Village Bank and Trust Financial (VBFC) 10-Q 2024 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 0-50765

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Virginia	16-1694602
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
13319 Midlothian Turnpike, Midlothian, Virginia	23113
(Address of principal executive offices)	(Zip code)

804-897-3900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $4.00 per share	VBFC	Nasdaq Capital Market

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ☐	Accelerated Filer  ☐
Non-Accelerated Filer  ☒	Smaller Reporting Company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

1,495,160 shares of common stock, $4.00 par value, outstanding as of July 31, 2024

Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS

Part I – Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 2024 (unaudited) and December 31, 2023	3
Consolidated Statements of Income For the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	4
Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	5
Consolidated Statements of Shareholders’ Equity For the Three and Six Months and Ended June 30, 2024 and 2023 (unaudited)	6
Consolidated Statements of Cash Flows For Six Months Ended June 30, 2024 and 2023 (unaudited)	8
Notes to Consolidated Financial Statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3. Quantitative and Qualitative Disclosures About Market Risk	52
Item 4. Controls and Procedures	52
Part II – Other Information
Item 1. Legal Proceedings	53
Item 1A. Risk Factors	53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3. Defaults Upon Senior Securities	53
Item 4. Mine Safety Disclosures	53
Item 5. Other Information	53
Item 6. Exhibits	53
Signatures	54

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

June 30, 2024 (Unaudited) and December 31, 2023*

(in thousands, except share and per share data)

	June 30,		December 31,
	2024		2023
Assets
Cash and due from banks	$	17,154	$	10,383
Federal funds sold		1,337		7,331
Total cash and cash equivalents		18,491		17,714
Investment securities available for sale, at fair value		83,124		105,585
Restricted stock, at cost		2,277		2,985
Loans held for sale		8,236		4,983
Loans
Outstandings		605,408		575,008
Allowance for credit losses		(3,681)		(3,423)
Deferred costs, net		678		803
Total loans, net		602,405		572,388
Premises and equipment, net		11,671		11,760
Bank owned life insurance		13,291		13,120
Accrued interest receivable		3,857		3,827
Other assets		4,374		4,254
Total Assets	$	747,726	$	736,616
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing demand	$	236,063	$	247,624
Interest bearing		392,849		357,721
Total deposits		628,912		605,345
Long-term debt - trust preferred securities		8,764		8,764
Subordinated debt, net		5,700		5,700
Federal Home Loan Bank advances		30,000		45,000
Accrued interest payable		489		210
Other liabilities		3,719		4,041
Total liabilities		677,584		669,060
Shareholders’ equity
Common stock, $4 par value, 10,000,000 shares authorized; 1,495,160 shares issued and outstanding at June 30, 2024 and 1,492,879 shares issued and outstanding at December 31, 2023		5,918		5,908
Additional paid-in capital		55,690		55,486
Retained earnings		14,662		11,775
Stock in directors rabbi trust		(439)		(467)
Directors deferred fees obligation		439		467
Accumulated other comprehensive loss		(6,128)		(5,613)
Total shareholders’ equity		70,142		67,556
Total liabilities and shareholders' equity	$	747,726	$	736,616

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

3

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three and Six Months Ended June 30, 2024 and 2023

(Unaudited)

(in thousands, except per share data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2024		2023		2024		2023
Interest income
Loans	$	8,712	$	7,266	$	16,912	$	14,029
Investment securities		905		719		1,837		1,446
Federal funds sold		252		114		455		207
Total interest income		9,869		8,099		19,204		15,682
Interest expense
Deposits		2,452		1,186		4,548		1,810
Borrowed funds		807		789		1,650		1,383
Total interest expense		3,259		1,975		6,198		3,193
Net interest income		6,610		6,124		13,006		12,489
Provision for credit losses		—		—		150		—
Net interest income after provision for credit losses		6,610		6,124		12,856		12,489
Noninterest income
Service charges and fees		655		711		1,296		1,380
Mortgage banking income, net		552		386		1,402		864
Other		184		124		296		234
Total noninterest income		1,391		1,221		2,994		2,478
Noninterest expense
Salaries and benefits		3,485		3,415		6,949		6,863
Occupancy		310		307		642		618
Equipment		302		280		580		565
Supplies		49		35		99		84
Data processing		482		492		921		931
Professional and outside services		411		346		829		720
Advertising and marketing		95		140		178		251
FDIC insurance premium		82		84		174		134
Other operating expense		723		733		1,195		1,423
Total noninterest expense		5,939		5,832		11,567		11,589
Income before income tax expense		2,062		1,513		4,283		3,378
Income tax expense		409		274		858		599
Net income	$	1,653	$	1,239	$	3,425	$	2,779
Earnings per share, basic	$	1.11	$	0.83	$	2.29	$	1.87
Earnings per share, diluted	$	1.11	$	0.83	$	2.29	$	1.87

See accompanying notes to consolidated financial statements.

4

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

Three and Six Months ended June 30, 2024 and 2023

(Unaudited)

(in thousands)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2024		2023		2024		2023
Net income	$	1,653	$	1,239	$	3,425	$	2,779
Other comprehensive (loss) income
Unrealized holding (losses) gains arising during the period		338		(1,312)		(652)		564
Tax effect		(71)		276		137		(118)
Net change in unrealized holding (losses) gains on securities available for sale, net of tax		267		(1,036)		(515)		446
Minimum pension adjustment		—		3		—		6
Tax effect		—		(1)		—		(2)
Minimum pension adjustment, net of tax		—		2		—		4
Total other comprehensive (loss) income		267		(1,034)		(515)		450
Total comprehensive income	$	1,920	$	205	$	2,910	$	3,229

See accompanying notes to consolidated financial statements.

5

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three and Six Months Ended June 30, 2024 and 2023

(Unaudited)

(In thousands)

	Three Months Ended June 30, 2024
									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Retained		Directors		Fees		Comprehensive
	Stock		Capital		Earnings		Rabbi Trust		Obligation		Income (Loss)		Total
Balance, March 31, 2024	$	5,918		55,557	$	13,278	$	(439)	$	439	$	(6,395)	$	68,358
Stock based compensation		—		133		—		—		—		—		133
Cash dividend declared ($0.18 per share)		—		—		(269)		—		—		—		(269)
Net income		—		—		1,653		—		—		—		1,653
Other comprehensive income		—		—		—		—		—		267		267
Balance, June 30, 2024	$	5,918	$	55,690	$	14,662	$	(439)	$	439	$	(6,128)	$	70,142

	Three Months Ended June 30, 2023
									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Retained		Directors		Fees		Comprehensive
	Stock		Capital		Earnings		Rabbi Trust		Obligation		Income (Loss)		Total
Balance, March 31, 2023	$	5,881	$	55,256	$	12,141	$	(595)	$	595	$	(9,397)	$	63,881
Restricted stock redemption		—		—		—		128		(128)		—		—
Vesting of restricted stock		2		(2)		—		—		—		—		—
Stock based compensation		—		166		—		—		—		—		166
Cash dividend declared ($0.16 per share)		—		—		(238)		—		—		—		(238)
Net income		—		—		1,239		—		—		—		1,239
Other comprehensive loss		—		—		—		—		—		(1,034)		(1,034)
Balance, June 30, 2023	$	5,883	$	55,420	$	13,142	$	(467)	$	467	$	(10,431)	$	64,014

	Six Months Ended June 30, 2024
									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Retained		Directors		Fees		Comprehensive
	Stock		Capital		Earnings		Rabbi Trust		Obligation		Income (Loss)		Total
Balance, December 31, 2023	$	5,908	$	55,486	$	11,775	$	(467)	$	467	$	(5,613)	$	67,556
Restricted stock redemption		—		—		—		28		(28)		—		—
Vesting of restricted stock		10		(10)		—		—		—		—		—
Stock based compensation		—		214		—		—		—		—		214
Cash dividend declared ($0.36 per share)		—		—		(538)								(538)
Net income		—		—		3,425		—		—		—		3,425
Other comprehensive loss		—		—		—		—		—		(515)		(515)
Balance, June 30, 2024	$	5,918	$	55,690	$	14,662	$	(439)	$	439	$	(6,128)	$	70,142

6

	Six Months Ended June 30, 2023
									Directors		Accumulated
			Additional				Stock in		Deferred		Other
	Common		Paid-in		Retained		Directors		Fees		Comprehensive
	Stock		Capital		Earnings		Rabbi Trust		Obligation		Income (Loss)		Total
Balance, December 31, 2022	$	5,868	$	55,167	$	10,957	$	(689)	$	689	$	(10,881)	$	61,111
Restricted stock redemption		—		—		—		222		(222)		—		—
Vesting of restricted stock		15		(15)		—		—		—		—		—
Stock based compensation		—		268		—		—		—		—		268
Cash dividend declared ($0.32 per share)		—		—		(475)		—		—		—		(475)
Impact of adoption of ASC 326		—		—		(119)		—		—		—		(119)
Net income		—		—		2,779		—		—		—		2,779
Other comprehensive income		—		—		—		—		—		450		450
Balance, June 30, 2023	$	5,883	$	55,420	$	13,142	$	(467)	$	467	$	(10,431)	$	64,014

See accompanying notes to consolidated financial statements.

