Village Bank and Trust Financial (VBFC) - 2023 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for the company ITEM 1 – FINANCIAL STATEMENTS 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] Consolidated Balance Sheets 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 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) 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 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 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 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 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] - 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] - 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][65] 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 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] Note 3 – Earnings per common share 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] Note 4 – Investment securities available for sale 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][40] - 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] Note 5 – Loans and allowance for credit losses 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] 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] Note 6 – Deposits 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 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][80] - 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] Note 8 – Trust preferred securities 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][85][86] Note 9 – Subordinated Debt 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] Note 10 – Stock incentive plan 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] - Total non-vested restricted stock was 26,152 shares at March 31, 2023, with unamortized compensation of $883,400[92][93] Note 11 – Fair value 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][97] 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][107] Note 12 – Segment Reporting 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] 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 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] 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][116] - The Bank elected not to opt into the Community Bank Leverage Ratio (CBLR) framework as of March 31, 2023[117] Note 14 – Commitments and contingencies 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] Note 15 – Mortgage Banking and Derivatives 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] - 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] - 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] Note 16 Recent Accounting Pronouncements 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][130] - 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] ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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] - 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] 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] - 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] 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] - 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] - 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] Net interest income 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] - 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] - Total PPP income recorded was $1,800 for Q1 2023, a significant decrease from $540,000 in Q1 2022[146] Provision for (recovery of) Credit losses 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] - 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] - 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] - 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] Noninterest income 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] Noninterest expense 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] Income taxes 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] Balance Sheet Analysis 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 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] 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] - 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] 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 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] - 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] 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 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][180] 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] - 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] 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 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] Capital resources 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] 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 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] - 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] - 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][194] - Commitments to originate loans totaled $136,918,000 at March 31, 2023[196] Interest rate sensitivity 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] - 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][199] Impact of inflation and changing prices 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] LIBOR and Other Benchmark Rates 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] - 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] - 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] ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that the item is not applicable to the Company - This item is marked as 'Not Applicable' in the report[205] ITEM 4 – CONTROLS AND PROCEDURES 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] - 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] PART II – OTHER INFORMATION This section provides disclosures on legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information ITEM 1 – LEGAL PROCEEDINGS 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] ITEM 1A – RISK FACTORS 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] ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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] ITEM 3 – DEFAULTS UPON SENIOR SECURITIES This section states that there are no defaults upon senior securities to report - This item is marked as 'Not applicable' in the report[213] ITEM 4 – MINE SAFETY DISCLOSURES This section indicates that there are no mine safety disclosures - This item is marked as 'None' in the report[214] ITEM 5 – OTHER INFORMATION This section states that there is no other information to report - This item is marked as 'Not applicable' in the report[215] ITEM 6 – EXHIBITS 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] - XBRL formatted financial statements (101) and the cover page (104) are also included as exhibits[217] 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]