538,427 | 100.00% | | Total loans, net | $563,449 | | $535,645 | | Nonaccrual Loans by Type (in thousands) | Loan Type | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------------ | :------------- | :------------- | | Consumer real estate | $269 | $635 | | Commercial and industrial loans | $30 | $19 | | Total loans | $299 | $654 | - The Company recorded a recovery for credit losses for loans of **$52,000** for the nine months ended September 30, 2023, driven by loan growth offset by improved credit metrics (non-performing loans decreased from **0.13% to 0.06%**) and **$162,000** in net-recoveries[77](index=77&type=chunk) - A provision for credit losses for unfunded commitments of **$52,000** was recorded for the nine months ended September 30, 2023, due to an increase in the total outstanding balance[77](index=77&type=chunk) [Note 6 – Deposits](index=30&type=section&id=Note%206%20%E2%80%93%20Deposits) This note presents a classification of deposits by type, including noninterest-bearing and interest-bearing accounts, and their respective balances Deposits by Type (in thousands) | Deposit Type | Sep 30, 2023 (Amount) | Sep 30, 2023 (%) | Dec 31, 2022 (Amount) | Dec 31, 2022 (%) | | :-------------------------------- | :---------------------- | :--------------- | :---------------------- | :--------------- | | Demand accounts (Noninterest bearing) | $243,390 | 38.8% | $255,236 | 40.9% | | Interest bearing | $383,384 | 61.2% | $369,507 | 59.1% | | Total deposits | $626,774 | 100.0% | $624,743 | 100.0% | [Note 7 – Borrowings](index=30&type=section&id=Note%207%20%E2%80%93%20Borrowings) This note details the company's borrowing activities, including FHLB advances and available lines of credit - The Company had FHLB advances of **$20,000,000** at both September 30, 2023, and December 31, 2022[84](index=84&type=chunk) - Unused lines of credit for future borrowings totaled approximately **$47.3 million** at September 30, 2023, including FHLB, revolving bank lines, secured federal funds, and repurchase lines[86](index=86&type=chunk) [Note 8 – Trust preferred securities](index=30&type=section&id=Note%208%20%E2%80%93%20Trust%20preferred%20securities) This note describes the outstanding trust preferred capital notes, their interest rates, and their treatment for regulatory capital purposes - The Company has **$8.764 million** in Trust Preferred Capital Notes outstanding, with floating interest rates indexed to SOFR (replacing LIBOR as of June 30, 2023) plus a spread adjustment[87](index=87&type=chunk)[89](index=89&type=chunk) - These securities can be included in Tier 1 capital for regulatory purposes up to **25%** of Tier 1 capital, with any excess included in Tier 2 capital[90](index=90&type=chunk) [Note 9 – Subordinated Debt](index=32&type=section&id=Note%209%20%E2%80%93%20Subordinated%20Debt) This note provides information on the company's subordinated notes, including their issuance terms, interest rate structure, and maturity - The Company issued **$5.7 million** of fixed-to-floating rate subordinated notes due March 31, 2028. The interest rate transitioned from a fixed **6.50%** to a floating rate (three-month SOFR plus **3.73%**) after March 21, 2023, with an interest rate of **9.05%** at September 30, 2023[92](index=92&type=chunk) [Note 10 – Stock incentive plan](index=32&type=section&id=Note%2010%20%E2%80%93%20Stock%20incentive%20plan) This note details the stock-based compensation expense and the number of shares underlying non-vested restricted stock units - Stock-based compensation expense was approximately **$358,000** for the nine months ended September 30, 2023, an increase from **$272,000** in the prior year period[98](index=98&type=chunk) - The total number of shares underlying non-vested restricted stock was **21,930** at September 30, 2023, with unamortized stock-based compensation of **$583,220**[96](index=96&type=chunk) [Note 11 – Fair value](index=35&type=section&id=Note%2011%20%E2%80%93%20Fair%20value) This note explains the fair value hierarchy and measurement techniques used for financial instruments, classifying them into Level 1, 2, or 3 inputs - The Company classifies financial instruments into a fair value hierarchy (Level 1, 2, or 3) based on the observability of inputs. Most recurring fair value measurements for financial assets (e.g., U.S. Government Agencies, Mortgage-backed securities, Loans held for sale) are classified as **Level 2**[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk)[104](index=104&type=chunk)[108](index=108&type=chunk) Fair Value Measurement of Financial Assets (in thousands) | Financial Asset | Sep 30, 2023 (Carrying Value) | Sep 30, 2023 (Estimated Fair Value) | Dec 31, 2022 (Carrying Value) | Dec 31, 2022 (Estimated Fair Value) | | :------------------------------------ | :------------------------------ | :---------------------------------- | :------------------------------ | :---------------------------------- | | Cash | $14,055 | $14,055 | $12,062 | $12,062 | | Cash equivalents | $5,276 | $5,276 | $4,616 | $4,616 | | Investment securities available for sale | $104,046 | $104,046 | $133,853 | $133,853 | | Loans held for sale | $5,425 | $5,425 | $2,268 | $2,268 | | Loans | $566,101 | $535,409 | $538,427 | $521,150 | [Note 12 – Segment Reporting](index=38&type=section&id=Note%2012%20%E2%80%93%20Segment%20Reporting) This note provides financial information for the company's reportable segments, commercial banking and mortgage banking, detailing their respective revenues and net income - The Company operates in two reportable segments: traditional commercial banking and mortgage banking. Commercial banking revenues primarily come from interest on loans and securities, and deposit fees, while mortgage banking revenues are mainly from interest on loans held for sale and gains on secondary market sales[112](index=112&type=chunk) Net Income (Loss) by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Commercial Banking | $(2,326) | $2,174 | $1,010 | $6,310 | | Mortgage Banking | $(227) | $(21) | $(784) | $(167) | | Consolidated Net Income (Loss) | $(2,553) | $2,153 | $226 | $6,143 | [Note 13 – Shareholders' Equity and Regulatory Matters](index=41&type=section&id=Note%2013%20%E2%80%93%20Shareholders'%20Equity%20and%20Regulatory%20Matters) This note details changes in shareholders' equity, including accumulated other comprehensive loss, and provides information on the company's compliance with regulatory capital requirements Accumulated Other Comprehensive Loss (AOCI) (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------------ | :----------- | :----------- | | Unrealized (Losses) on AFS Securities | $(8,048) | $(10,863) | | Defined Benefit Plan | $(12) | $(18) | | Total Accumulated Other Comprehensive Loss | $(8,060) | $(10,881) | - The Bank exceeded all minimum capital ratios under Basel III Capital Rules and 'prompt corrective action' regulations as of September 30, 2023, classifying it as '**well capitalized**'[120](index=120&type=chunk)[121](index=121&type=chunk) Bank Capital Ratios (Sep 30, 2023) | Capital Ratio | Actual Ratio | Minimum Including Conservation Buffer | To Be Well Capitalized | | :------------------------------------ | :----------- | :------------------------------------ | :--------------------- | | Total capital (to risk-weighted assets) | 14.19% | 10.50% | 10.00% | | Tier 1 capital (to risk-weighted assets) | 13.58% | 8.50% | 8.00% | | Leverage ratio (Tier 1 capital to average assets) | 10.74% | 4.00% | 5.00% | | Common equity tier 1 (to risk-weighted assets) | 13.58% | 7.00% | 6.50% | [Note 14 – Commitments and contingencies](index=43&type=section&id=Note%2014%20%E2%80%93%20Commitments%20and%20contingencies) This note discloses off-balance-sheet financial instruments, such as credit lines and letters of credit, and discusses credit risk concentrations Off-Balance-Sheet Financial Instruments (in thousands) | Instrument | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :------------- | :------------- | | Undisbursed credit lines | $138,311 | $119,454 | | Commitments to extend or originate credit | $10,166 | $9,899 | | Standby letters of credit | $1,164 | $922 | | Total commitments to extend credit | $149,641 | $130,275 | - The Company's credit risk concentration is primarily within the Richmond, Virginia area, particularly in real estate markets, though it aims for diversification across loan types and sizes[128](index=128&type=chunk) [Note 15 – Mortgage Banking and Derivatives](index=44&type=section&id=Note%2015%20%E2%80%93%20Mortgage%20Banking%20and%20Derivatives) This note provides information on loans held for sale and derivative instruments like interest rate lock commitments and forward sales commitments - Loans held for sale (LHFS) increased to **$5.4 million** at September 30, 2023, from **$2.3 million** at December 31, 2022, and are accounted for at fair value (**Level 2**)[129](index=129&type=chunk) - Interest Rate Lock Commitments (IRLCs) are treated as derivatives and increased to **$183,000** (notional **$10.2 million**) at September 30, 2023, from **$142,000** (notional **$9.9 million**) at December 31, 2022. Forward sales commitments, also at fair value, increased to **$262,000** (notional **$15.6 million**) from **$207,000** (notional **$12.1 million**)[130](index=130&type=chunk)[133](index=133&type=chunk) [Note 16 Recent Accounting Pronouncements](index=46&type=section&id=Note%2016%20Recent%20Accounting%20Pronouncements) This note discusses recently issued accounting standards and their expected or actual impact on the company's financial statements - The FASB issued ASU 2023-03, amending financial statement presentation, which the Company does not expect to have a material impact[134](index=134&type=chunk) - ASU 2022-06 extended the sunset date for reference rate reform relief guidance (Topic 848) from December 31, 2022, to December 31, 2024, to cover the transition away from LIBOR. The Company is assessing its impact[135](index=135&type=chunk)[136](index=136&type=chunk) - ASU 2020-04 and ASU 2021-01 provide optional expedients for accounting for reference rate reform, which the Company does not expect to have a material impact[137](index=137&type=chunk) [ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=47&type=section&id=ITEM%202%20-%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the Company's financial condition and operational results for the three and nine months ended September 30, 2023, compared to the same periods in 2022. It covers key financial metrics, strategic actions, and the impact of accounting changes and market conditions [Caution about forward-looking statements](index=47&type=section&id=Caution%20about%20forward-looking%20statements) This section warns readers that the report contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements regarding profitability, liquidity, credit losses, interest rate sensitivity, and growth strategy, which are subject to numerous assumptions, risks, and uncertainties[138](index=138&type=chunk) - Key risk factors include changes in interest rates, ability to maintain liquidity, economic conditions, regulatory changes (e.g., Dodd-Frank, Basel III), cybersecurity risks, real estate market declines, and reliance on management[139](index=139&type=chunk) [General](index=49&type=section&id=General) This section discusses the company's primary earnings source, net interest income, and its exposure to interest rate risk and assumptions regarding loan portfolio collectability - The Company's primary earnings source is net interest income, with interest rate risk being its principal market risk exposure. The asset/liability management strategy may not fully mitigate adverse effects of interest rate changes[141](index=141&type=chunk) - Management makes assumptions about loan portfolio collectability; if incorrect, the current allowance for credit losses may be insufficient, negatively impacting net income[142](index=142&type=chunk) [Summary](index=49&type=section&id=Summary) This section provides a high-level overview of the company's financial performance, including net income, EPS, and key strategic actions like CECL adoption and securities repositioning Net Income (Loss) and EPS Summary | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) (in thousands) | $(2,553) | $2,153 | $226 | $6,143 | | Diluted EPS | $(1.72) | $1.46 | $0.15 | $4.16 | - The Company adopted the CECL methodology on January 1, 2023, increasing the allowance for credit losses to **$3.52 million**, including **$3.24 million** for loans and **$277,000** for unfunded commitments. By September 30, 2023, the total allowance reached **$3.68 million**[145](index=145&type=chunk)[146](index=146&type=chunk) - A securities repositioning strategy was executed, selling **$55.2 million** in available-for-sale securities at a **$5.0 million** pre-tax loss. This reduced FHLB borrowings by **$15.0 million** and reinvested funds into higher-yielding securities (**5.48%** vs. **1.48%** yield), projected