7

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2024 and 2023

(Unaudited)

(in thousands)

	Six Months Ended
	June 30,
	2024		2023
Cash Flows from Operating Activities
Net income	$	3,425	$	2,779
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		328		285
Amortization of debt issuance costs		—		8
Deferred income taxes		(118)		76
Provision for credit losses		150		—
Gain on sales of loans held for sale		(1,273)		(1,269)
Stock compensation expense		214		268
Proceeds from sale of mortgage loans		49,066		60,443
Origination of mortgage loans held for sale		(51,046)		(63,793)
Amortization of premiums and accretion of discounts on securities, net		(134)		(72)
Increase in bank owned life insurance		(171)		(149)
Net change in:
Interest receivable		(30)		169
Other assets		135		(91)
Interest payable		279		200
Other liabilities		(335)		(365)
Net cash provided by (used in) operating activities		490		(1,511)
Cash Flows from Investing Activities
Purchases of available for sale securities		(1,582)		(2,652)
Proceeds from maturities, calls and paydowns of available for sale securities		23,525		4,906
Net increase in loans		(30,154)		(18,134)
Purchases of premises and equipment, net		(239)		(427)
Redemption (purchase) of restricted stock, net		708		(1,042)
Net cash used in investing activities		(7,742)		(17,349)
Cash Flows from Financing Activities
Cash dividends paid		(538)		(475)
Net increase in deposits		23,567		3,639
Net (decrease) increase in other borrowings		(15,000)		25,000
Net cash provided by financing activities		8,029		28,164
Net increase in cash and cash equivalents		777		9,304
Cash and cash equivalents, beginning of period		17,714		16,678
Cash and cash equivalents, end of period	$	18,491	$	25,982
Supplemental Disclosure of Cash Flow Information
Cash payments for interest	$	5,919	$	2,993
Cash payments for taxes	$	349	$	337
Supplemental Schedule of Non-Cash Activities
Unrealized (losses) gains on securities available for sale	$	(652)	$	564
Minimum pension adjustment	$	—	$	6

See accompanying notes to consolidated financial statements.

8

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Principles of presentation

Village Bank and Trust Financial Corp. (the “Company”) is the holding company of Village Bank (the “Bank”). The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s subsidiary, Village Bank Mortgage Corporation. All material intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and six month periods ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission (“SEC”).

Note 2 – Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of income for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for credit losses and its related provision including collateral dependent loans.

Note 3 – Earnings per common share

The following table presents the basic and diluted earnings per common share computation (dollars in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Numerator
Net income - basic and diluted	$	1,653	$	1,239	$	3,425	$	2,779
Denominator
Weighted average shares outstanding - basic		1,495		1,486		1,494		1,485
Dilutive effect of common stock options		—		—		—		—
Weighted average shares outstanding - diluted		1,495		1,486		1,494		1,485
Earnings per share - basic	$	1.11	$	0.83	$	2.29	$	1.87
Earnings per share - diluted	$	1.11	$	0.83	$	2.29	$	1.87

Applicable guidance requires that outstanding, unvested share-based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

The vesting of 10,252 and 10,658 of the unvested restricted units at June 30, 2024 and 2023, respectively, included in Note 10 “Stock incentive plan” was dependent upon meeting certain performance criteria. As of June 30, 2024 and 2023, it was indeterminable whether these unvested restricted units would vest and as such the underlying shares were excluded from common shares issued and outstanding at such date and were not included in the computation of earnings per share for such period.

9

Note 4 – Investment securities available for sale

The amortized cost and fair value of investment securities available for sale as of June 30, 2024 and December 31, 2023 are as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
June 30, 2024
U.S. Government agency obligations	$	655	$	—	$	(15)	$	640
Mortgage-backed securities		75,745		338		(5,877)		70,206
Municipals		2,263		—		(593)		1,670
Subordinated debt		12,205		32		(1,629)		10,608
	$	90,868	$	370	$	(8,114)	$	83,124
December 31, 2023
U.S. Government agency obligations	$	20,690	$	—	$	(75)	$	20,615
Mortgage-backed securities		77,275		643		(5,381)		72,537
Municipals		2,264		—		(608)		1,656
Subordinated debt		12,449		30		(1,702)		10,777
	$	112,678	$	673	$	(7,766)	$	105,585

The Company did not have any investments securities pledged at June 30, 2024 and had investment securities with a fair value of $24,926,000 pledged to secure borrowings from the Federal Home Loan Bank of Atlanta ("FHLB") at December 31, 2023.

There were no sales of available for sale securities for the three and six months ended June 30, 2024 and 2023.

Investment securities available for sale that have an unrealized loss position at June 30, 2024 and December 31, 2023 are detailed below (in thousands):

	Securities in a loss				Securities in a loss
	position for less than				position for more than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
June 30, 2024
U.S. Government agency obligations	$	—	$	—	$	437		(15)	$	437	$	(15)
Mortgage-backed securities		11,675		(129)		30,598		(5,748)		42,273		(5,877)
Municipals		—		—		1,670		(593)		1,670		(593)
Subordinated debt		497		(2)		9,408		(1,627)		9,905		(1,629)
	$	12,172	$	(131)	$	42,113	$	(7,983)	$	54,285	$	(8,114)
December 31, 2023
U.S. Government agency obligations	$	—	$	—	$	20,289	$	(75)	$	20,289	$	(75)
Mortgage-backed securities		4,631		(24)		30,311		(5,357)		34,942		(5,381)
Municipals		—		—		1,656		(608)		1,656		(608)
Subordinated debt		4,145		(587)		5,937		(1,115)		10,082		(1,702)
	$	8,776	$	(611)	$	58,193	$	(7,155)	$	66,969	$	(7,766)

10

As of June 30, 2024, there were 58 investments available for sale totaling $54.3 million that were in a loss position and had an unrealized loss of $8.1 million.

All of the unrealized losses are attributable to increases in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the declines in fair value are attributable to changes in interest rates and not to credit quality, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company has not recorded an allowance for credit losses on these investments at June 30, 2024.

The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2024, by contractual maturity, are as follows (in thousands):

	Amortized
	Cost		Fair Value
Less than one year	$	2,289	$	2,256
One to five years		47,716		44,210
Five to ten years		23,691		21,848
More than ten years		17,172		14,810
Total	$	90,868	$	83,124

11

Note 5 – Loans and allowance for credit losses

Loans classified by type as of June 30, 2024 and December 31, 2023 are as follows (dollars in thousands):

	June 30, 2024				December 31, 2023
	Amount		%		Amount		%
Construction and land development
Residential	$	13,080	2.16	%	$	10,471	1.82	%
Commercial		36,067	5.96	%		37,024	6.44	%
		49,147	8.12	%		47,495	8.26	%
Commercial real estate
Owner occupied		128,783	21.28	%		122,666	21.33	%
Non-owner occupied		162,621	26.86	%		154,855	26.93	%
Multifamily		18,293	3.02	%		12,743	2.22	%
Farmland		315	0.05	%		326	0.06	%
		310,012	51.21	%		290,590	50.54	%
Consumer real estate
Home equity lines		22,281	3.68	%		21,557	3.75	%
Secured by 1-4 family residential,
First deed of trust		95,196	15.72	%		95,638	16.63	%
Second deed of trust		12,808	2.12	%		11,337	1.97	%
		130,285	21.52	%		128,532	22.35	%
Commercial and industrial loans
(except those secured by real estate)		97,363	16.08	%		86,203	14.99	%
Guaranteed student loans		14,156	2.34	%		17,923	3.12	%
Consumer and other		4,445	0.73	%		4,265	0.74	%
Total loans		605,408	100.0	%		575,008	100.0	%
Deferred and costs, net		678				803
Less: allowance for credit losses		(3,681)				(3,423)
	$	602,405			$	572,388

The Bank has a purchased portfolio of rehabilitated student loans guaranteed by the U.S. Department of Education (“DOE”). The guarantee covers approximately 98% of principal and accrued interest. The loans are serviced by a third-party servicer that specializes in handling the special needs of the DOE student loan programs.

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $57.2 million and $35.5 million as of June 30, 2024, and December 31, 2023, respectively.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

12

The following table provides information on nonaccrual loans segregated by type at the dates indicated (in thousands):

	June 30,		December 31,
	2024		2023
Consumer real estate
Secured by 1-4 family residential
First deed of trust	$	157	$	160
Second deed of trust		96		105
		253		265
Commercial and industrial loans
(except those secured by real estate)		134		26
Total loans	$	387	$	291

There was $125,000 in loans with an individual allowance of $17,000 that were collateral dependent associated with the total nonaccrual loans of $387,000 at June 30, 2024.  There were no individual allowances associated with the total nonaccrual loans of $291,000 at December 31, 2023, that were considered collateral dependent.

