Village Bank and Trust Financial (VBFC) - 2024 Q2 - Quarterly Results

Executive Summary & Company Overview 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) 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 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] - The commercial bank grew loans (excluding student loans) by 2.73% and deposits by 1.39% during Q2 2024[3] - 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][19] Segment Performance Analysis This section analyzes the distinct financial performance of the Commercial Banking and Mortgage Banking segments, highlighting their respective contributions and challenges Commercial Banking Segment 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 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] Six Months Ended June 30, 2024 vs 2023 Performance 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] - The decrease in noninterest income was driven by lower service and charge fee income[11] - The decrease in noninterest expense was the result of efforts to control expenses, including reducing fraud losses[12] Mortgage Banking Segment 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 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] Six Months Ended June 30, 2024 vs 2023 Performance 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] Key Financial Metrics & Trends 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 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][21] - 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][23] - 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][22] Noninterest Income and Expense 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] - Expense control efforts, including reducing fraud losses from check and debit card fraud, contributed to the minimal increase or decrease in noninterest expenses[12][25] Loans and Asset Quality 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 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] - Consumer/residential loan growth from Q2 2023 was primarily in purchase money adjustable-rate mortgages and home equity loans[29] Asset Quality Metrics and Allowance for Credit Losses 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] - 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][36] - 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][34][51] 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] - 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] Capital Adequacy 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] Shareholders' Equity 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] Consolidated Financial Highlights 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 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 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 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 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 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 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. 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][56] - 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] - 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] Forward-Looking Statements and Risk Factors 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][57] - 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][58][59] - 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]