to be accretive to EPS, NIM, ROA, and tangible common equity[147](index=147&type=chunk) [Net interest income](index=49&type=section&id=Net%20interest%20income) This section analyzes the components of net interest income and net interest margin, explaining the factors influencing changes in interest income and expense Net Interest Income and Margin (NIM) Summary | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest income (in thousands) | $6,114 | $6,535 | $18,603 | $18,716 | | Net interest margin (NIM) | 3.46% | 3.70% | 3.59% | 3.54% | | Yield on interest-earning assets | 4.79% | 3.94% | 4.66% | 3.78% | | Cost of interest-bearing liabilities | 2.16% | 0.41% | 1.76% | 0.41% | - For the three months ended September 30, 2023, NIM compressed by **24 basis points** to **3.46%** due to a **175 basis point** increase in the cost of interest-bearing liabilities (driven by variable rate debt and deposit rates) outpacing an **85 basis point** increase in asset yields[152](index=152&type=chunk) - For the nine months ended September 30, 2023, NIM expanded by **5 basis points** to **3.59%**, as an **88 basis point** increase in asset yields (due to asset mix improvement and rising rates) slightly outpaced a **135 basis point** increase in the cost of interest-bearing liabilities. Strong non-interest bearing deposits (near **40%** of deposit base) helped mitigate the increase in overall cost of funds[154](index=154&type=chunk)[155](index=155&type=chunk) [Provision for (recovery of) Credit losses](index=57&type=section&id=Provision%20for%20(recovery%20of)%20Credit%20losses) This section details the company's provision or recovery for credit losses, including the impact of the CECL methodology and changes in credit metrics - The Company adopted the CECL methodology on January 1, 2023, increasing the allowance for credit losses to **$3.52 million**. By September 30, 2023, the total allowance for credit losses was **$3.68 million**, comprising **$3.35 million** for loans and **$329,000** for unfunded commitments[161](index=161&type=chunk)[162](index=162&type=chunk) - For the three months ended September 30, 2023, a recovery of credit losses for loans of **$53,000** was recorded due to improved credit metrics and **$150,000** in net-recoveries. A provision of **$53,000** for unfunded commitments was recorded due to increased outstanding balances[164](index=164&type=chunk) - For the nine months ended September 30, 2023, a recovery for credit losses for loans of **$52,000** was recorded, driven by loan growth, improved credit metrics (non-performing loans decreased from **0.13% to 0.06%**), and **$162,000** in net-recoveries. A provision of **$52,000** for unfunded commitments was recorded due to increased outstanding balances[165](index=165&type=chunk) [Noninterest income](index=59&type=section&id=Noninterest%20income) This section analyzes the various sources of noninterest income, including service charges, mortgage banking income, and gains or losses on investment securities Noninterest Income (Loss) (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Service charges and fees | $694 | $670 | $2,074 | $1,960 | | Mortgage banking income, net | $489 | $973 | $1,353 | $2,942 | | Loss on sale of investment securities | $(4,986) | $0 | $(4,986) | $0 | | Total noninterest income (loss) | $(3,669) | $1,750 | $(1,191) | $5,317 | - Total noninterest income decreased by **$5,419,000** for the three months and **$6,508,000** for the nine months ended September 30, 2023, primarily due to a **$4,986,000** loss on the sale of investment securities as part of a balance sheet repositioning strategy[174](index=174&type=chunk)[176](index=176&type=chunk) - Mortgage banking income, net, decreased by **$484,000** (three months) and **$1,589,000** (nine months) due to lower mortgage originations, which were down **37.6%** and **34.94%** respectively, driven by rising mortgage rates and low housing inventory[175](index=175&type=chunk)[177](index=177&type=chunk) [Noninterest expense](index=60&type=section&id=Noninterest%20expense) This section breaks down noninterest expenses, such as salaries, professional services, and other operating costs, and explains the drivers of changes in these expenses Noninterest Expense (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Salaries and benefits | $3,310 | $3,446 | $10,173 | $10,394 | | Professional and outside services | $894 | $655 | $2,543 | $2,118 | | Other operating expense | $741 | $681 | $2,165 | $1,893 | | Total noninterest expense | $5,752 | $5,524 | $17,341 | $16,720 | - Total noninterest expense increased by **$228,000** (three months) and **$621,000** (nine months) ended September 30, 2023[176](index=176&type=chunk)[179](index=179&type=chunk) - Key drivers for the increase include higher professional and outside services expenses (due to data processing and online banking platform rollout) and increased other operating expenses (primarily from check and card fraud). Salaries and benefits decreased due to lower mortgage production[181](index=181&type=chunk)[182](index=182&type=chunk) [Income taxes](index=61&type=section&id=Income%20taxes) This section discusses the company's income tax expense or benefit and the effective tax rate, highlighting factors influencing tax liabilities Income Tax Expense (Benefit) and Effective Tax Rate | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Income tax expense (benefit) (in thousands) | $(754) | $508 | $(155) | $1,470 | | Effective tax rate | 22.8% | 19.1% | 217.99% | 19.3% | - The effective tax rate for the nine months ended September 30, 2023, was **217.99%**, significantly higher than the prior year, primarily due to an increase in tax credits related to state taxes and the impact of permanent differences from bank-owned life insurance[180](index=180&type=chunk) [Balance Sheet Analysis](index=61&type=section&id=Balance%20Sheet%20Analysis) This section provides a detailed review of the company's balance sheet components, including investment securities, loans, allowance for credit losses, asset quality, deposits, borrowings, capital resources, and liquidity [Investment securities](index=61&type=section&id=Investment%20securities) This subsection discusses the classification and composition of the company's investment securities portfolio - All investment securities were classified as available for sale at September 30, 2023, and December 31, 2022[181](index=181&type=chunk) [Loans](index=62&type=section&id=Loans) This subsection details the company's loan portfolio, including underwriting standards, diversification strategies, and geographic concentration - The Company maintains rigorous underwriting standards and focuses on industry, loan type, and loan size diversification, with approximately **81.1%** of loans secured by real property in Virginia[183](index=183&type=chunk)[184](index=184&type=chunk) Loans Classified by Type (in thousands) | Loan Type | Sep 30, 2023 (Amount) | Sep 30, 2023 (%) | Dec 31, 2022 (Amount) | Dec 31, 2022 (%) | | :------------------------------------------ | :---------------------- | :--------------- | :---------------------- | :--------------- | | Construction and land development | $56,260 | 9.94% | $45,127 | 8.38% | | Commercial real estate | $286,281 | 50.57% | $284,617 | 52.86% | | Consumer real estate | $117,014 | 20.67% | $93,680 | 17.40% | | Commercial and industrial loans | $83,045 | 14.67% | $90,348 | 16.78% | | Guaranteed student loans | $18,923 | 3.34% | $20,617 | 3.83% | | Consumer and other | $4,578 | 0.81% | $4,038 | 0.75% | | Total loans | $566,101 | 100.00% | $538,427 | 100.00% | [Allowance for Credit losses](index=63&type=section&id=Allowance%20for%20Credit%20losses) This subsection explains the changes in the allowance for credit losses, reflecting ongoing monitoring and adjustments based on credit metrics and economic conditions - The allowance for credit losses increased to **$3.68 million** at September 30, 2023, from **$3.52 million** at January 1, 2023 (post-CECL adoption), reflecting ongoing monitoring and adjustments based on credit metrics and economic conditions[186](index=186&type=chunk)[187](index=187&type=chunk) Allowance for Credit Losses Activity (Nine Months Ended Sep 30, 2023, in thousands) | Loan Type | Beginning Balance (Dec 31, 2022) | Impact of ASC 326 Adoption | Provision (Recovery) of Credit Losses | Charge-offs | Recoveries | Ending Balance (Sep 30, 2023) | | :------------------------------------------ | :------------------------------- | :------------------------- | :------------------------------------ | :---------- | :--------- | :------------------------------ | | Construction and land development | $271 | $37 | $57 | $0 | $0 | $365 | | Commercial real estate | $2,189 | $(276) | $(34) | $0 | $0 | $1,879 | | Consumer real estate | $185 | $125 | $73 | $0 | $13 | $396 | | Commercial and industrial loans | $576 | $1 | $(139) | $0 | $172 | $610 | | Student loans | $52 | $0 | $15 | $(21) | $0 | $46 | | Consumer and other | $37 | $(5) | $5 | $(2) | $0 | $35 | | Unallocated | $60 | $(9) | $(29) | $0 | $0 | $22 | | Total | $3,370 | $(127) | $(52) | $(23) | $185 | $3,353 | [Asset quality](index=65&type=section&id=Asset%20quality) This subsection provides key metrics related to asset quality, including nonaccrual loans, nonperforming assets, and ratios of allowance to nonaccrual loans Asset Quality Information (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------------ | :------------- | :------------- | | Nonaccrual loans | $299 | $654 | | Total nonperforming assets | $299 | $654 | | Nonaccrual loans to total loans | 0.05% | 0.12% | | Nonperforming assets to total assets | 0.04% | 0.09% | | Allowance for credit losses on loans to Nonaccrual loans | 1,121.40% | 515.29% | - Nonperforming assets decreased to **$299,000** at September 30, 2023, from **$654,000** at December 31, 2022, consisting solely of nonaccrual loans[193](index=193&type=chunk) - Loans past due 90 days and still accruing totaled **$2,398,000** at September 30, 2023, primarily rehabilitated student loans with a **98%** DOE guarantee[196](index=196&type=chunk) [Deposits](index=67&type=section&id=Deposits) This subsection analyzes the composition and changes in the company's deposit base, including noninterest-bearing, interest-bearing, and time deposits Deposits by Type (in thousands) | Deposit Type | Sep 30, 2023 (Amount) | Sep 30, 2023 (%) | Dec 31, 2022 (Amount) | Dec 31, 2022 (%) | | :-------------------------------- | :---------------------- | :--------------- | :---------------------- | :--------------- | | Demand accounts (Noninterest bearing) | $243,390 | 38.8% | $255,236 | 40.9% | | Interest checking accounts | $81,779 | 13.0% | $90,252 | 14.4% | | Money market accounts | $210,439 | 33.6% | $179,036 | 28.7% | | Savings accounts | $42,367 | 6.8% | $55,695 | 8.9% | | Time deposits of $250,000 and over | $11,813 | 1.9% | $4,740 | 0.8% | | Other time deposits | $36,986 | 5.9% | $39,784 | 6.3% | | Total | $626,774 | 100.0% | $624,743 | 100.0% | - Total deposits increased by **$2,031,000** (**0.33%**) from December 31, 2022. Noninterest-bearing demand accounts decreased by **$11,846,000** (**4.64%**), while low-cost relationship deposits (interest checking, money market, savings) increased by **$9,602,000** (**2.95%**). Time deposits increased by **$4,275,000** (**9.60%**) due to efforts to lock in lower rates[197](index=197&type=chunk)[198](index=198&type=chunk) [Borrowings](index=68&type=section&id=Borrowings) This subsection discusses the company's use of borrowings to supplement deposits and manage liability duration - The Company uses borrowings to supplement deposits and manage liability duration. Further details are provided in Note 7[202](index=202&type=chunk) [Capital resources](index=68&type=section&id=Capital%20resources) This subsection details changes in shareholders' equity and provides an overview of the company's regulatory capital and ratios - Shareholders' equity increased by **$2,574,000** to **$63,685,000** at September 30, 2023, from **$61,111,000** at December 31, 2022, primarily due to a **$2,821,000** decrease in accumulated other comprehensive loss and **$226,000** in net income[203](index=203&type=chunk) Regulatory Capital and Ratios for the Bank (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :------------- | :------------- | | Total Tier 1 capital | $81,339 | $81,612 | | Total Tier 2 capital | $3,682 | $3,370 | | Total risk-based capital | $85,021 | $84,982 | | Risk-weighted assets | $599,165 | $573,976 | | Average assets | $757,004 | $745,120 | | Leverage ratio | 10.74% | 10.95% | | Common equity tier 1 capital ratio | 13.58% | 14.22% | | Tier 1 capital to risk-weighted assets | 13.58% | 14.22% | | Total capital to risk-weighted assets | 14.19% | 14.81% | | Equity to total assets | 10.09% | 9.78% | [Liquidity](index=69&type=section&id=Liquidity) This subsection assesses the company's liquidity position, including liquid assets, uninsured deposits, and