The Company recognized $12,000 of interest on nonaccrual loans outstanding as of June 30, 2024.

Management considers the guidance in Accounting Standards Codification (“ASC”) 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination.  Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below.

13

As of June 30, 2024, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows (in thousands):

																Revolving-	Total
	2024		2023		2022		2021			2020		Prior		Revolving		Term	Loans
June 30, 2024
Construction and land development
Residential
Pass	$	5,528	$	4,902	$	2,311	$	339	$	—	$	—	$	—	$	—	$	13,080
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Residential	$	5,528	$	4,902	$	2,311	$	339	$	—	$	—	$	—	$	—	$	13,080
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial
Pass		1,271		7,430		14,118		10,277		214		959		1,798		—		36,067
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Commercial	$	1,271	$	7,430	$	14,118	$	10,277	$	214	$	959	$	1,798	$	—	$	36,067
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Owner occupied
Pass		8,890		12,906		24,293		19,014		9,161		50,313		625		—		125,202
Special Mention		—		—		—		—		456		3,125		—		—		3,581
Substandard		—		—		—		—		—		—		—		—		—
Total Owner occupied	$	8,890	$	12,906	$	24,293	$	19,014	$	9,617	$	53,438	$	625	$	—	$	128,783
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied
Pass		9,535		9,379		28,949		28,023		23,128		54,241		4,476		—		157,731
Special Mention		—		—		—		2,148		—		2,742		—		—		4,890
Substandard		—		—		—		—		—		—		—		—		—
Total Non-owner occupied	$	9,535	$	9,379	$	28,949	$	30,171	$	23,128	$	56,983	$	4,476	$	—	$	162,621
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multifamily
Pass		5,250		1,300		—		2,363		537		6,751		2,092		—		18,293
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Multifamily	$	5,250	$	1,300	$	—	$	2,363	$	537	$	6,751	$	2,092	$	—	$	18,293
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Farmland
Pass		—		—		—		—		—		20		295		—		315
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Farmland	$	—	$	—	$	—	$	—	$	—	$	20	$	295	$	—	$	315
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer real estate
Home equity lines
Pass		—		—		—		—		—		—		22,206		—		22,206
Special Mention		—		—		—		—		—		—		75		—		75
Substandard		—		—		—		—		—		—		—		—		—
Total Home equity lines	$	—	$	—	$	—	$	—	$	—	$	—	$	22,281	$	—	$	22,281
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential
First deed of trust
Pass		7,483		30,394		14,148		14,019		7,834		18,826		2,124		—		94,828
Special Mention		—		—		—		—		—		211		—		—		211
Substandard		—		—		—		—		—		157		—		—		157
Total First deed of trust	$	7,483	$	30,394	$	14,148	$	14,019	$	7,834	$	19,194	$	2,124	$	—	$	95,196
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Second deed of trust
Pass		1,768		4,377		2,996		989		375		1,464		547		—		12,516
Special Mention		87		—		—		—		—		109		—		—		196
Substandard		—		—		—		—		—		96		—		—		96
Total Second deed of trust	$	1,855	$	4,377	$	2,996	$	989	$	375	$	1,669	$	547	$		$	12,808
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial loans
(except those secured by real estate)
Pass		11,149		17,274		13,894		12,044		5,003		5,135		32,098		—		96,597
Special Mention		—		—		93		—		—		123		416		—		632
Substandard		—		—		—		83		—		51		—		—		134
Total Commercial and industrial	$	11,149	$	17,274	$	13,987	$	12,127	$	5,003	$	5,309	$	32,514	$	—	$	97,363
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Guaranteed student loans
Pass		—		—		—		—		—		14,156		—		—		14,156
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Guaranteed student loans	$	—	$	—	$	—	$	—	$	—	$	14,156	$	—	$	—	$	14,156
Current period gross writeoff	$	11	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	11
Consumer and other
Pass		283		394		363		81		30		16		3,278		—		4,445
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Consumer and other	$	283	$	394	$	363	$	81	$	30	$	16	$	3,278	$		$	4,445
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total Current period gross writeoff	$	11	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	11
Total loans	$	51,244	$	88,356	$	101,165	$	89,380	$	46,738	$	158,495	$	70,030	$	—	$	605,408

14

																Revolving-	Total
	2023		2022		2021		2020			2019		Prior		Revolving		Term	Loans
December 31, 2023
Construction and land development
Residential
Pass	$	6,320	$	3,812	$	339	$	—	$	—	$	—	$	—	$	—	$	10,471
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Residential	$	6,320	$	3,812	$	339	$	—	$	—	$	—	$	—	$	—	$	10,471
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial
Pass		5,007		14,506		10,339		235		—		1,183		5,754		—		37,024
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Commercial	$	5,007	$	14,506	$	10,339	$	235	$	—	$	1,183	$	5,754	$	—	$	37,024
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Owner occupied
Pass		11,945		21,846		20,044		9,855		12,145		41,067		788		—		117,690
Special Mention		—		202		73		—		—		4,701		—		—		4,976
Substandard		—		—		—		—		—		—		—		—		—
Total Owner occupied	$	11,945	$	22,048	$	20,117	$	9,855	$	12,145	$	45,768	$	788	$	—	$	122,666
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied
Pass		9,468		25,607		28,455		23,567		9,528		47,645		3,312		—		147,582
Special Mention		—		—		2,173		—		—		5,100		—		—		7,273
Substandard		—		—		—		—		—		—		—		—		—
Total Non-owner occupied	$	9,468	$	25,607	$	30,628	$	23,567	$	9,528	$	52,745	$	3,312	$	—	$	154,855
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multifamily
Pass		1,300		—		2,503		548		885		6,113		1,394		—		12,743
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Multifamily	$	1,300	$	—	$	2,503	$	548	$	885	$	6,113	$	1,394	$	—	$	12,743
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Farmland
Pass		—		—		—		—		—		26		300		—		326
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Farmland	$	—	$	—	$	—	$	—	$	—	$	26	$	300	$	—	$	326
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer real estate
Home equity lines
Pass		—		446		—		—		—		—		21,036		—		21,482
Special Mention		—		—		—		—		—		—		75		—		75
Substandard		—		—		—		—		—		—		—		—		—
Total Home equity lines	$	—	$	446	$	—	$	—	$	—	$	—	$	21,111	$	—	$	21,557
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential
First deed of trust
Pass		34,067		14,288		15,613		8,107		2,957		17,427		2,125		—		94,584
Special Mention		—		—		—		170		—		724		—		—		894
Substandard		—		—		—		—		—		160		—		—		160
Total First deed of trust	$	34,067	$	14,288	$	15,613	$	8,277	$	2,957	$	18,311	$	2,125	$	—	$	95,638
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Second deed of trust
Pass		4,530		3,207		1,027		397		1,067		626		266		—		11,120
Special Mention		—		—		—		—		45		67		—		—		112
Substandard		—		—		—		—		—		105		—		—		105
Total Second deed of trust	$	4,530	$	3,207	$	1,027	$	397	$	1,112	$	798	$	266	$		$	11,337
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial loans
(except those secured by real estate)
Pass		15,022		15,900		15,321		5,634		2,852		3,698		27,068		—		85,495
Special Mention		37		—		—		—		318		22		306		—		683
Substandard		—		—		—		13		—		12		—		—		25
Total Commercial and industrial	$	15,059	$	15,900	$	15,321	$	5,647	$	3,170	$	3,732	$	27,374	$	—	$	86,203
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Guaranteed student loans
Pass		—		—		—		—		—		17,923		—		—		17,923
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Guaranteed student loans	$	—	$	—	$	—	$	—	$	—	$	17,923	$	—	$	—	$	17,923
Current period gross writeoff	$	30	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	30
Consumer and other
Pass		455		483		123		50		17		11		3,126		—		4,265
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Consumer and other	$	455	$	483	$	123	$	50	$	17	$	11	$	3,126	$		$	4,265
Current period gross writeoff	$	3	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	3
Total Current period gross writeoff	$	33	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	33
Total loans	$	88,151	$	100,297	$	96,010	$	48,576	$	29,814	$	146,610	$	65,550	$	—	$	575,008

15

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

					Greater								Investment >
	30‑59 Days		60‑89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
June 30, 2024
Construction and land development
Residential	$	—	$	—	$	—	$	—	$	13,080	$	13,080	$	—
Commercial		—		—		—		—		36,067		36,067		—
		—		—		—		—		49,147		49,147		—
Commercial real estate
Owner occupied		—		—		—		—		128,783		128,783		—
Non-owner occupied		—		—		—		—		162,621		162,621		—
Multifamily		—		—		—		—		18,293		18,293		—
Farmland		—		—		—		—		315		315		—
		—		—		—		—		310,012		310,012		—
Consumer real estate
Home equity lines		25		—		—		25		22,256		22,281		—
Secured by 1‑4 family residential
First deed of trust		—		—		—		—		95,196		95,196		—
Second deed of trust		—		—		—		—		12,808		12,808		—
		25		—		—		25		130,260		130,285		—
Commercial and industrial loans
(except those secured by real estate)		46		1,086		—		1,132		96,231		97,363		—
Guaranteed student loans		547		172		1,050		1,769		12,387		14,156		1,050
Consumer and other		—		—		17		17		4,428		4,445		—
Total loans	$	618	$	1,258	$	1,067	$	2,943	$	602,465	$	605,408	$	1,050

													Recorded
					Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
December 31, 2023
Construction and land development
Residential	$	—	$	—	$	—	$	—	$	10,471	$	10,471	$	—
Commercial		—		—		—		—		37,024		37,024		—
		—		—		—		—		47,495		47,495		—
Commercial real estate
Owner occupied		—		—		—		—		122,666		122,666		—
Non-owner occupied		—		—		—		—		154,855		154,855		—
Multifamily		—		—		—		—		12,743		12,743		—
Farmland		—		—		—		—		326		326		—
		—		—		—		—		290,590		290,590		—
Consumer real estate
Home equity lines		83		25		—		108		21,449		21,557		—
Secured by 1-4 family residential
First deed of trust		—		—		—		—		95,638		95,638		—
Second deed of trust		33		—		—		33		11,304		11,337		—
		116		25		—		141		128,391		128,532		—
Commercial and industrial loans
(except those secured by real estate)		—		—		—		—		86,203		86,203		—
Guaranteed student loans		690		493		2,228		3,411		14,512		17,923		2,228
Consumer and other		734		—		—		734		3,531		4,265		—
Total loans	$	1,540	$	518	$	2,228	$	4,286	$	570,722	$	575,008	$	2,228

Loans greater than 90 days past due consist of student loans that are guaranteed by the DOE which covers approximately 98% of the principal and interest. Accordingly, these loans will not be placed on nonaccrual status and are not considered to be impaired.

Loans that are individually evaluated for credit losses are limited to loans that have specific risk characteristics that are not shared by other loans and based on current information and events it is probable the Company will be unable to collect all amounts when due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. The repayment of these loans is expected to be substantially through the operations or the sale of the collateral. The allowance for credit

16

losses on loans that are individually evaluated will be measured based on the fair value of the collateral either through operations or the sale of the collateral. When repayment is expected through the sale of the collateral, the allowance will be based on the fair value of the collateral less estimated costs to sell. Collateral dependent loans, or portions thereof, are charged off when deemed uncollectible.

Collateral dependent loans are set forth in the following table as of the dates indicated (in thousands):

	June 30, 2024						December 31, 2023
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Secured by 1‑4 family residential
First deed of trust	$	157	$	157	$	—	$	160	$	160	$	—
Second deed of trust		96		96		—		105		105		—
		253		253		—		265		265		—
Commercial and industrial loans
(except those secured by real estate)		9		9		—		26		26		—
		262		262		—		291		291		—
With an allowance recorded
Commercial and industrial loans
(except those secured by real estate)		125		125		17		—		—		—
		125		125		17		—		—		—
Total
Secured by 1-4 family residential,
First deed of trust		157		157		—		160		160		—
Second deed of trust		96		96		—		105		105		—
		253		253		—		265		265		—
Commercial and industrial loans
(except those secured by real estate)		134		134		17		26		26		—
Consumer and other		—		—		—		—		—		—
	$	387	$	387	$	17	$	291	$	291	$	—

17

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

	For the Three Months Ended				For the Six Months Ended
	June 30, 2024				June 30, 2024
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Consumer real estate
Secured by 1-4 family residential
First deed of trust	$	158	$	3	$	159	$	5
Second deed of trust		98		5		100		6
		256		8		259		11
Commercial and industrial loans
(except those secured by real estate)		11		—		16		—
		267		8		275		11
With an allowance recorded
Commercial and industrial loans
(except those secured by real estate)		134		5		134		8
		134		5		134		8
Total
Consumer real estate
Secured by 1-4 family residential,
First deed of trust		158		3		159		5
Second deed of trust		98		5		100		6
		256		8		259		11
Commercial and industrial loans
(except those secured by real estate)		145		5		150		8
Consumer and other		—		—		—		—
	$	401	$	13	$	409	$	19

Loan Modifications to Borrowers in Financial Difficulty

As part of its credit risk management, the Company may modify a loan agreement with a borrower experiencing financial difficulties through a refinancing or restructuring of the borrower’s loan agreement. There were no modified loans identified during the six months ended June 30, 2024 and June 30, 2023.  

18

In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics by call report code. The Company’s forecast of estimated expected losses is based on a twelve-month forecast of the national rate of unemployment and external observations of historical loan losses. The Company uses the Federal Open Market Committee’s projection of unemployment for its reasonable and supportable forecasting of current expected credit losses. For the periods beyond the reasonable and supportable forecast period, projections of expected credit losses are based on a reversion to the long-run mean for the national unemployment rate. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes in lending policies and procedures including changes in underwriting standards, and collections, charge-offs, and recovery practices, changes in international, national, regional, and local conditions, changes in the nature and volume of the portfolio and terms of loans, changes in experience, depth, and ability of lending management, changes in the volume and severity of past due loans and other similar conditions, changes in the quality of the organization’s loan review system, changes in the value of underlying collateral for collateral dependent loans, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.

Activity in the allowance for credit losses on loans is as follows for the periods indicated (in thousands):

			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three Months Ended June 30, 2024
Construction and land development
Residential	$	57	$	27	$	—	$	—	$	84
Commercial		202		4		—		—		206
		259		31		—		—		290
Commercial real estate
Owner occupied		437		24		—		—		461
Non-owner occupied		1,596		(127)		—		—		1,469
Multifamily		86		(2)		—		—		84
Farmland		—		1		—		—		1
		2,119		(104)		—		—		2,015
Consumer real estate
Home equity lines		32		—		—		—		32
Secured by 1-4 family residential				—
First deed of trust		298		(7)		—		1		292
Second deed of trust		98		(103)		—		108		103
		428		(110)		—		109		427
Commercial and industrial loans
(except those secured by real estate)		666		57		—		3		726
Student loans		55		(5)		(5)		—		45
Consumer and other		36		(2)		—		—		34
Unallocated		11		133		—		—		144
	$	3,574	$	—	$	(5)	$	112	$	3,681

19

			Impact of		Provision for
	Beginning		adopting		(Recovery of)						Ending
	Balance		ASC 326		Credit Losses		Charge-offs		Recoveries		Balance
Three Months Ended June 30, 2023
Construction and land development
Residential	$	51	$	—	$	10	$	—	$	—	$	61
Commercial		264		—		3		—		—		267
		315		—		13		—		—		328
Commercial real estate
Owner occupied		391		—		(12)		—		—		379
Non-owner occupied		1,460		—		(84)		—		—		1,376
Multifamily		40		—		—		—		—		40
Farmland		—		—		—		—		—		—
		1,891		—		(96)		—		—		1,795
Consumer real estate
Home equity lines		33		—		30		—		—		63
Secured by 1-4 family residential						—
First deed of trust		214		—		5		—		—		219
Second deed of trust		75		—		4		—		4		83
		322		—		39		—		4		365
Commercial and industrial loans
(except those secured by real estate)		549		—		118		—		6		673
Student loans		112		—		(95)		(4)		—		13
Consumer and other		34		—		1		—		—		35
Unallocated		49		—		(2)		—		—		47
	$	3,272	$	—	$	(22)	$	(4)	$	10	$	3,256

			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Six Months Ended June 30, 2024
Construction and land development
Residential	$	86	$	(2)	$	—	$	—	$	84
Commercial		228		(22)		—		—		206
		314		(24)		—		—		290
Commercial real estate
Owner occupied		409		52		—		—		461
Non-owner occupied		1,467		2		—		—		1,469
Multifamily		44		40		—		—		84
Farmland		3		(2)		—		—		1
		1,923		92		—		—		2,015
Consumer real estate
Home equity lines		40		(18)		—		10		32
Secured by 1-4 family residential
First deed of trust		293		(3)		—		2		292
Second deed of trust		99		(109)		—		113		103
		432		(130)		—		125		427
Commercial and industrial loans
(except those secured by real estate)		640		79		—		7		726
Student loans		57		(1)		(11)		—		45
Consumer and other		36		(2)		—		—		34
Unallocated		21		123		—		—		144
	$	3,423	$	137	$	(11)	$	132	$	3,681

20

			Impact of		Provision for
	Beginning		adopting		(Recovery of)						Ending
	Balance		ASC 326		Loan Losses		Charge-offs		Recoveries		Balance
Six Months Ended June 30, 2023
Construction and land development
Residential	$	79	$	3	$	(21)	$	—	$	—	$	61
Commercial		192		34		41		—		—		267
		271		37		20		—		—		328
Commercial real estate
Owner occupied		867		(475)		(13)		—		—		379
Non-owner occupied		1,289		192		(105)		—		—		1,376
Multifamily		33		7		—		—		—		40
Farmland		—		—		—		—		—		—
		2,189		(276)		(118)		—		—		1,795
Consumer real estate
Home equity lines		11		24		28		—		—		63
Secured by 1-4 family residential
First deed of trust		131		76		11		—		1		219
Second deed of trust		43		25		9		—		6		83
		185		125		48		—		7		365
Commercial and industrial loans
(except those secured by real estate)		576		1		84		—		12		673
Student loans		52		—		(32)		(7)		—		13
Consumer and other		37		(5)		3		—		—		35
Unallocated		60		(9)		(4)		—		—		47
	$	3,370	$	(127)	$	1	$	(7)	$	19	$	3,256