available borrowing capacity - Liquid assets (cash, cash equivalents, and available-for-sale securities) totaled **$123,377,000**, representing **16.96%** of total assets at September 30, 2023[207](index=207&type=chunk) - Uninsured deposits were approximately **$222.4 million** (**35.48%** of total deposits) at September 30, 2023, with total liquidity sources of **$145.8 million**, covering **65.6%** of uninsured deposits[208](index=208&type=chunk) - The Company had **$109.1 million** in additional wholesale deposit availability and an unused FHLB borrowing capacity of **$4.6 million**, which could be increased to **$138.5 million** by pledging additional collateral[209](index=209&type=chunk)[212](index=212&type=chunk) [Interest rate sensitivity](index=71&type=section&id=Interest%20rate%20sensitivity) This subsection explains how the company monitors and manages its exposure to interest rate fluctuations to protect net interest margin - The Company monitors interest rate sensitivity to manage net interest margin, considering expected cash flows and repricing of assets and liabilities. The sale of fixed-rate loans helps protect against precipitous interest rate changes[215](index=215&type=chunk)[217](index=217&type=chunk) [Impact of inflation and changing prices](index=72&type=section&id=Impact%20of%20inflation%20and%20changing%20prices) This subsection discusses the relative impact of interest rate changes versus inflation on the company's financial condition - Changes in interest rates affect the Company's financial condition more significantly than inflation, as interest rates are highly sensitive to various factors beyond the Company's control, including economic conditions and monetary policies[219](index=219&type=chunk) [LIBOR and Other Benchmark Rates](index=72&type=section&id=LIBOR%20and%20Other%20Benchmark%20Rates) This subsection describes the company's transition from LIBOR to SOFR for financial instruments and its impact on financial statements - Following LIBOR's discontinuation on June 30, 2023, the Company replaced LIBOR with the three-month term Secured Overnight Funding Rate (SOFR) plus an applicable tenor spread adjustment for its financial instruments, which did not significantly impact consolidated financial statements[220](index=220&type=chunk)[221](index=221&type=chunk)[222](index=222&type=chunk) [ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=72&type=section&id=ITEM%203%20%E2%80%93%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section states that there are no quantitative and qualitative disclosures about market risk applicable for this report [ITEM 4 – CONTROLS AND PROCEDURES](index=72&type=section&id=ITEM%204%20%E2%80%93%20CONTROLS%20AND%20PROCEDURES) The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023. No material changes in internal control over financial reporting were identified during the last fiscal quarter - The CEO and CFO evaluated and concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023[224](index=224&type=chunk) - No material changes in internal control over financial reporting were identified during the last fiscal quarter[225](index=225&type=chunk) PART II – OTHER INFORMATION [ITEM 1 – LEGAL PROCEEDINGS](index=74&type=section&id=ITEM%201%20%E2%80%93%20LEGAL%20PROCEEDINGS) The Company is not a party to any material pending legal proceedings - There are no material pending legal proceedings to which the Company is a party or whose property is subject[227](index=227&type=chunk) [ITEM 1A – RISK FACTORS](index=74&type=section&id=ITEM%201A%20%E2%80%93%20RISK%20FACTORS) There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[228](index=228&type=chunk) [ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES](index=74&type=section&id=ITEM%202%20%E2%80%93%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES,%20USE%20OF%20PROCEEDS,%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) This item is not applicable to the current report [ITEM 3 – DEFAULTS UPON SENIOR SECURITIES](index=74&type=section&id=ITEM%203%20%E2%80%93%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This item is not applicable to the current report [ITEM 4 – MINE SAFETY DISCLOSURES](index=74&type=section&id=ITEM%204%20%E2%80%93%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the current report [ITEM 5 – OTHER INFORMATION](index=74&type=section&id=ITEM%205%20%E2%80%93%20OTHER%20INFORMATION) This item is not applicable to the current report [ITEM 6 – EXHIBITS](index=75&type=section&id=ITEM%206%20%E2%80%93%20EXHIBITS) This section lists the exhibits filed with the Form 10-Q, including employment agreement amendments, certifications from the CEO and CFO, and XBRL formatted financial statements - Exhibits include Amendment No. 1 to Employment Agreements for Donald M. Kaloski, Jr. and Max C. Morehead, Jr., certifications from the CEO and CFO (31.1, 31.2, 32.1), and XBRL formatted financial statements (101, 104)[235](index=235&type=chunk) [Signatures](index=76&type=section&id=Signatures) The report is duly signed on November 13, 2023, by James E. Hendricks, Jr., President and Chief Executive Officer, and Donald M. Kaloski, Jr., Executive Vice President and Chief Financial Officer - The report was signed on November 13, 2023, by James E. Hendricks, Jr. (President and CEO) and Donald M. Kaloski, Jr. (EVP and CFO)[238](index=238&type=chunk)

PART I – FINANCIAL INFORMATION This section presents the company's financial statements and management's discussion for the periods ended June 30, 2023, and December 31, 2022 [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited consolidated financial statements including balance sheets, income statements, cash flows, and detailed notes for periods ended June 30, 2023, and December 31, 2022 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific dates | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $754,655 | $723,270 | | Total Liabilities | $690,641 | $662,159 | | Total Shareholders' Equity | $64,014 | $61,111 | | Loans, net | $553,660 | $535,645 | | Total Deposits | $628,382 | $624,743 | | Federal Home Loan Bank advances | $45,000 | $20,000 | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Details the company's revenues, expenses, and net income over specific reporting periods | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net income | $1,239 | $2,190 | $2,779 | $3,990 | | Earnings per share, basic | $0.83 | $1.48 | $1.87 | $2.71 | | Total interest income | $8,099 | $6,731 | $15,682 | $12,999 | | Total interest expense | $1,975 | $410 | $3,193 | $818 | | Net interest income | $6,124 | $6,321 | $12,489 | $12,181 | | Total noninterest income | $1,221 | $1,938 | $2,478 | $3,567 | | Total noninterest expense | $5,832 | $5,514 | $11,589 | $11,196 | [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Reports net income and other comprehensive income items, reflecting changes in equity not from transactions with owners | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net income | $1,239 | $2,190 | $2,779 | $3,990 | | Net change in unrealized holding gains (losses) on securities available for sale, net of tax | $(1,036) | $(3,532) | $446 | $(7,139) | | Total comprehensive income (loss) | $205 | $(1,340) | $3,229 | $(3,145) | [Consolidated Statements of Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) Outlines changes in the company's equity accounts, including common stock, retained earnings, and accumulated other comprehensive loss | Metric | Balance, December 31, 2022 (in thousands) | Balance, June 30, 2023 (in thousands) | | :--- | :--- | :--- | | Common Stock | $5,868 | $5,883 | | Additional Paid-in Capital | $55,167 | $55,420 | | Retained Earnings | $10,957 | $13,142 | | Accumulated Other Comprehensive Loss | $(10,881) | $(10,431) | | Total Shareholders' Equity | $61,111 | $64,014 | - The adoption of ASC 326 resulted in a **$119,000 reduction in retained earnings** for the six months ended June 30, 2023[20](index=20&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Categorizes cash inflows and outflows from operating, investing, and financing activities | Metric | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,511) | $(159) | | Net cash used in investing activities | $(17,349) | $(47,741) | | Net cash provided by financing activities | $28,164 | $10,180 | | Net decrease in cash and cash equivalents | $9,304 | $(37,720) | | Cash and cash equivalents, end of period | $25,982 | $54,896 | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Provides detailed explanations and disclosures supporting the consolidated financial statements [Note 1 – Principles of presentation](index=9&type=section&id=Note%201%20%E2%80%93%20Principles%20of%20presentation) Explains the basis of financial statement preparation and significant accounting policies, including CECL adoption - The Company adopted ASU 2016-13 (CECL methodology) on January 1, 2023, resulting in a net decrease to retained earnings of **$119,000, net of taxes**[30](index=30&type=chunk) - The CECL methodology utilizes a weighted average remaining maturity (WARM) approach, segments the loan portfolio by risk characteristics, and forecasts expected losses based on a twelve-month unemployment rate projection[31](index=31&type=chunk) Impact of CECL Adoption | Metric | December 31, 2022 (As Previously Reported) | Impact of CECL Adoption | January 1, 2023 (As Reported Under CECL) | | :--- | :--- | :--- | :--- | | Allowance for credit losses (loans) | $3,370 | $(127) | $3,243 | | Allowance for credit losses on unfunded credit exposure | $0 | $277 | $277 | | Total Allowance for credit losses | $3,370 | $150 | $3,520 | [Note 2 – Use of estimates](index=12&type=section&id=Note%202%20%E2%80%93%20Use%20of%20estimates) Discusses management's use of estimates and judgments in preparing financial statements, particularly for credit losses - Material estimates particularly susceptible to significant change include the determination of the allowance for credit losses and its related provision, including collateral-dependent loans[35](index=35&type=chunk) [Note 3 – Earnings per common share](index=12&type=section&id=Note%203%20%E2%80%93%20Earnings%20per%20common%20share) Presents the calculation of basic and diluted earnings per share for the reporting periods | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income - basic and diluted (in thousands) | $1,239 | $2,190 | $2,779 | $3,990 | | Weighted average shares outstanding - basic (in thousands) | 1,486 | 1,477 | 1,485 | 1,476 | | Earnings per share - basic | $0.83 | $1.48 | $1.87 | $2.71 | | Earnings per share - diluted | $0.83 | $1.48 | $1.87 | $2.70 | [Note 4 – Investment securities available for sale](index=13&type=section&id=Note%204%20%E2%80%93%20Investment%20securities%20available%20for%20sale) Details the amortized cost, fair value, and unrealized gains/losses of investment securities available for sale | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Amortized Cost | $145,421 | $147,603 | | Fair Value | $132,235 | $133,853 | | Gross Unrealized Losses | $(13,210) | $(13,790) | - All unrealized losses are attributed to movements in interest rates, not credit deterioration, and the Company does not consider these investments impaired[43](index=43&type=chunk) - No sales of available for sale securities occurred for the three and six months ended June 30, 2023 and 2022[40](index=40&type=chunk) [Note 5 – Loans and allowance for credit losses](index=15&type=section&id=Note%205%20%E2%80%93%20Loans%20and%20allowance%20for%20credit%20losses) Provides a breakdown of the loan portfolio and the methodology and balances for the allowance for credit losses - The Company adopted ASC 326 (CECL) on January 1, 2023, and all loan information presented as of June 30, 2023, is in accordance with this standard[45](index=45&type=chunk) Loan Portfolio Composition | Loan Type | June 30, 2023 (in thousands) | % of Total | December 31, 2022 (in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Total loans | $556,170 | 100.0% | $538,427 | 100.0% | | Commercial real estate | $282,921 | 50.86% | $284,617 | 52.86% | | Commercial and industrial loans | $91,394 | 16.43% | $90,348 | 16.78% | | Consumer real estate | $106,532 | 19.16% | $93,680 | 17.40% | Nonaccrual Loans | Loan Type | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total nonaccrual loans | $286 | $654 | - Loans greater than 90 days past due are primarily guaranteed student loans (**98% by DOE**) and USDA loans (**100% guarantee**), which are not placed on nonaccrual status[56](index=56&type=chunk) Allowance for Credit Losses Rollforward | Metric | Beginning Balance (Dec 31, 2022) | Impact of adopting ASC 326 | Provision for Credit Losses | Charge-offs | Recoveries | Ending Balance (June 30, 2023) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Allowance for Credit Losses (in thousands) | $3,370 | $(127) | $1 | $(7) | $19 | $3,256 | - The provision for credit losses for loans was **$1,000** for the six months ended June 30, 2023, due to loan growth