			Impact of		Provision for
	Beginning		adopting		(Recovery of)						Ending
	Balance		ASC 326		Loan Losses		Charge-offs		Recoveries		Balance
Year Ended December 31, 2023
Construction and land development
Residential	$	79	$	3	$	4	$	—	$	—	$	86
Commercial		192		34		2		—		—		228
		271		37		6		—		—		314
Commercial real estate
Owner occupied		867		(475)		17		—		—		409
Non-owner occupied		1,289		192		(14)		—		—		1,467
Multifamily		33		7		4		—		—		44
Farmland		—		—		3		—		—		3
		2,189		(276)		10		—		—		1,923
Consumer real estate
Home equity lines		11		24		5		—		—		40
Secured by 1-4 family residential
First deed of trust		131		76		83		—		3		293
Second deed of trust		43		25		15		—		16		99
		185		125		103		—		19		432
Commercial and industrial loans
(except those secured by real estate)		576		1		(110)		—		173		640
Student loans		52		—		35		(30)		—		57
Consumer and other		37		(5)		7		(3)		—		36
Unallocated		60		(9)		(30)		—		—		21
	$	3,370	$	(127)	$	21	$	(33)	$	192	$	3,423

21

Loans are required to be measured at amortized costs and to be presented at the net amount expected to be collected. Off balance sheet credit exposures, including loan commitments, are not recorded on balance sheet, but expected credit losses arising from off balance sheet credit exposures are recorded as a reserve for unfunded commitments and reported in Other Liabilities. Credit losses on available for sale debt securities are accounted for as an allowance for credit losses, which is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value and the amount expected to be collected on the financial assets. The allowance for credit losses on loans, available for sale debt securities and the reserve for unfunded commitments are established through a provision for credit losses charged against earnings.

The following table presents a breakdown of the provision for credit losses for the periods indicated (in thousands):

	Three Months Ended June 30,
		2024		2023
Provision for credit losses:
Recovery (provision) for loans		$	—	$	(22)
Provision for unfunded commitments			—		22
Total		$	—	$	—

	Six Months Ended June 30,
		2024		2023
Provision for credit losses:
Recovery for loans		$	137	$	1
Provision (recovery) for unfunded commitments			13		(1)
Total		$	150	$	—

As of June 30, 2024, the allowance for credit losses was $4.0 million and included an allowance for credit losses on loans of $3.68 million and a reserve for unfunded commitments of $320,000.

The Company did not record a provision for credit losses for the three months ended June 30, 2024. The lack of a provision for credit losses was driven primarily by the recognition of a net-recovery of previously charged-off loans of $107,000 during the period and was supported by stable local economic conditions and credit quality remaining strong during the period.

The Company did not record a provision for credit losses for unfunded commitments for the three months ended June 30, 2024, which was driven by a stable balance in the total commitments outstanding at June 30, 2024.

The Company recorded a provision for credit losses for loans of $136,700 for the six months ended June 30, 2024, which was the result of loan growth as all credit metrics remained strong compared to year-end 2023. Non-performing loans as a percentage of loans were consistent, 0.06% at June 30, 2024 compared to 0.05 at December 31, 2023.

The Company recorded a provision for credit losses for unfunded commitments of $13,300 for the six months ended June 30, 2024, which was driven by an increase in the total commitments outstanding at June 30, 2024.

As of June 30, 2023, the allowance for credit losses was $3.53 million and included an allowance for credit losses on loans of $3.26 million and a reserve for unfunded commitments of $277,000.

The Company recorded a recovery of credit losses for loans of $22,000 for the three months ended June 30, 2023, which was due to improved credit metrics as nonperforming loans as a percentage of loans decreased from 0.12% at March 31, 2023 to 0.06% at June 30, 2023.

The Company recorded a provision for credit losses for unfunded commitments of $22,000 for the three months ended June 30, 2023, which was driven by an increase in the total balance outstanding at June 30, 2023.

The Company recorded a provision for credit losses for loans of $1,000 for the six months ended June 30, 2023, which was the result of loan growth being offset by improved credit metrics as non-performing loans as a percentage of loans decreased from 0.13% at December 31, 2022 to 0.06% at June 30, 2023.  

22

The Company recorded a recovery for credit losses for unfunded commitments of $1,000 for the six months ended June 30, 2023, which was driven by a slight decrease in the total balance outstanding at June 30, 2023.

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

	Recorded Investment in Loans
	Allowance						Loans
	Ending						Ending
	Balance		Individually		Collectively		Balance		Individually		Collectively
Six Months Ended June 30, 2024
Construction and land development
Residential	$	84	$	—	$	84	$	13,080	$	—	$	13,080
Commercial		206		—		206		36,067		—		36,067
		290		—		290		49,147		—		49,147
Commercial real estate
Owner occupied		461		—		461		128,783		—		128,783
Non-owner occupied		1,469		—		1,469		162,621		—		162,621
Multifamily		84		—		84		18,293		—		18,293
Farmland		1		—		1		315		—		315
		2,015		—		2,015		310,012		—		310,012
Consumer real estate
Home equity lines		32		—		32		22,281		—		22,281
Secured by 1-4 family residential
First deed of trust		292		—		292		95,196		157		95,039
Second deed of trust		103		—		103		12,808		96		12,712
		427		—		427		130,285		253		130,032
Commercial and industrial loans
(except those secured by real estate)		726		17		709		97,363		134		97,229
Student loans		45		—		45		14,156		—		14,156
Consumer and other		178		—		178		4,445		—		4,445
	$	3,681	$	17	$	3,664	$	605,408	$	387	$	605,021
Year Ended December 31, 2023
Construction and land development
Residential	$	86	$	—	$	86	$	10,471	$	—	$	10,471
Commercial		228		—		228		37,024		—		37,024
		314		—		314		47,495		—		47,495
Commercial real estate
Owner occupied		409		—		409		122,666		—		122,666
Non-owner occupied		1,467		—		1,467		154,855		—		154,855
Multifamily		44		—		44		12,743		—		12,743
Farmland		3		—		3		326		—		326
		1,923		—		1,923		290,590		—		290,590
Consumer real estate
Home equity lines		40		—		40		21,557		—		21,557
Secured by 1-4 family residential
First deed of trust		293		—		293		95,638		160		95,478
Second deed of trust		99		—		99		11,337		105		11,232
		432		—		432		128,532		265		128,267
Commercial and industrial loans
(except those secured by real estate)		640		—		640		86,203		26		86,177
Student loans		57		—		57		17,923		—		17,923
Consumer and other		57		—		57		4,265		—		4,265
	$	3,423	$	—	$	3,423	$	575,008	$	291	$	574,717

23

Note 6 – Deposits

Deposits as of June 30, 2024 and December 31, 2023 were as follows (dollars in thousands):

	June 30, 2024				December 31, 2023
	Amount		%		Amount		%
Demand accounts	$	236,063	37.5	%	$	247,624	40.9	%
Interest checking accounts		73,305	11.7	%		76,289	12.6	%
Money market accounts		217,147	34.5	%		195,249	32.3	%
Savings accounts		33,892	5.4	%		39,633	6.5	%
Time deposits of $250,000 and over		32,124	5.1	%		9,145	1.5	%
Other time deposits		36,381	5.8	%		37,405	6.2	%
Total	$	628,912	100.0	%	$	605,345	100.0	%

Note 7 – Borrowings

The Company uses both short-term and long-term borrowings to supplement deposits when they are available at a lower overall cost to the Company or they can be invested at a positive rate of return.

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $1,936,000 in FHLB stock at June 30, 2024 and $2,644,000 at December 31, 2023, which is held at cost. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions. The FHLB borrowings are secured by the pledge of commercial and 1-4 family residential loans and investment securities. The Company had FHLB advances of $30,000,000 at June 30, 2024 and $45,000,000 at December 31, 2023.  

The Company uses federal funds purchased and repurchase agreements for short-term borrowing needs. Securities sold under agreements to repurchase are classified as borrowings and generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. There were no borrowings against the lines at June 30, 2024 or December 31, 2023.

The Company’s unused lines of credit for future borrowings total approximately $37.5 million at June 30, 2024, which consists of $14.7 million available from the FHLB based on current pledged assets, $20 million on revolving bank line of credit, and $2.8 million under secured federal funds agreements with third party financial institutions. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank of Richmond or the FHLB above the current lendable collateral value.

Note 8 – Trust preferred securities

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a floating rate of interest indexed to the London InterBank Offered Rate (“LIBOR”) (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term Secured Overnight Funding Rate (“SOFR”) plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The interest rate at June 30, 2024 was 7.73%. The securities were redeemable at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035. No amounts have been redeemed at June 30, 2024 and there are no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

24

During the third quarter of 2007, Village Financial Statutory Trust II, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly.  As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The interest rate at June 30, 2024 was 6.98%. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in 2037. No amounts have been redeemed at June 30, 2024 and there are no plans to do so. The principal asset of the Trust is $3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the Trust Preferred Capital Notes not considered as Tier 1 capital may be included in Tier 2 capital.

The obligations of the Company with respect to the issuance of the Trust Preferred Capital Notes constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the Trust Preferred Capital Notes. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related Trust Preferred Capital Notes and require a deferral of common dividends. The Company is current on these interest payments.

Note 9 – Subordinated Debt

On March 21, 2018, the Company issued $5,700,000 of fixed-to-floating rate subordinated notes due March 31, 2028 in a private placement. The Company received $5,539,000 in net proceeds after deducting issuance costs. The subordinated notes accrued interest at a fixed rate of 6.50% for the first five years until March 21, 2023. The subordinated notes have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 3.73%) which adjusts and is also payable quarterly. As a result of the discontinuation of the 3-month LIBOR on June 30, 2023, the Company is replaced the 3-month LIBOR leg of the calculated floating rate with the three-month term SOFR plus the applicable tenor spread adjustment for 3-month LIBOR of 0.26161 percent as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System. The interest rate at June 30, 2024 was 9.31%. The Company may redeem the subordinated notes in whole or in part, on or after March 31, 2023. The subordinated notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior indebtedness, whether secured or unsecured, including claims of depositors and general creditors, and rank equally in right of payment with any unsecured, subordinated indebtedness that the Company may incur in the future. The carrying value of the notes totaled $5,700,000 at June 30, 2024 and December 31, 2023, respectively.

Note 10 – Stock incentive plan

In accordance with accounting standards, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service in exchange for the award rather than disclosed in the financial statements.

25

The following table summarizes option activity under the Company's stock incentive plans during the indicated periods:

	Six Months Ended June 30,
	2024							2023
		Weighted							Weighted
		Average							Average
		Exercise		Fair Value		Intrinsic			Exercise		Fair Value		Intrinsic
	Options	Price		Per Share		Value		Options	Price		Per Share		Value
Options outstanding, beginning of period	—	$	—	$	—			14	$	25.28	$	9.76
Granted	—		—		—			—		—		—
Forfeited	—		—		—			—		—		—
Exercised	—		—	$	—			—		—		—
Options outstanding, end of period	—	$	—	$	—	$	—	14	$	25.28	$	9.76	$	—
Options exercisable, end of period	—							14

During the six months ended June 30, 2023, we granted certain officers time-based restricted shares of common stock. The time-based restricted shares vest ratably over a three year period provided the officer is employed with the Company on the applicable vesting date.

The total number of shares underlying non-vested restricted stock was 25,859 and 25,752 at June 30, 2024 and 2023, respectively.  The fair value of the stock is based on the grant date of the award and the expense is recognized over the vesting period.  Unamortized stock-based compensation related to non-vested share-based compensation arrangements granted under the stock incentive plan as of June 30, 2024 and 2023 was $642,200 and $885,700, respectively. The time-based unrecognized compensation of $464,000 is expected to be recognized over a weighted average period of 1.84 years. For the period ended June 30, 2024, there were no forfeitures of restricted stock.

A summary of changes in the Company’s non-vested restricted stock and restricted stock unit awards for the six months ended June 30, 2024 follows:

		Weighted-
		Average		Aggregate
		Grant-Date		Intrinsic
	Shares	Fair-Value		Value
December 31, 2023	31,077	$	45.93	$	1,384,791
Granted	—		—		—
Vested	(4,431)		51.89		(197,445)
Forfeited	—		—		—
Other (1)	(787)		58.95		(35,069)
June 30, 2024	25,859	$	44.51	$	1,152,277

(1) Represents the incremental decrease in shares that vested based on the restricted stock units vesting at a lower value as opposed to the targeted value of the award.

Stock-based compensation expense was approximately $214,000 and $268,000 for the six months ended June 30, 2024 and 2023, respectively.

26

Note 11 – Fair value

The Company determines the fair value of its financial instruments based on the requirements established in ASC 820: Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs when measuring fair value. ASC 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

ASC 820 establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

Level 1 Inputs — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 Inputs — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 Inputs — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods to determine the fair value of each type of financial instrument:

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Levels 1 and 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).

Collateral dependent: The Company does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered collateral dependent and an allowance for credit losses is established. The Company measures expected credit losses based on the fair value of the collateral either through the operation of the collateral or the sale of the collateral to include estimated cost to sell. The Company maintains a valuation allowance to the extent that this measure of the collateral dependent loan is less than the recorded investment in the loan. The Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to appraisals are required or if observable inputs are not available, the Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 3.

Loans held for sale: Fair value of the Company's loans held for sale is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company's portfolio of loans held for sale is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

Derivative asset – interest rate lock commitments (“IRLCs”): The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company's IRLCs are classified as Level 2.

Forward sale commitments: Best efforts sale commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The Company has elected the fair value option on their firm commitments under ASC 825.  

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

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

	Fair Value Measurement
	at June 30, 2024 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
U.S. Government Agencies	$	640	$	—	$	640	$	—
Mortgage-backed securities		70,206		—		70,206		—
Municipals		1,670		—		1,670		—
Subordinated debt		10,608		—		10,108		500
Loans held for sale		8,236		—		8,236		—
IRLC		237		—		237		—
Forward sales commitment		22		—		22		—

	Fair Value Measurement
	at December 31, 2023 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
U.S. Government Agencies	$	20,615	$	—	$	20,615	$	—
Mortgage-backed securities		72,537		—		72,537		—
Municipals		1,656		—		1,656		—
Subordinated debt		10,777		—		10,277		500
Loans held for sale		4,983		—		4,983		—
IRLC		271		—		271		—
Financial Liabilities - Recurring
Forward sales commitment		506		—		506		—

There were no Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at June 30, 2024 and December 31, 2023.

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.  In accordance with Accounting Standards Update (“ASU”) 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

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The following table reflects the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value (in thousands).

		June 30,				December 31,
		2024				2023
	Level in Fair
	Value	Carrying		Estimated		Carrying		Estimated
	Hierarchy	Value		Fair Value		Value		Fair Value
Financial assets
Cash	Level 1	$	17,154	$	17,154	$	10,383	$	10,383
Cash equivalents	Level 2		1,337		1,337		7,331		7,331
Investment securities available for sale	Level 2		82,624		82,624		105,085		105,085
Investment securities available for sale	Level 3		500		500		500		500
Restricted stock	Level 2		2,277		2,277		2,985		2,985
Loans held for sale	Level 2		8,236		8,236		4,983		4,983
Loans	Level 3		605,408		582,559		575,008		547,935
Bank owned life insurance	Level 2		13,291		13,291		13,120		13,120
Accrued interest receivable	Level 2		3,857		3,857		3,827		3,827
Interest rate lock commitments	Level 2		237		237		271		271
Forward sales commitment	Level 2		22		22		—		—
Financial liabilities
Deposits	Level 2		628,912		628,932		605,345		605,226
FHLB borrowings	Level 2		30,000		29,854		45,000		44,999
Trust preferred securities	Level 2		8,764		8,920		8,764		8,848
Other borrowings	Level 2		5,700		5,700		5,700		5,700
Accrued interest payable	Level 2		489		489		210		210
Forward sales commitment	Level 2		—		—		506		506

Note 12 – Segment Reporting

The Company has two reportable segments: traditional commercial banking and mortgage banking. Revenues from commercial banking operations consist primarily of interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income.

The Commercial Banking Segment provides the Mortgage Banking Segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the Mortgage Banking Segment interest based on the Commercial Banking Segment’s cost of funds. Additionally, the Mortgage Banking Segment leases premises from the Commercial Banking Segment. These transactions are eliminated in the consolidation process.