being offset by improved credit metrics (non-performing loans decreased from **0.13% to 0.06%**)[78](index=78&type=chunk) [Note 6 – Deposits](index=30&type=section&id=Note%206%20%E2%80%93%20Deposits) Presents a detailed breakdown of the company's deposit categories and their respective balances | Deposit Type | June 30, 2023 (in thousands) | % of Total | December 31, 2022 (in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Demand accounts | $249,059 | 39.6% | $255,236 | 40.9% | | Interest checking accounts | $88,330 | 14.1% | $90,252 | 14.4% | | Money market accounts | $196,603 | 31.3% | $179,036 | 28.6% | | Savings accounts | $44,378 | 7.0% | $55,695 | 8.9% | | Time deposits | $49,012 | 7.8% | $44,524 | 7.2% | | Total Deposits | $628,382 | 100.0% | $624,743 | 100.0% | [Note 7 – Borrowings](index=30&type=section&id=Note%207%20%E2%80%93%20Borrowings) Details the company's short-term and long-term borrowings, including FHLB advances and available credit lines | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | FHLB advances | $45,000 | $20,000 | - The Company's unused lines of credit for future borrowings totaled approximately **$45.3 million** at June 30, 2023[87](index=87&type=chunk) [Note 8 – Trust preferred securities](index=30&type=section&id=Note%208%20%E2%80%93%20Trust%20preferred%20securities) Describes the outstanding trust preferred capital notes and the transition from LIBOR to SOFR for interest rates - The Company has **$8.76 million** in Trust Preferred Capital Notes outstanding[10](index=10&type=chunk) - Due to the discontinuation of 3-month LIBOR, the floating interest rate for these securities will be replaced with the three-month term SOFR plus an applicable tenor spread adjustment of **0.26161 percent**[88](index=88&type=chunk)[89](index=89&type=chunk) [Note 9 – Subordinated Debt](index=32&type=section&id=Note%209%20%E2%80%93%20Subordinated%20Debt) Details the company's subordinated notes, including their fixed-to-floating interest rate structure and LIBOR transition - The Company issued **$5.7 million** of fixed-to-floating rate subordinated notes due March 31, 2028[92](index=92&type=chunk) - The interest rate transitioned from a fixed **6.50%** to a floating rate (3-month LIBOR plus **3.73%**) after March 21, 2023, and will now use SOFR plus a spread adjustment due to LIBOR's discontinuation[92](index=92&type=chunk) [Note 10 – Stock incentive plan](index=32&type=section&id=Note%2010%20%E2%80%93%20Stock%20incentive%20plan) Reports stock-based compensation expense and the number of non-vested restricted stock units | Metric | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :--- | :--- | :--- | | Stock-based compensation expense | $268 | $210 | - The total number of shares underlying non-vested restricted stock was **25,752** at June 30, 2023, compared to **23,051** at June 30, 2022[96](index=96&type=chunk) [Note 11 – Fair value](index=35&type=section&id=Note%2011%20%E2%80%93%20Fair%20value) Explains the fair value hierarchy and classification of financial instruments based on input observability - The Company uses a fair value hierarchy (Level 1, 2, 3) to classify financial instruments based on the observability of inputs[100](index=100&type=chunk)[101](index=101&type=chunk) - Investment securities available for sale, loans held for sale, Interest Rate Lock Commitments (IRLCs), and forward sale commitments are primarily classified as **Level 2**[102](index=102&type=chunk)[104](index=104&type=chunk)[105](index=105&type=chunk)[108](index=108&type=chunk) - Loans (held for investment) are classified as **Level 3** for fair value measurement[111](index=111&type=chunk) [Note 12 – Segment Reporting](index=38&type=section&id=Note%2012%20%E2%80%93%20Segment%20Reporting) Provides financial performance details for the company's commercial banking and mortgage banking segments - The Company has two reportable segments: traditional commercial banking and mortgage banking[112](index=112&type=chunk) Segment Net Income | Segment | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Commercial Banking | $1,478 | $2,137 | $3,336 | $4,136 | | Mortgage Banking | $(239) | $53 | $(557) | $(146) | | Consolidated Net Income | $1,239 | $2,190 | $2,779 | $3,990 | [Note 13 – Shareholders' Equity and Regulatory Matters](index=41&type=section&id=Note%2013%20%E2%80%93%20Shareholders'%20Equity%20and%20Regulatory%20Matters) Discusses shareholders' equity components and the company's compliance with regulatory capital requirements | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total accumulated other comprehensive loss | $(10,431) | $(10,881) | - The Bank exceeded the minimum capital ratios under the Basel III Capital Rules and the "prompt corrective action" regulations to be classified as "well capitalized" as of June 30, 2023[120](index=120&type=chunk)[121](index=121&type=chunk) Capital Ratios | Capital Ratio | Actual Ratio | Minimum Capital Requirements Including Conservation Buffer | To Be Well Capitalized | | :--- | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 14.97% | 10.50% | 10.00% | | Tier 1 capital (to risk-weighted assets) | 14.36% | 8.50% | 8.00% | | Leverage ratio (Tier 1 capital to average assets) | 11.18% | 4.00% | 5.00% | | Common equity tier 1 (to risk-weighted assets) | 14.36% | 7.00% | 6.50% | [Note 14 – Commitments and contingencies](index=42&type=section&id=Note%2014%20%E2%80%93%20Commitments%20and%20contingencies) Discloses off-balance sheet commitments, credit lines, and potential contingent liabilities | Instrument | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Undisbursed credit lines | $121,237 | $119,454 | | Commitments to extend or originate credit | $11,206 | $9,899 | | Standby letters of credit | $1,164 | $922 | | Total commitments to extend credit | $133,607 | $130,275 | - A substantial portion of the Company's credit risk is reliant upon the economic stability of the Richmond, Virginia area[127](index=127&type=chunk) [Note 15 – Mortgage Banking and Derivatives](index=43&type=section&id=Note%2015%20%E2%80%93%20Mortgage%20Banking%20and%20Derivatives) Details loans held for sale, interest rate lock commitments, and forward sales commitments as derivatives - Loans held for sale (LHFS) totaled **$6.9 million** at June 30, 2023, and are accounted for at fair value (Level 2)[128](index=128&type=chunk) - Interest Rate Lock Commitments (IRLCs) and Forward Sales Commitments are considered derivatives and are measured at fair value, classified as **Level 2**[129](index=129&type=chunk)[131](index=131&type=chunk) Derivative Instruments | Instrument | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | IRLC (Fair Value) | $205 | $142 | | IRLC (Notional Amount) | $11,200 | $9,900 | | Forward Sales Commitment (Fair Value) | $370 | $207 | | Forward Sales Commitment (Notional Amount) | $18,000 | $12,100 | [Note 16 Recent Accounting Pronouncements](index=45&type=section&id=Note%2016%20Recent%20Accounting%20Pronouncements) Discusses the impact of recently adopted and issued accounting pronouncements on the financial statements - ASU 2022-06 defers the sunset date of Topic 848 (Reference Rate Reform) to December 31, 2024, to provide relief during the transition away from LIBOR, with the Company assessing its impact[134](index=134&type=chunk)[135](index=135&type=chunk) - ASU 2023-03, related to presentation of financial statements, is not expected to have a material impact on the consolidated financial statements[133](index=133&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=40&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Provides management's perspective on financial performance, condition, and key drivers for the reported periods [Caution about forward-looking statements](index=46&type=section&id=Caution%20about%20forward-looking%20statements) Warns that forward-looking statements are subject to various risks and uncertainties that could affect future results - Forward-looking statements are subject to numerous risks and uncertainties, including changes in interest rates, economic conditions, legislative and regulatory changes, cybersecurity threats, and market conditions (e.g., real estate market declines)[138](index=138&type=chunk) [General](index=48&type=section&id=General) Outlines the company's primary earnings source, interest rate risk, and the importance of allowance for credit losses - Net interest income is the Company's primary source of earnings, and interest rate risk is its principal market risk exposure[140](index=140&type=chunk) - The adequacy of the allowance for credit losses depends on management's assumptions and judgments about loan collectability; incorrect assessments could negatively impact net income[141](index=141&type=chunk) [Results of operations](index=48&type=section&id=Results%20of%20operations) Summarizes the company's net income and earnings per share, noting the adoption of the CECL methodology | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (in thousands) | $1,239 | $2,190 | $2,779 | $3,990 | | Diluted EPS | $0.83 | $1.48 | $1.87 | $2.70 | - The Company adopted the CECL methodology on January 1, 2023, increasing the Allowance for Credit Losses to **$3.52 million**, which included **$3.24 million** for loans and **$277,000** for unfunded commitments[144](index=144&type=chunk) [Net interest income](index=48&type=section&id=Net%20interest%20income) Analyzes changes in net interest income, net interest margin, and the yields and costs of interest-earning assets and liabilities Three Months Ended June 30 | Metric | June 30, 2023 | June 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Net interest income (in thousands) | $6,124 | $6,321 | $(197) | | Net interest margin | 3.52% | 3.57% | (0.05)% | | Yield on interest-earning assets | 4.66% | 3.80% | 0.86% | | Cost of interest-bearing liabilities | 1.86% | 0.40% | 1.46% | Six Months Ended June 30 | Metric | June 30, 2023 | June 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Net interest income (in thousands) | $12,489 | $12,181 | $308 | | Net interest margin | 3.66% | 3.47% | 0.19% | | Yield on interest-earning assets | 4.59% | 3.70% | 0.89% | | Cost of interest-bearing liabilities | 1.55% | 0.40% | 1.15% | - The increase in earning asset yields was due to an improved asset mix and rising interest rates, while the increase in funding costs was driven by variable rate debt and market pressures on deposit rates[149](index=149&type=chunk)[151](index=151&type=chunk) [Provision for (recovery of) Credit losses](index=54&type=section&id=Provision%20for%20(recovery%20of)%20Credit%20losses) Discusses the provision or recovery of credit losses and the total allowance for credit losses - For the three months ended June 30, 2023, the Company recorded a recovery of credit losses for loans of **$22,000** due to improved credit metrics (non-performing loans decreased from **0.12% to 0.06%**)[161](index=161&type=chunk) - For the six months ended June 30, 2023, the Company recorded a provision for credit losses for loans of **$1,000**, resulting from loan growth offset by improved credit metrics[162](index=162&type=chunk) - The Allowance for Credit Losses was **$3.53 million** at June 30, 2023, including **$3.26 million** for loans and **$277,000** for unfunded commitments[159](index=159&type=chunk) [Noninterest income](index=56&type=section&id=Noninterest%20income) Details the components and changes in noninterest income, particularly mortgage banking income Noninterest Income (3 Months Ended June 30) | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total noninterest income | $1,221 | $1,938 | $(717) | (37.0)% | | Mortgage banking income, net | $386 | $1,090 | $(704) | (64.6)% | Noninterest Income (6 Months Ended June 30) | Metric | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total noninterest income | $2,478 | $3,567 | $(1,089) | (30.5)% | | Mortgage banking income, net | $864 | $1,969 | $(1,105) | (56.1)% | - The decrease in mortgage banking income was driven by lower mortgage originations, down **22.66%** for the three months and **38.27%** for the six months, due to rising mortgage rates and low housing inventory[171](index=171&type=chunk)[174](index=174&type=chunk) [Noninterest expense](index=58&type=section&id=Noninterest%20expense) Presents a breakdown of noninterest expenses and their period-over-period changes Noninterest Expense (3 Months Ended June 30) | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total noninterest expense | $5,832 | $5,514 | $318 | 5.8% | | Professional and outside services | $838 | $738 | $100 | 13.6% | | Other operating expense | $733 | $607 | $126 | 20.8% | Noninterest Expense (6 Months Ended June 30) | Metric | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total noninterest expense | $11,589 | $11,196 | $393 | 3.5% | | Professional and outside services | $1,651 | $1,463 | $188 | 12.9% | | Other operating expense | $1,423 | $1,213 | $210 | 17.3% | [Income taxes](index=60&type=section&id=Income%20taxes) Reports