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The following table presents segment information as of and for the three and six months ended June 30, 2024 and 2023 (in thousands):

	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Three Months Ended June 30, 2024
Revenues
Interest income	$	9,734	$	135	$	—	$	9,869
Mortgage banking income, net		—		600		(48)		552
Other revenues		880		—		(41)		839
Total revenues		10,614		735		(89)		11,260
Expenses
Provision for credit losses		—		—		—		—
Interest expense		3,259		—		—		3,259
Salaries and benefits		2,791		694		—		3,485
Other expenses		2,309		234		(89)		2,454
Total operating expenses		8,359		928		(89)		9,198
Income (loss) before income taxes		2,255		(193)		—		2,062
Income tax expense (benefit)		449		(40)		—		409
Net income	$	1,806	$	(153)	$	—	$	1,653
Capital expenditures by segment	$	63	$	—	$	—	$	63
Total assets	$	755,588	$	16,659	$	(24,521)	$	747,726

	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Three Months Ended June 30, 2023
Revenues
Interest income	$	7,998	$	101	$	—	$	8,099
Mortgage banking income, net		—		610		(224)		386
Other revenues		878		—		(43)		835
Total revenues		8,876		711		(267)		9,320
Expenses
Provision for credit losses		—		—		—		—
Interest expense		1,975		—		—		1,975
Salaries and benefits		2,694		721		—		3,415
Other expenses		2,391		293		(267)		2,417
Total operating expenses		7,060		1,014		(267)		7,807
Income (loss) before income taxes		1,816		(303)		—		1,513
Income tax expense (benefit)		338		(64)		—		274
Net income (loss)	$	1,478	$	(239)	$	—	$	1,239
Capital expenditures by segment	$	—	$	—	$	—	$	—
Total assets	$	764,034	$	17,856	$	(27,235)	$	754,655

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	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Six Months Ended June 30, 2024
Revenues
Interest income	$	18,977	$	227	$	—	$	19,204
Mortgage banking income, net		—		1,509		(107)		1,402
Other revenues		1,675		—		(83)		1,592
Total revenues		20,652		1,736		(190)		22,198
Expenses
Provision for credit losses		150		—		—		150
Interest expense		6,198		—		—		6,198
Salaries and benefits		5,576		1,373		—		6,949
Loss on sale of investment securities, net		—		—		—		—
Other expenses		4,339		469		(190)		4,618
Total operating expenses		16,263		1,842		(190)		17,915
Income (loss) before income taxes		4,389		(106)		—		4,283
Income tax expense (benefit)		880		(22)		—		858
Net income (loss)	$	3,509	$	(84)	$	—	$	3,425
Capital expenditures by segment	$	239	$	—	$	—	$	239
Total assets	$	755,588	$	16,659	$	(24,521)	$	747,726

	Commercial		Mortgage				Consolidated
	Banking		Banking		Eliminations		Totals
Six Months Ended June 30, 2023
Revenues
Interest income	$	15,541	$	141	$	—	$	15,682
Mortgage banking income, net		—		1,148		(284)		864
Other revenues		1,700		—		(86)		1,614
Total revenues		17,241		1,289		(370)		18,160
Expenses
Provision for credit losses		—		—		—		—
Interest expense		3,193		—		—		3,193
Salaries and benefits		5,436		1,427		—		6,863
Other expenses		4,529		567		(370)		4,726
Total operating expenses		13,158		1,994		(370)		14,782
Income (loss) before income taxes		4,083		(705)		—		3,378
Income tax expense (benefit)		747		(148)		—		599
Net income (loss)	$	3,336	$	(557)	$	—	$	2,779
Capital expenditures by segment	$	198	$	—	$	—	$	198
Total assets	$	764,034	$	17,856	$	(27,235)	$	754,655

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Note 13 – Shareholders’ Equity and Regulatory Matters

Accumulated Other Comprehensive Loss

The following table presents the change in accumulated other comprehensive loss for the six months ended June 30, 2024 and year ended December 31, 2023 and is summarized as follows, net of tax (dollars in thousands):

	Unrealized		Defined
	Losses on AFS		Benefit
	Securities		Plan		Total
Accumulated other comprehensive loss December 31, 2023	$	(5,604)	$	(9)	$	(5,613)
Other comprehensive loss
Other comprehensive loss before reclassification		(515)		-		(515)
Net current period other comprehensive loss		(515)		-		(515)
Accumulated other comprehensive loss June 30, 2024	$	(6,119)	$	(9)	$	(6,128)

	Unrealized		Defined
	Losses on AFS		Benefit
	Securities		Plan		Total
Accumulated other comprehensive loss December 31, 2022	$	(10,863)	$	(18)	$	(10,881)
Other comprehensive income
Other comprehensive income before reclassification		1,320		9		1,329
Amounts reclassified from AOCI into earnings		3,939		-		3,939
Net current period other comprehensive income		5,259		9		5,268
Accumulated other comprehensive loss December 31, 2023	$	(5,604)	$	(9)	$	(5,613)

Regulatory Matters

The Company meets the eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve System’s (“Federal Reserve”) Small Bank Holding Company Policy Statement (the “SBHC Policy Statement”).  Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules").  The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules.

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

The Basel III Capital Rules require banks to comply with the following minimum capital ratios: (1) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (2) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (3) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (4) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).  The capital conservation buffer is designed to absorb losses during periods of economic stress.  Banking organizations with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of June 30, 2024, the Bank exceeded the minimum ratios under the Basel III Capital Rules.

The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act of 1950.  To be well capitalized under these regulations, a bank must have the following minimum capital ratios: (1) a common equity Tier 1 capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least 8.0%; (3) a total

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risk-based capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%.  As of June 30, 2024, the Bank exceeded the minimum ratios to be classified as well capitalized.

The capital amounts and ratios at June 30, 2024 and December 31, 2023 for the Bank are presented in the table below (dollars in thousands):

					Minimum Capital
					Requirements
	Actual				Including Conservation Buffer (1)				To be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2024
Total capital (to risk- weighted assets) Village Bank	$	89,883	14.06	%	$	67,114	10.50	%	$	63,918	10.00	%
Tier 1 capital (to risk- weighted assets) Village Bank		85,882	13.44	%		54,330	8.50	%		51,134	8.00	%
Leverage ratio (Tier 1 capital to average assets) Village Bank		85,882	11.33	%		30,326	4.00	%		37,907	5.00	%
Common equity tier 1 (to risk- weighted assets) Village Bank		85,882	13.44	%		44,743	7.00	%		41,547	6.50	%
December 31, 2023
Total capital (to risk- weighted assets) Village Bank	$	86,493	14.49	%	$	62,679	10.50	%	$	59,695	10.00	%
Tier 1 capital (to risk- weighted assets) Village Bank		82,764	13.86	%		50,740	8.50	%		47,756	8.00	%
Leverage ratio (Tier 1 capital to average assets) Village Bank		82,764	11.14	%		29,706	4.00	%		37,133	5.00	%
Common equity tier 1 (to risk- weighted assets) Village Bank		82,764	13.86	%		41,786	7.00	%		38,801	6.50	%
(1) Basel III Capital Rules require banking organizations to maintain a minimum CETI ratio of 4.5%, plus a 2.5% capital conservation buffer; a minimum Tier 1 capital ratio of 6.0%, plus a 2.5% capital conservation buffer; a minimum, total risk-based capital ratio of 8.0%, plus a 2.5% conservation buffer; and a minimum Tier leverage ratio of 4.0%.

Note 14 – Commitments and contingencies

Off-balance-sheet risk – The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the financial statements. The contract amounts of these instruments reflect the extent of involvement that the Company has in particular classes of instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, and to potential credit loss associated with letters of credit issued, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans and other such on-balance sheet instruments.

At June 30, 2024 and December 31, 2023, the Company had the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

	June 30,		December 31,
	2024		2023
Undisbursed credit lines	$	139,450	$	127,918
Commitments to extend or originate credit		11,280		7,463
Standby letters of credit		1,210		1,202
Total commitments to extend credit	$	151,940	$	136,583

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Historically, many commitments expire without being drawn upon; therefore, the total commitment amounts shown in the above table are not necessarily indicative of future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include personal or income-producing commercial real estate, accounts receivable, inventory and equipment.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

Concentrations of credit risk – Generally, the Company’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company’s market area. Although the Company is building a diversified loan portfolio, a substantial portion of its clients’ ability to honor contracts is reliant upon the economic stability of the Richmond, Virginia area, including the real estate markets in the area. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

Note 15 – Mortgage Banking and Derivatives

Loans held for sale. The Company, through the Bank’s mortgage banking subsidiary, originates residential mortgage loans for sale in the secondary market. Residential mortgage loans held for sale are sold to the permanent investor with the mortgage servicing rights released. The Company’s portfolio of loans held for sale (“LHFS”) is accounted for in accordance with ASC 820 - Fair Value Measurement and Disclosures. Fair value of the Company’s LHFS is based on observable market prices for the identical instruments traded in the secondary mortgage loan markets in which the Company conducts business and totaled $8.2 million as of June 30, 2024, of which $8.1 million is related to unpaid principal, and totaled $5.0 million as of December 31, 2023, of which $4.8 million is related to unpaid principal. The Company’s portfolio of LHFS is classified as Level 2.