income tax expense and the effective tax rates for the respective periods | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Income tax expense | $274 | $555 | $599 | $962 | | Effective tax rate | 18.1% | 20.2% | 17.7% | 19.4% | [Balance Sheet Analysis](index=60&type=section&id=Balance%20Sheet%20Analysis) Provides a detailed analysis of key balance sheet components, including investments, loans, and allowances [Investment securities](index=60&type=section&id=Investment%20securities) Focuses on the classification and characteristics of the company's investment securities portfolio - All investment securities are classified as available for sale[178](index=178&type=chunk) [Loans](index=60&type=section&id=Loans) Details the composition and geographic concentration of the company's loan portfolio - Approximately **79.2%** of all loans are secured by real property located principally in the Commonwealth of Virginia[180](index=180&type=chunk) - Commercial and industrial loans represent approximately **16.4%** of the total loan portfolio, while guaranteed student loans account for **3.6%**[180](index=180&type=chunk) Loan Portfolio Breakdown | Loan Type | June 30, 2023 (in thousands) | % | December 31, 2022 (in thousands) | % | | :--- | :--- | :--- | :--- | :--- | | Total loans | $556,170 | 100.00% | $538,427 | 100.00% | | Construction and land development | $50,938 | 9.16% | $45,127 | 8.38% | | Commercial real estate | $282,921 | 50.86% | $284,617 | 52.86% | | Consumer real estate | $106,532 | 19.16% | $93,680 | 17.40% | | Commercial and industrial loans | $91,394 | 16.43% | $90,348 | 16.78% | | Guaranteed student loans | $20,002 | 3.60% | $20,617 | 3.83% | [Allowance for Credit losses](index=61&type=section&id=Allowance%20for%20Credit%20losses) Discusses the adequacy and components of the allowance for credit losses under the CECL methodology - The Allowance for Credit Losses was **$3.53 million** at June 30, 2023, comprising **$3.26 million** for loans and **$277,000** for unfunded commitments, following the adoption of the CECL methodology[184](index=184&type=chunk) - Management believes the current level of allowance for credit losses is sufficient, despite economic challenges due to higher inflation and rising interest rates[163](index=163&type=chunk) [Asset quality](index=63&type=section&id=Asset%20quality) Reviews key asset quality metrics, including nonaccrual loans and nonperforming assets | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Nonaccrual loans | $286 | $654 | | Total nonperforming assets | $286 | $654 | | Nonaccrual loans to total loans | 0.05% | 0.12% | | Nonperforming assets to total assets | 0.04% | 0.09% | - Loans past due 90 days and still accruing (**$1.98 million** at June 30, 2023) are primarily rehabilitated student loans, which have a **98% guarantee by the DOE**[190](index=190&type=chunk)[196](index=196&type=chunk) [Deposits](index=65&type=section&id=Deposits) Analyzes changes in deposit balances across different categories, including noninterest-bearing and time deposits | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total deposits | $628,382 | $624,743 | $3,639 | 0.58% | | Noninterest bearing demand accounts | $249,059 | $255,236 | $(6,177) | (2.42)% | | Low cost relationship deposits (interest checking, money market, savings) | $329,311 | $325,083 | $4,228 | 1.30% | | Time deposits | $49,012 | $44,524 | $4,488 | 10.08% | - The decrease in noninterest-bearing demand accounts was driven by consumers and businesses drawing down balances due to increased pressure from high inflation and investing in higher-yielding products[198](index=198&type=chunk) [Borrowings](index=66&type=section&id=Borrowings) Explains the company's use of borrowings to manage funding and liability duration needs - The Company utilizes borrowings to supplement deposits and address funding or liability duration needs[202](index=202&type=chunk) [Capital resources](index=66&type=section&id=Capital%20resources) Presents the company's shareholders' equity and regulatory capital ratios, demonstrating compliance | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change ($) | | :--- | :--- | :--- | :--- | | Shareholders' equity | $64,014 | $61,111 | $2,903 | Capital Ratios | Capital Ratio | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Leverage ratio | 11.18% | 10.95% | | Common equity tier 1 capital ratio (CET 1) | 14.36% | 14.22% | | Tier 1 capital to risk-weighted assets | 14.36% | 14.22% | | Total capital to risk-weighted assets | 14.97% | 14.81% | [Liquidity](index=67&type=section&id=Liquidity) Assesses the company's liquid assets, total liquidity sources, and coverage of uninsured deposits - Liquid assets, consisting of cash, cash equivalents, and investment securities available for sale, totaled **$158.22 million**, or **20.97%** of total assets, at June 30, 2023[207](index=207&type=chunk) - Total liquidity sources (**$179.5 million**) covered **90.66%** of uninsured deposits (**$198.0 million**) at June 30, 2023[208](index=208&type=chunk) - The Company has an unused borrowing capacity of **$3.5 million** from the FHLB, which can be increased to **$138.5 million** by pledging additional collateral[210](index=210&type=chunk) [Interest rate sensitivity](index=69&type=section&id=Interest%20rate%20sensitivity) Describes management's strategies for monitoring and managing interest rate risk to stabilize net interest margin - Management actively monitors interest sensitivity risk to maximize and stabilize the net interest margin by limiting exposure to interest rate changes[213](index=213&type=chunk) - Strategies to manage interest rate risk include the sale of fixed-rate loans and regular evaluation of adjustable-rate mortgage loans[215](index=215&type=chunk) [Impact of inflation and changing prices](index=69&type=section&id=Impact%20of%20inflation%20and%20changing%20prices) Discusses the greater impact of interest rate changes compared to inflation on financial institutions - Changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate[216](index=216&type=chunk) - Interest rates are highly sensitive to factors beyond the Company's control, including inflation, economic conditions, and government monetary and fiscal policies[216](index=216&type=chunk) [LIBOR and Other Benchmark Rates](index=69&type=section&id=LIBOR%20and%20Other%20Benchmark%20Rates) Explains the transition from LIBOR to SOFR for financial instruments and its impact on the company - The Company replaced the LIBOR leg of calculated floating rates for its financial instruments with the corresponding term SOFR plus an applicable tenor spread adjustment, following LIBOR's discontinuation on June 30, 2023[218](index=218&type=chunk) - This transition did not have a significant impact on the Company's consolidated financial statements[219](index=219&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=71&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) States that this section is not applicable, indicating no material market risk disclosures beyond other sections - This section is marked 'Not Applicable' by the registrant[220](index=220&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) Confirms the effectiveness of disclosure controls and procedures and the absence of material changes in internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023[221](index=221&type=chunk) - No material changes in internal control over financial reporting were identified during the last fiscal quarter[222](index=222&type=chunk) PART II – OTHER INFORMATION Contains disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, exhibits, and signatures [ITEM 1. LEGAL PROCEEDINGS](index=72&type=section&id=Item%201.%20Legal%20Proceedings) Confirms the absence of any material pending legal proceedings involving the company - There are no material pending legal proceedings involving the Company[225](index=225&type=chunk) [ITEM 1A. RISK FACTORS](index=72&type=section&id=Item%201A.%20Risk%20Factors) States that there have been no material changes to the risk factors previously disclosed in the annual report - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for December 31, 2022[226](index=226&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=72&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) States that this section is not applicable, indicating no unregistered equity sales or use of proceeds to disclose - This section is marked 'Not applicable' by the registrant[227](index=227&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=72&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) States that this section is not applicable, indicating no defaults upon senior securities to disclose - This section is marked 'Not applicable' by the registrant[228](index=228&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=72&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) States that this section is not applicable, indicating no mine safety disclosures are required - This section is marked 'None' by the registrant[229](index=229&type=chunk) [ITEM 5. OTHER INFORMATION](index=72&type=section&id=Item%205.%20Other%20Information) States that this section is not applicable, indicating no other information to disclose - This section is marked 'Not applicable' by the registrant[230](index=230&type=chunk) [ITEM 6. EXHIBITS](index=72&type=section&id=Item%206.%20Exhibits) Lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and XBRL formatted financial statements - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, and XBRL formatted financial statements[232](index=232&type=chunk) [Signatures](index=73&type=section&id=Signatures) Provides the official signatures of the company's President, CEO, EVP, and CFO, along with the signing date - The report was signed by James E. Hendricks, Jr. (President and CEO) and Donald M. Kaloski, Jr. (EVP and CFO) on August 11, 2023[235](index=235&type=chunk)

[PART I – FINANCIAL INFORMATION](index=3&type=section&id=Part%20I%20%E2%80%93%20Financial%20Information) This section presents the unaudited consolidated financial statements and management's discussion and analysis for the company [ITEM 1 – FINANCIAL STATEMENTS](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Village Bank and Trust Financial Corp. and its subsidiary for the three months ended March 31, 2023, and comparative periods. It includes the Balance Sheets, Statements of Income, Comprehensive Income (Loss), Shareholders' Equity, and Cash Flows, along with detailed notes explaining accounting policies, estimates, and specific financial instrument details - The consolidated financial statements are unaudited and prepared in accordance with GAAP for interim financial information[26](index=26&type=chunk) [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section presents the consolidated balance sheets, detailing assets, liabilities, and equity at specific dates Consolidated Balance Sheet Summary (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Total Assets | $734,797 | $723,270 | +$11,527 | | Total Liabilities | $670,916 | $662,159 | +$8,757 | | Total Shareholders' Equity | $63,881 | $61,111 | +$2,770 | | Cash and due from banks | $8,087 | $12,062 | -$3,975 | | Federal funds sold | $16,047 | $4,616 | +$11,431 | | Total cash and cash equivalents | $24,134 | $16,678 | +$7,456 | | Total loans, net | $537,193 | $535,645 | +$1,548 | | Total deposits | $618,016 | $624,743 | -$6,727 | | Federal Home Loan Bank advances | $35,000 | $20,000 | +$15,000 | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) This section presents the consolidated statements of income, outlining revenues, expenses, and net income for the periods Consolidated Statements of Income Summary (Three Months Ended March 31, 2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | Change (%) | | :--------------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Total interest income | $7,583 | $6,268 | +$1,315 | +20.98% | | Total interest expense | $1,218 | $407 | +$811 | +199.26% | | Net interest income | $6,365 | $5,861 | +$504 | +8.60% | | Provision for (recovery of) credit losses | $— | $(400) | +$400 | N/A | | Total noninterest income | $1,256 | $1,628 | -$372 | -22.85% | | Total noninterest expense | $5,756 | $5,682 | +$74 | +1.30% | | Income before income tax expense | $1,865 | $2,207 | -$342 | -15.49% | | Net income | $1,540 | $1,800 | -$260 | -14.44% | | Earnings per share, basic | $1.04 | $1.24 | -$0.20 | -16.13% | | Earnings per share, diluted | $1.04 | $1.24 | -$0.20 | -16.13% | [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This section presents comprehensive income, including net income and other comprehensive income (loss) components Consolidated Statements of Comprehensive Income (Loss) Summary (Three Months Ended March 31, 2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | | :---------------------------------------------------------------- | :------------------ | :------------------ | :-------------------- | | Net income | $1,540 | $1,800 | -$260 | | Net change in unrealized holding gains (losses) on securities AFS, net of tax | $1,482 | $(3,607) | +$5,089 | | Total comprehensive income (loss) | $3,024 | $(1,805) | +$4,829 | [Consolidated Statements of Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) This section details changes in shareholders' equity, including net income, dividends, and other comprehensive income Shareholders' Equity Changes (Three Months Ended March 31, 2023) | Item | Amount (in thousands) | | :------------------------------------------ | :-------------------- | | Balance, December 31, 2022 | $61,111 | | Stock based compensation | $102 | | Cash dividend declared ($0.16 per share) | $(237) | | Impact of adoption of ASC 326 | $(119) | | Net income | $1,540 | | Other comprehensive income | $1,484 | | Balance, March 31, 2023 | $63,881 | Shareholders' Equity Changes (Three Months Ended March 31, 2022) | Item | Amount (in thousands) | | :------------------------------------------ | :-------------------- | | Balance, December 31, 2021 | $63,401 | | Stock based compensation | $90 | | Cash dividend declared ($0.14 per share) | $(206) | | Net income | $1,800 | | Other comprehensive loss | $(3,605) | | Balance, March 31, 2022 | $61,480 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents cash flows from operating, investing, and financing activities for the periods Cash Flow Summary (Three Months Ended March 31, 2023 vs. 2022) | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :------------------ | :------------------ | :-------------------- | | Net cash provided by (used in) operating activities | $2,096 | $(1,339) | +$3,435 | | Net cash used in investing activities | $(2,676) | $(42,212) | +$39,536 | | Net cash provided by financing activities | $8,036 | $19,419 | -$11,383 | | Net increase (decrease) in cash and cash equivalents | $7,456 | $(24,132) | +$31,588 | | Cash and cash equivalents, end of period | $24,134 | $68,484 | -$44,350 | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed disclosures and explanations for the consolidated financial statements, covering accounting policies, estimates, new accounting standards adopted (like CECL), and specific financial instrument details such as investment securities, loans, deposits, borrowings, and fair value measurements. It also includes information on segment reporting, shareholders' equity, regulatory matters, commitments, contingencies, and recent accounting pronouncements [Note 1 – Principles of presentation](index=8&type=section&id=Note%201%20%E2%80%93%20Principles%20of%20presentation) This note outlines the basis of consolidation, significant accounting policies, and the adoption of new accounting standards - The consolidated financial statements include Village Bank and Trust Financial Corp., Village Bank, and Village Bank Mortgage Corporation[25](index=25&type=chunk) - The Company adopted ASU 2016-13 (CECL methodology) on January 1, 2023, resulting in a net decrease to retained earnings of **$119,000**, net of taxes, due to adjustments to the allowance for credit losses on loans and a reserve for unfunded loan commitments[27](index=27&type=chunk) - The CECL methodology utilizes a third-party model with a Weighted Average Remaining Maturity (WARM) approach, segmenting the loan portfolio by risk characteristics and basing forecasts on a twelve-month unemployment rate projection from the Federal Open Market Committee[28](index=28&type=chunk)[65](index=65&type=chunk) Impact of ASC 326 Adoption (January 1, 2023) | Item | As Previously Reported (Incurred Loss) (in thousands) | Impact of CECL Adoption (in thousands) | As Reported Under CECL (in thousands) | | :------------------------------------ | :------------------------------------------------ | :----------------------------------- | :-------------------------------- | | Allowance for credit losses | $3,370 | $(127) | $3,243 | | Allowance for credit losses on unfunded credit exposure | $— | $277 | $277 | | Total Allowance for credit losses | $3,370 | $150 | $3,520 | [Note 2 – Use of estimates](index=11&type=section&id=Note%202%20%E2%80%93%20Use%20of%20estimates) This note discusses the use of estimates in financial reporting, particularly for the allowance for credit losses - The determination of the allowance for credit losses, including collateral dependent loans, is a material estimate particularly susceptible to significant change[32](index=32&type=chunk) [Note 3 – Earnings per common share](index=11&type=section&id=Note%203%20%E2%80%93%20Earnings%20per%20common%20share) This note provides details on the calculation of basic and diluted earnings per common share Earnings Per Share (Three Months Ended March 31, 2023 vs. 2022) | Metric | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Net income - basic and diluted (in thousands) | $1,540 | $1,800 | | Weighted average shares outstanding - basic | 1,484 | 1,457 | | Weighted average shares outstanding - diluted | 1,484 | 1,457 | | Earnings per share - basic | $1.04 | $1.24 | | Earnings per share - diluted | $1.04 | $1.24 | - **10,658** and **6,264** unvested restricted units at March 31, 2023 and 2022, respectively, were excluded from EPS computation due to indeterminable performance-based vesting criteria[34](index=34&type=chunk) [Note 4 – Investment securities available for sale](index=12&type=section&id=Note%204%20%E2%80%93%20Investment%20securities%20available%20for%20sale) This note details the composition and fair value of investment securities classified as available for sale Investment Securities AFS (March 31, 2023 vs. December 31, 2022) | Category | March 31, 2023 Fair Value (in thousands) | December 31, 2022 Fair Value (in thousands) | | :------------------------------ | :------------------------------------ | :------------------------------------ | | U.S. Government agency obligations | $61,701 | $60,902 | | Mortgage-backed securities | $61,090 | $60,560 | | Municipals | $1,654 | $1,550 | | Subordinated debt | $11,508 | $10,841 | | **Total Fair Value** | **$135,953** | **$133,853** | - As of March 31, 2023, **68** investments totaling **$124,663,000** had an unrealized loss of **$11,986,000**, primarily due to interest rate movements rather than credit deterioration, and are not considered impaired[39](index=39&type=chunk)[40](index=40&type=chunk) - Investment securities with a fair value of **$16,498,000** (March 31, 2023) and **$5,613,000** (December 31, 2022) were pledged to secure FHLB borrowings[36](index=36&type=chunk) [Note 5 – Loans and allowance for credit losses](index=14&type=section&id=Note%205%20%E2%80%93%20Loans%20and%20allowance%20for%20credit%20losses) This note provides a breakdown of the loan portfolio, nonaccrual loans, and activity in the allowance for credit losses Loan Portfolio by Type (March 31, 2023 vs. December 31, 2022) | Loan Type | March 31, 2023 Amount (in thousands) | March 31, 2023 % | December 31, 2022 Amount (in thousands) | December 31, 2022 % | | :------------------------------------------------ | :----------------------------------- | :--------------- | :----------------------------------- | :--------------- | | Construction and land development | $49,426 | 9.16% | $45,127 | 8.38% | | Commercial real estate | $281,587 | 52.16% | $284,617 | 52.86% | | Consumer real estate | $96,615 | 17.90% | $93,680 | 17.40% | | Commercial and industrial loans | $87,728 | 16.25% | $90,348 | 16.78% | | Guaranteed student loans | $20,195 | 3.74% | $20,617 | 3.83% | | Consumer and other | $4,267 | 0.79% | $4,038 | 0.75% | | **Total loans** | **$539,818** | **100.0%** | **$538,427** | **100.0%** | Nonaccrual Loans (March 31, 2023 vs. December 31, 2022) | Loan Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Consumer real estate | $571 | $635 | | Commercial and industrial loans | $18 | $19 | | **Total loans** | **$589** | **$654** | - Loans are classified into Pass (1-4), Special Mention (5), Substandard (6), and Doubtful (7) risk ratings[48](index=48&type=chunk) Allowance for Credit Losses Activity (Three Months Ended March 31, 2023) | Item | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Beginning Balance (Dec 31, 2022) | $3,370 | | Impact of adopting ASC 326 | $(127) | | Provision for Credit Losses | $23 | | Charge-offs | $(3) | | Recoveries | $9 | | **Ending Balance (March 31, 2023)** | **$3,272** | Provision for Credit Losses (Three Months Ended March 31, 2023 vs. 2022) | Item | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Provision (recovery) for loans | $23 | $(400) | | Provision (recovery) for unfunded commitments | $(23) | $— | | **Total** | **$—** | **$(400)** | - As of March 31, 2023, the Allowance for Credit Losses was **$3.53 million**, including **$3.27 million** for loans and **$254,000** for unfunded commitments[71](index=71&type=chunk) [Note 6 – Deposits](index=27&type=section&id=Note%206%20%E2%80%93%20Deposits) This note details the composition of deposits by type and their respective balances Deposits by Type (March 31, 2023 vs. December 31, 2022) | Deposit Type | March 31, 2023 Amount (in thousands) | March 31, 2023 % | December 31, 2022 Amount (in thousands) | December 31, 2022 % | | :-------------------------------- | :----------------------------------- | :--------------- | :----------------------------------- | :--------------- | | Demand accounts | $254,039 | 41.1% | $255,236 | 40.9% | | Interest checking accounts | $80,265 | 13.0% | $90,252 | 14.4% | | Money market accounts | $186,096 | 30.1% | $179,036 | 28.6% | | Savings accounts | $51,015 | 8.3% | $55,695 | 8.9% | | Time deposits of $250,000 and over | $7,595 | 1.2% | $4,740 | 0.8% | | Other time deposits | $39,006 | 6.3% | $39,784 | 6.4% | | **Total** | **$618,016** | **100.0%** | **$624,743** | **100.0%** | [Note 7 – Borrowings](index=27&type=section&id=Note%207%20%E2%80%93%20Borrowings) This note describes the company's borrowing activities, including Federal Home Loan Bank advances and unused credit lines - Federal Home Loan Bank (FHLB) advances increased to **$35,000,000** at March 31, 2023, from **$20,000,000** at December 31, 2022[10](index=10&type=chunk)[80](index=80&type=chunk) - The Company had approximately **$44.4 million** in unused lines of credit for future borrowings at March 31, 2023, including FHLB, revolving bank lines, secured federal funds, and repurchase lines[82](index=82&type=chunk) [Note 8 – Trust preferred securities](index=28&type=section&id=Note%208%20%E2%80%93%20Trust%20preferred%20securities) This note details the company's trust preferred capital notes, their interest rates, and regulatory capital treatment - The Company has **$8.8 million** in Trust Preferred Capital Notes with floating interest rates indexed to LIBOR (**7.18%** and **6.43%** at March 31, 2023), which can be included in Tier 1 capital for regulatory purposes[84](index=84&type=chunk)[85](index=85&type=chunk)[86](index=86&type=chunk) [Note 9 – Subordinated Debt](index=28&type=section&id=Note%209%20%E2%80%93%20Subordinated%20Debt) This note describes the company's subordinated notes, including their terms, interest rates, and maturity - The Company issued **$5.7 million** in fixed-to-floating rate subordinated notes due March 31, 2028, with the interest rate transitioning from a fixed **6.50%** to a LIBOR-indexed floating rate (**8.73%** at March 31, 2023) after March 21, 2023[88](index=88&type=chunk) [Note 10 – Stock incentive plan](index=28&type=section&id=Note%2010%20%E2%80%93%20Stock%20incentive%20plan) This note provides information on stock-based compensation expense and non-vested restricted stock under the incentive plan - Stock-based compensation expense was **$102,000** for the three months ended March 31, 2023, compared to **$90,000** for the same period in 2022[94](index=94&type=chunk) - Total non-vested restricted stock was **26,152 shares** at March 31, 2023, with unamortized compensation of **$883,400**[92](index=92&type=chunk)[93](index=93&type=chunk) [Note 11 – Fair value](index=31&type=section&id=Note%2011%20%E2%80%93%20Fair%20value) This note explains the fair value measurement hierarchy and provides fair value disclosures for financial instruments - The Company classifies financial instruments into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (significant unobservable inputs) based on ASC 820[96](index=96&type=chunk)[97](index=97&type=chunk) Fair Value Measurement (March 31, 2023) | Financial Instrument | Carrying Value (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :-------------------------------- | :---------------------------- | :--------------------- | :--------------------- | :--------------------- | | U.S. Government Agencies | $61,701 | $— | $61,701 | $— | | Mortgage-backed securities | $61,090 | $— | $61,090 | $— | | Municipals | $1,654 | $— | $1,654 | $— | | Subordinated debt | $11,508 | $— | $9,028 | $2,480 | | Loans held for sale | $1,852 | $— | $1,852 | $— | | IRLC | $472 | $— | $472 | $— | | Forward sales commitment | $534 | $— | $534 | $— | - Collateral-dependent loans are measured at fair value for allowance for credit losses, typically classified as Level 2 or Level 3 if unobservable inputs are required[99](index=99&type=chunk)[107](index=107&type=chunk) [Note 12 – Segment Reporting](index=34&type=section&id=Note%2012%20%E2%80%93%20Segment%20Reporting) This note presents financial information for the company's operating segments: commercial banking and mortgage banking - The Company operates in two reportable segments: traditional commercial banking and mortgage banking[108](index=108&type=chunk) Segment Performance (Three Months Ended March 31, 2023) | Metric | Commercial Banking (in thousands) | Mortgage Banking (in thousands) | Consolidated Totals (in thousands) | | :-------------------------- | :------------------------------ | :------------------------------ | :------------------------------- | | Total revenues | $8,321 | $721 | $9,026 | | Total operating expenses | $6,054 | $1,123 | $7,161 | | Income (loss) before income taxes | $2,267 | $(402) | $1,865 | | Net income (benefit) | $1,858 | $(318) | $1,540 | Segment Performance (Three Months Ended March 31, 2022) | Metric | Commercial Banking (in thousands) | Mortgage Banking (in thousands) | Consolidated Totals (in thousands) | | :-------------------------- | :------------------------------ | :------------------------------ | :------------------------------- | | Total revenues | $7,019 | $1,404 | $8,351 | | Total operating expenses | $4,560 | $1,656 | $6,144 | | Income before income taxes | $2,459 | $(252) | $2,207 | | Net income | $1,999 | $(199) | $1,800 | [Note 13 – Shareholders' Equity and Regulatory Matters](index=36&type=section&id=Note%2013%20%E2%80%93%20Shareholders'%20Equity%20and%20Regulatory%20Matters) This note details changes in shareholders' equity and the company's compliance with regulatory capital requirements - Total accumulated other comprehensive loss improved to **$(9,397,000)** at March 31, 2023, from **$(10,881,000)** at December 31, 2022, primarily due to net unrealized losses on securities[112](index=112&type=chunk) Regulatory Capital Ratios (Village Bank, March 31, 2023) | Capital Ratio | Actual Ratio | Minimum Capital Requirements Including Conservation Buffer | To Be Well Capitalized | | :------------------------------------ | :----------- | :------------------------------------------------ | :-------------------- | | Total capital (to risk-weighted assets) | 15.14% | 10.50% | 10.00% | | Tier 1 capital (to risk-weighted assets) | 14.52% | 8.50% | 8.00% | | Leverage ratio (Tier 1 capital to average assets) | 11.27% | 4.00% | 5.00% | | Common equity tier 1 (to risk-weighted assets) | 14.52% | 7.00% | 6.50% | - The Bank exceeded all minimum capital ratios under Basel III Capital Rules and 'prompt corrective action' regulations as of March 31, 2023, classifying it as 'well capitalized'[115](index=115&type=chunk)[116](index=116&type=chunk) - The Bank elected not to opt into the Community Bank Leverage Ratio (CBLR) framework as of March 31, 2023[117](index=117&type=chunk) [Note 14 – Commitments and contingencies](index=37&type=section&id=Note%2014%20%E2%80%93%20Commitments%20and%20contingencies) This note discloses off-balance-sheet financial instruments and concentrations of credit risk Off-Balance-Sheet Financial Instruments (March 31, 2023 vs. December 31, 2022) | Instrument | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :---------------------------- | :---------------------------- | | Undisbursed credit lines | $119,405 | $119,454 | | Commitments to extend or originate credit | $16,596 | $9,899 | | Standby letters of credit | $917 | $922 | | **Total commitments to extend credit** | **$136,918** | **$130,275** | - The Company's credit risk is concentrated in the Richmond, Virginia area, particularly in real estate markets[123](index=123&type=chunk) [Note 15 – Mortgage Banking and Derivatives](index=39&type=section&id=Note%2015%20%E2%80%93%20Mortgage%20Banking%20and%20Derivatives) This note provides information on loans held for sale, interest rate lock commitments, and forward sales commitments - Loans held for sale (LHFS) totaled **$1.9 million** at March 31, 2023, and **$2.3 million** at December 31, 2022, accounted for at fair value (Level 2)[124](index=124&type=chunk) - Interest Rate Lock Commitments (IRLCs) totaled **$472,000** (notional **$16.6 million**) at March 31, 2023, up from **$142,000** (notional **$9.9 million**) at December 31, 2022, and are classified as Level 2 derivatives[125](index=125&type=chunk) - Forward sales commitments, classified as Level 2 derivative liabilities, totaled **$534,000** (notional **$18.4 million**) at March 31, 2023, up from **$207,000** (notional **$12.1 million**) at December 31, 2022[128](index=128&type=chunk) [Note 16 Recent Accounting Pronouncements](index=41&type=section&id=Note%2016%20Recent%20Accounting%20Pronouncements) This note discusses the impact of recent accounting pronouncements, particularly those related to LIBOR transition - ASU 2022-06 extends the sunset date for reference rate reform relief guidance (Topic 848) from December 31, 2022, to December 31, 2024, to facilitate the transition away from LIBOR[129](index=129&type=chunk)[130](index=130&type=chunk) - ASU 2020-04 and 2021-01 provide optional expedients and exceptions for accounting for contract modifications and hedging relationships affected by LIBOR discontinuation, with the Company assessing their impact[131](index=131&type=chunk) [ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=42&type=section&id=Item%202%20-%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition and operational results for the three months ended March 31, 2023, compared to the same period in 2022. It covers key financial metrics, the impact of accounting changes like CECL, and discussions on net interest income, noninterest income/expense, balance sheet components, asset quality, liquidity, and interest rate sensitivity. It also includes forward-looking statements and risk factors [Caution about forward-looking statements](index=42&type=section&id=Caution%20about%20forward-looking%20statements) This section highlights the inherent uncertainties and risks associated with forward-looking statements in the report - The report contains forward-looking statements regarding profitability, liquidity, credit losses, interest rate sensitivity, market risk, and growth strategy, which are subject to numerous assumptions, risks, and uncertainties[133](index=133&type=chunk) - Potential material adverse effects include changes in credit loss assumptions, interest rate fluctuations, liquidity issues, economic conditions, regulatory changes, cybersecurity risks, real estate market declines, loan risks, mortgage company operations, governmental policies, geopolitical conditions, accounting policies, reliance on management, competition, technology issues, natural disasters, and the impact of COVID-19[134](index=134&type=chunk) [General](index=44&type=section&id=General) This section provides a general overview of the company's primary earnings source and key management judgments - Net interest income is the Company's primary source of earnings, with interest rate risk being its principal market risk exposure[136](index=136&type=chunk) - Management's assumptions and judgments about loan collectability are crucial, as incorrect assessments could lead to insufficient allowance for credit losses and negative impacts on net income[137](index=137&type=chunk) [Summary](index=44&type=section&id=Summary) This section summarizes key financial performance metrics and the impact of recent accounting changes - Net income decreased to **$1,540,000** (**$1.04** diluted EPS) for the three months ended March 31, 2023, from **$1,800,000** (**$1.24** diluted EPS) for the same period in 2022[139](index=139&type=chunk) - The adoption of the CECL methodology on January 1, 2023, increased the Allowance for Credit Losses by **$150,000** to **$3.52 million**, comprising **$3.24 million** for loans and **$277,000** for unfunded commitments[140](index=140&type=chunk) - As of March 31, 2023, the Allowance for Credit Losses was **$3.53 million**, with **$3.27 million** allocated to loans and **$254,000** to unfunded commitments[141](index=141&type=chunk) [Net interest income](index=44&type=section&id=Net%20interest%20income) This section analyzes the components of net interest income, net interest margin, and factors influencing changes Net Interest Income Performance (Three Months Ended March 31, 2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Net interest income | $6,365 | $5,861 | +$504 | +8.60% | | Net interest margin (NIM) | 3.79% | 3.36% | +0.43% | N/A | | Yield on interest-earning assets | 4.51% | 3.59% | +0.92% | N/A | | Cost of interest-bearing liabilities | 1.22% | 0.40% | +0.82% | N/A | - The **43 basis point** increase in Net Interest Margin (NIM) was primarily driven by a **92 basis point** increase in the yield on average earning assets, resulting from an improved asset mix and rising interest rates[146](index=146&type=chunk) - The cost of interest-bearing liabilities increased by **82 basis points** due to higher rates on variable rate debt, increased borrowings to offset deposit outflows, and market pressure on deposit rates[146](index=146&type=chunk) - Total PPP income recorded was **$1,800** for Q1 2023, a significant decrease from **$540,000** in Q1 2022[146](index=146&type=chunk) [Provision for (recovery of) Credit losses](index=47&type=section&id=Provision%20for%20(recovery%20of)%20Credit%20losses) This section discusses the provision for credit losses, including the impact of CECL adoption and credit quality factors - The adoption of the CECL methodology on January 1, 2023, increased the Allowance for Credit Losses by **$150,000** to **$3.52 million**, comprising **$3.24 million** for loans and **$277,000** for unfunded commitments[150](index=150&type=chunk) - As of March 31, 2023, the Allowance for Credit Losses was **$3.53 million**, with **$3.27 million** allocated to loans and **$254,000** to unfunded commitments[151](index=151&type=chunk) - The absence of an overall provision for credit losses in Q1 2023 was attributed to stable local economic conditions and strong credit quality, despite risks from higher inflation and rising interest rates[153](index=153&type=chunk) - A recovery of provision for loan losses expense of **$400,000** was recorded for the three months ended March 31, 2022, driven by improving macroeconomic conditions and strong credit quality[156](index=156&type=chunk) [Noninterest income](index=49&type=section&id=Noninterest%20income) This section analyzes the components of noninterest income and factors contributing to changes in revenue streams Noninterest Income (Three Months Ended March 31, 2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | Change (%) | | :------------------------ | :------------------ | :------------------ | :-------------------- | :--------- | | Service charges and fees | $669 | $619 | +$50 | +8.1% | | Mortgage banking income, net | $478 | $878 | -$400 | -45.6% | | Other | $109 | $131 | -$22 | -16.8% | | **Total noninterest income** | **$1,256** | **$1,628** | **$(372)** | **-22.9%** | - The **$400,000** decrease in mortgage banking income was primarily due to reduced loan originations and sales, a sharp rise in mortgage rates, historically low housing inventory, and compressed gain on sale margins[159](index=159&type=chunk) [Noninterest expense](index=49&type=section&id=Noninterest%20expense) This section details the components of noninterest expense and explains the drivers of changes in operating costs Noninterest Expense (Three Months Ended March 31, 2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | Change (%) | | :------------------------------ | :------------------ | :------------------ | :-------------------- | :--------- | | Salaries and benefits | $3,448 | $3,524 | $(76) | -2.2% | | Professional and outside services | $813 | $725 | +$88 | +12.1% | | Other operating expense | $690 | $606 | +$84 | +13.9% | | **Total noninterest expense** | **$5,756** | **$5,682** | **+$74** | **+1.3%** | - The overall increase in noninterest expense was driven by higher professional and outside services costs (data processing, online/mobile banking platform rollout) and increased other operating expenses (check and card fraud), partially offset by lower salaries and benefits due to decreased mortgage production[161](index=161&type=chunk) [Income taxes](index=51&type=section&id=Income%20taxes) This section discusses income tax expense and the effective tax rate, including factors influencing their changes Income Tax Expense and Effective Rate (Three Months Ended March 31, 2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Income tax expense | $325 | $407 | | Effective tax rate | 17.4% | 18.4% | - The decrease in the effective tax rate was primarily due to an increase in tax credits related to state taxes attributed to the Company and the Mortgage Banking Segment[162](index=162&type=chunk) [Balance Sheet Analysis](index=51&type=section&id=Balance%20Sheet%20Analysis) This section provides a detailed analysis of the Company's balance sheet components, including investment securities, loans, allowance for credit losses, asset quality, deposits, borrowings, and capital resources, comparing March 31, 2023, with December 31, 2022 [Investment securities](index=51&type=section&id=Investment%20securities) This section discusses the classification of investment securities and their role in the balance sheet - All investment securities were classified as available for sale at both March 31, 2023, and December 31, 2022[163](index=163&type=chunk) [Loans](index=51&type=section&id=Loans) This section details the loan portfolio composition, underwriting standards, and credit concentration risks - The Company maintains rigorous underwriting standards and focuses on loan type and size diversification to minimize credit concentration risk, particularly in construction and land development loans[164](index=164&type=chunk) - Approximately **79.2%** of all loans are secured by real property in Virginia, **3.7%** are rehabilitated student loans (**98%** guaranteed by the U.S. DOE), and **16.3%** are commercial and industrial loans[165](index=165&type=chunk) Loan Portfolio by Type (March 31, 2023 vs. December 31, 2022) | Loan Type | March 31, 2023 Amount (in thousands) | March 31, 2023 % | December 31, 2022 Amount (in thousands) | December 31, 2022 % | | :------------------------------------------------ | :----------------------------------- | :--------------- | :----------------------------------- | :--------------- | | Construction and land development | $49,426 | 9.16% | $45,127 | 8.38% | | Commercial real estate | $281,587 | 52.16% | $284,617 | 52.86% | | Consumer real estate | $96,615 | 17.90% | $93,680 | 17.40% | | Commercial and industrial loans | $87,728 | 16.25% | $90,348 | 16.78% | | Guaranteed student loans | $20,195 | 3.74% | $20,617 | 3.83% | | Consumer and other | $4,267 | 0.79% | $4,038 | 0.75% | | **Total loans** | **$539,818** | **100.00%** | **$538,427** | **100.00%** | [Allowance for Credit losses](index=52&type=section&id=Allowance%20for%20Credit%20losses) This section discusses the allowance for credit losses, including the impact of CECL adoption and activity - The adoption of the CECL methodology on January 1, 2023, increased the Allowance for Credit Losses by **$150,000** to **$3.52 million**, comprising **$3.24 million** for loans and **$277,000** for unfunded commitments[169](index=169&type=chunk) - As of March 31, 2023, the Allowance for Credit Losses was **$3.53 million**, with **$3.27 million** allocated to loans and **$254,000** to unfunded commitments[170](index=170&type=chunk) Allowance for Loan Losses Activity (Three Months Ended March 31, 2023) | Item | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Beginning Balance (Dec 31, 2022) | $3,370 | | Impact of adopting ASC 326 | $(127) | | Provision for Credit Losses | $23 | | Charge-offs | $(3) | | Recoveries | $9 | | **Ending Balance (March 31, 2023)** | **$3,272** | [Asset quality](index=54&type=section&id=Asset%20quality) This section analyzes nonperforming assets, asset quality ratios, and loans past due but still accruing interest Nonperforming Assets (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Nonaccrual loans | $589 | $654 | | Foreclosed properties | $— | $— | | **Total nonperforming assets** | **$589** | **$654** | Asset Quality Ratios (March 31, 2023 vs. December 31, 2022) | Ratio | March 31, 2023 | December 31, 2022 | | :------------------------------------------------ | :------------- | :---------------- | | Nonaccrual loans to total loans | 0.11% | 0.12% | | Nonperforming assets to loans | 0.11% | 0.12% | | Nonperforming assets to total assets | 0.08% | 0.09% | | Allowance for loan losses to Nonaccrual loans | 555.52% | 515.29% | - Loans past due 90 days and still accruing totaled **$1,871,000** at March 31, 2023, and **$1,725,000** at December 31, 2022, consisting entirely of rehabilitated student loans with a **98%** DOE guarantee[176](index=176&type=chunk)[180](index=180&type=chunk) [Deposits](index=56&type=section&id=Deposits) This section details changes in total deposits, noninterest-bearing accounts, and the cost of interest-bearing deposits - Total deposits decreased by **$6,727,000** (**1.08%**) to **$618,016,000** at March 31, 2023, from December 31, 2022[181](index=181&type=chunk) - Noninterest bearing demand accounts decreased by **$1,197,000**, while low-cost relationship deposits (interest checking, money market, savings) decreased by **$7,607,000** (**2.3%**). Time deposits increased by **$2,077,000** (**4.66%**) due to efforts to lock in lower rates[182](index=182&type=chunk) Average Deposit Cost Rate (March 31, 2023 vs. December 31, 2022) | Deposit Type | March 31, 2023 | December 31, 2022 | | :------------------------ | :------------- | :---------------- | | Interest checking | 0.30% | 0.12% | | Money market | 1.00% | 0.27% | | Savings | 0.16% | 0.15% | | Certificates (Less than $250,000) | 0.81% | 0.61% | | Certificates ($250,000 or more) | 0.84% | 0.69% | | **Total interest bearing deposits** | **0.70%** | **0.28%** | | **Total deposits** | **0.41%** | **0.16%** | [Borrowings](index=57&type=section&id=Borrowings) This section discusses the company's use of borrowings to supplement funding and manage liability duration - The Company utilizes borrowings to supplement deposits for funding or liability duration needs[186](index=186&type=chunk) [Capital resources](index=57&type=section&id=Capital%20resources) This section analyzes changes in shareholders' equity and regulatory capital ratios - Shareholders' equity increased by **$2,770,000** to **$63,881,000** at March 31, 2023, from **$61,111,000** at December 31, 2022, driven by net income and a decrease in accumulated other comprehensive loss[187](index=187&type=chunk) Regulatory Capital Ratios (Village Bank, March 31, 2023 vs. December 31, 2022) | Capital Ratio | March 31, 2023 | December 31, 2022 | | :------------------------------------ | :------------- | :---------------- | | Leverage ratio | 11.27% | 10.95% | | Common equity tier 1 capital ratio (CET 1) | 14.52% | 14.22% | | Tier 1 capital to risk-weighted assets | 14.52% | 14.22% | | Total capital to risk-weighted assets | 15.14% | 14.81% | | Equity to total assets | 10.01% | 9.78% | [Liquidity](index=58&type=section&id=Liquidity) This section assesses the company's liquid assets, uninsured deposits, and available borrowing capacity - Liquid assets, including cash, cash equivalents, and available-for-sale investment securities, totaled **$160,087,000** (**21.79%** of total assets) at March 31, 2023[191](index=191&type=chunk) - Uninsured deposits were approximately **$190.0 million** (**30.73%** of total deposits) at March 31, 2023, with total liquidity sources covering **94.73%** of these deposits[192](index=192&type=chunk) - The Company had an unused FHLB borrowing capacity of **$1.6 million** at March 31, 2023, with potential to increase to **$145.8 million** by pledging additional collateral, and **$17.8 million** in federal funds lines of credit[193](index=193&type=chunk)[194](index=194&type=chunk) - Commitments to originate loans totaled **$136,918,000** at March 31, 2023[196](index=196&type=chunk) [Interest rate sensitivity](index=60&type=section&id=Interest%20rate%20sensitivity) This section discusses the company's approach to monitoring and managing interest rate risk to stabilize net interest margin - The Company actively monitors its sensitivity to interest rate movements and formulates guidelines to manage this risk, aiming to maximize and stabilize the net interest margin[197](index=197&type=chunk) - The actual term of the loan portfolio is often shorter than contractual terms due to prepayments and due-on-sale clauses, and the sale of fixed-rate loans is used to mitigate interest rate risk[198](index=198&type=chunk)[199](index=199&type=chunk) [Impact of inflation and changing prices](index=60&type=section&id=Impact%20of%20inflation%20and%20changing%20prices) This section addresses the effects of inflation on operating costs and the greater impact of interest rate changes - The primary effect of inflation on the Company's operations is increased operating costs, though changes in interest rates are considered to have a greater impact on financial condition than inflation rates[200](index=200&type=chunk) [LIBOR and Other Benchmark Rates](index=60&type=section&id=LIBOR%20and%20Other%20Benchmark%20Rates) This section discusses the transition away from LIBOR, the Adjustable Interest Rate (LIBOR) Act, and associated risks - The most commonly used U.S. dollar LIBOR settings are expected to cease being published or representative after June 30, 2023[201](index=201&type=chunk) - The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on the Secured Overnight Funding Rate (SOFR) for contracts without effective fallbacks[203](index=203&type=chunk) - The transition from LIBOR poses risks including considerable costs, changes to market risk profiles, and the need for adjustments to risk/pricing models, valuation tools, product design, and hedging strategies[204](index=204&type=chunk) [ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=62&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that the item is not applicable to the Company - This item is marked as 'Not Applicable' in the report[205](index=205&type=chunk) [ITEM 4 – CONTROLS AND PROCEDURES](index=62&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the Company's disclosure controls and procedures and internal control over financial reporting, including changes related to the adoption of new accounting standards - The Company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31, 2023[206](index=206&type=chunk) - New internal controls were designed and implemented related to the adoption of ASC 326 (CECL) on January 1, 2023, specifically for measuring the allowance for credit losses on loans and unfunded commitments, with no other material changes to internal control over financial reporting[208](index=208&type=chunk) [PART II – OTHER INFORMATION](index=63&type=section&id=Part%20II%20%E2%80%93%20Other%20Information) This section provides disclosures on legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information [ITEM 1 – LEGAL PROCEEDINGS](index=63&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) This section confirms that there are no material legal proceedings involving the Company - There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject[210](index=210&type=chunk) [ITEM 1A – RISK FACTORS](index=63&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) This section states that there have been no material changes to the risk factors previously disclosed - There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[211](index=211&type=chunk) [ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=63&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there is no information to report regarding unregistered sales of equity securities or use of proceeds - This item is marked as 'Not applicable' in the report[212](index=212&type=chunk) [ITEM 3 – DEFAULTS UPON SENIOR SECURITIES](index=63&type=section&id=Item%203%20%E2%80%93%20Defaults%20Upon%20Senior%20Securities) This section states that there are no defaults upon senior securities to report - This item is marked as 'Not applicable' in the report[213](index=213&type=chunk) [ITEM 4 – MINE SAFETY DISCLOSURES](index=63&type=section&id=Item%204%20%E2%80%93%20Mine%20Safety%20Disclosures) This section indicates that there are no mine safety disclosures - This item is marked as 'None' in the report[214](index=214&type=chunk) [ITEM 5 – OTHER INFORMATION](index=63&type=section&id=Item%205%20%E2%80%93%20Other%20Information) This section states that there is no other information to report - This item is marked as 'Not applicable' in the report[215](index=215&type=chunk) [ITEM 6 – EXHIBITS](index=63&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL financial statements - Exhibits include certifications from the Chief Executive Officer (31.1), Chief Financial Officer (31.2), and a statement pursuant to 18 U.S.C. Section 1350 (32.1)[217](index=217&type=chunk) - XBRL formatted financial statements (101) and the cover page (104) are also included as exhibits[217](index=217&type=chunk) [SIGNATURES](index=64&type=section&id=Signatures) This section contains the official signatures for the Form 10-Q report - The report was signed by James E. Hendricks, Jr. (President and Chief Executive Officer) and Donald M. Kaloski, Jr. (Executive Vice President and Chief Financial Officer) on May 12, 2023[221](index=221&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-50765 VILLAGE BANK AND TRUST FINANCIAL CORP. (Exact name of registrant as specified in its charter) (State or other jurisdiction of (I.R.S. Employer incorporation or ...