Interest Rate Lock Commitments and Forward Sales Commitments. The Company, through the Bank’s mortgage banking subsidiary, enters into commitments to originate residential mortgage loans in which the interest rate on the loan is determined prior to funding, termed interest rate lock commitments. Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. Upon entering into a commitment to originate a loan, the Company protects itself from changes in interest rates during the period prior to sale by requiring a firm purchase agreement from a permanent investor before a loan can be closed (forward sales commitment). The Company locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs on a best efforts basis, thus limiting interest rate risk. Certain additional risks exist if the investor fails to meet its purchase obligation; however, based on historical performance and the size and nature of the investors the Company does not expect them to fail to meet their obligation.  The Company determines the fair value of IRLCs based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. The fair value of these derivative instruments is reported in “Other Assets” in the Consolidated Balance Sheet at June 30, 2024, and totaled $237,000, with a notional amount of $11.3 million and total positions of 33, and was reported in “Other Assets” at December 31, 2023, and totaled $271,000 with a notional amount of $7.5 million and total positions of 27. Changes in fair value are recorded as a component of mortgage banking income, net in the Consolidated Income Statement for the periods ended June 30, 2024 and 2023. The Company’s IRLCs are classified as Level 2. At June 30, 2024 and December 31, 2023, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

The Company uses fair value accounting for its forward sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b).  The fair value of forward sales commitments is reported in “Other Assets” in the Consolidated Balance Sheet at June 30, 2024, and totaled $22,000 with a notional amount of $19.4 million and total positions of 59 and was reported in “Other Liabilities” at December 31, 2023, and totaled $506,000, with a notional amount of $12.3 million and total positions of 47.

Note 16 - Recent Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five

34

percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (“CODM”), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Company does not expect the adoption of ASU 2023-07 to have a material impact on its consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain U.S. Securities and Exchange Commission (“SEC”) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

In July 2023, the FASB issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB ASC pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

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

Caution about forward-looking statements

In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include statements regarding profitability, liquidity, allowance for credit losses, interest rate sensitivity, market risk, growth strategy and financial and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements.

There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to:

● changes in assumptions underlying the establishment of allowances for credit losses, and other estimates;

● the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;

● the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged;

● the effects of future economic, business and market conditions;

● legislative and regulatory changes, including the Dodd-Frank Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;

● our inability to maintain our regulatory capital position;

● the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions despite security measures implemented by the Company;

● changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions with which we do business;

● risks inherent in making loans such as repayment risks and fluctuating collateral values;

● changes in operations of Village Bank Mortgage Corporation as a result of the activity in the residential real estate market;

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

● governmental monetary and fiscal policies;

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

● changes in accounting policies, rules and practices;

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

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

● demand, development and acceptance of new products and services;

● problems with technology utilized by us;

● the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events;

● changing trends in customer profiles and behavior; and

● other factors described from time to time in our reports filed with the SEC.

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These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.  In addition, past results of operations are not necessarily indicative of future results.

General

The Company’s primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Company is not able to predict market interest rate fluctuations and its asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on the Company’s results of operations and financial condition.

Although we endeavor to minimize the credit risk inherent in the Company’s loan portfolio, we must necessarily make various assumptions and judgments about the collectability of the loan portfolio based on our experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for credit losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income.

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at June 30, 2024 and December 31, 2023 and the results of operations for the Company for the three and six months ended June 30, 2024 and 2023. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

Summary

For the three months ended June 30, 2024, the Company had a net income of $1.65 million, or $1.11 per fully diluted share, compared to net income of $1.24 million, or $0.83 per fully diluted share, for the same period in 2023.  For the six months ended June 30, 2024, the Company had net income of $3.43 million, or $2.29 per fully diluted share, compared to net income of $2.78 million, or $1.87 per fully diluted share, for the same period in 2023.

On January 1, 2023, the Commercial Banking Segment adopted the Current Expected Credit Loss (“CECL”) methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023 to $3.52 million. The allowance for credit losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.

As of June 30, 2024, the allowance for credit losses was $4.0 million and included an allowance for credit losses on loans of $3.68 million and a reserve for unfunded commitments of $320,000.

Net interest income

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders’ equity. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets (“net interest margin” or “NIM”) is calculated by dividing tax equivalent net interest income by average interest-earning assets.

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Generally, the net interest margin will exceed the net interest spread because a portion of interest earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders’ equity.

	For the Three Months Ended June 30,
	2024			2023			Change
	(dollars in thousands)
Average interest-earning assets	$	708,777		$	697,114		$	11,663
Interest income	$	9,869		$	8,099		$	1,770
Yield on interest-earning assets		5.60	%		4.66	%		0.94	%
Average interest-bearing liabilities	$	444,881		$	426,333		$	18,548
Interest expense	$	3,259		$	1,975		$	1,284
Cost of interest-bearing liabilities		2.95	%		1.86	%		1.09	%
Net interest income	$	6,610		$	6,124		$	486
Net interest margin		3.75	%		3.52	%		0.23	%

The following are variances of note for the three months ended June 30, 2024 compared to the three months ended June 30, 2023:

●NIM expanded by 23 basis points to 3.75% for the three months ended June 30, 2024 compared to 3.52% for the three months ended June 30, 2023. The expansion was driven by the following:

o The yield on our earning assets increased by 94 basis point to 5.60% for the three months ended June 30, 2024 compared to 4.66% for the three months ended June 30, 2023. The increase in our yield on earning assets continues to be a result of improvement in our earning asset mix as well as the impact of the rise in interest rates during 2023 and 2024. We expect to see continued improvement in the yield on earning assets because of higher yielding loan growth combined with the amortization of lower yielding assets.

o The increased yield on earnings assets was partially offset by the cost of interest-bearing liabilities increasing by 109 basis points to 2.95% for the three months ended June 30,  2024 compared to 1.86% for the three months ended June 30, 2023. The increase in our cost of interest bearing liabilities has been driven by an increase in the rate paid on variable rate debt and market pressures on deposit rates. The rate paid on money market deposit accounts increased 137 basis points to 3.16% for the three months ended June 30, 2024 compared to 1.79% for the three months ended June 30, 2023, and the rate paid on time deposits increased 199 basis points to 3.55% for the three months ended June 30, 2024 compared to 1.56% for the three months ended June 30, 2023. The increase in the rate on time deposits was impacted heavily by the addition of $20.0 million in brokered time deposits at a weighted average rate of 4.89% during the three months ended March 31, 2024. While we expect there will be continued pressure on our funding base, we are seeing the velocity of those increases slowing down as of June 30, 2024.

o While the rate paid on interest bearing liabilities increased by 109 basis points for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, overall cost of funds increased by 76 basis points, 1.93% for the three months ended June 30, 2024 compared to 1.17% for the three months ended June 30, 2023. The lower increase in cost of funds was driven by our strong non-interest bearing deposits level, which remains near 37% of our deposit base.

	For the Six Months Ended June 30,
	2024			2023			Change
	(dollars in thousands)
Average interest-earning assets	$	700,430		$	689,068		$	11,362
Interest income	$	19,204		$	15,682		$	3,522
Yield on interest-earning assets		5.51	%		4.59	%		0.92	%
Average interest-bearing liabilities	$	437,151		$	416,218		$	20,933
Interest expense	$	6,198		$	3,193		$	3,005
Cost of interest-bearing liabilities		2.85	%		1.55	%		1.30	%
Net interest income	$	13,006		$	12,489		$	517
Net interest margin		3.73	%		3.66	%		0.07	%

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The following are variances of note for the six months ended June 30, 2024 compared to the six months ended June 30, 2023:

● NIM expanded by 7 basis points to 3.73% for the six months ended June 30, 2024 compared to 3.66% for the six months ended June 30, 2023. The expansion was driven by the following:

o The yield on our earning assets increased by 92 basis points, 5.51% as of the six months ended June 30, 2024 compared to 4.59% as of the six months ended June 30, 2023. The increase in our yield on earning assets continues to be a result of improvement in our earning asset mix as well as the impact of the rise in interest rates during 2023 and 2024. We expect to see continued improvement in the yield on earning assets because of higher yielding loan growth combined with the amortization of lower yielding assets.

o The increased yield on earning assets was partially offset by the cost of interest-bearing liabilities increasing by 130 basis points to 2.85% for the six months ended June 30, 2024 compared to 1.55% for the six months ended June 30, 2023.  The increase in our cost of funds was driven by an increase in the rate paid on variable rate debt and market pressures on deposit rates. The rate paid on money market deposit accounts increased 163 basis points to 3.05% for the six months ended June 30, 2024 compared to 1.42% for the six months ended June 30, 2023, and the rate paid on time deposits increased 218 basis points to 3.39% for the six months ended June 30, 2024 compared to 1.21% for the six months ended June 30, 2023. The increase in the rate on time deposits was impacted heavily by the addition of $20.0 million in brokered time deposits at a weighted average rate of 4.89% during the three months ended March 31, 2024. While we expect there will be continued pressure on our funding base, we are seeing the velocity of those increases slowing down as of June 30, 2024.

o While the rate paid on interest bearing liabilities increased by 130 basis points for the six months ended June 30, 2024, overall cost of funds increased by 89 basis points, 1.86% for the six months ended June 30, 2024 vs. 0.97% for the six months ended June 30, 2023. The lower increase in cost of funds was driven by our strong non-interest bearing deposits level, which remained near 37% of our deposit base.

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

	Three Months Ended June 30, 2024						Three Months Ended June 30, 2023
			Interest						Interest
	Average		Income/		Yield		Average		Income/		Yield
	Balance		Expense		Rate		Balance		Expense		Rate
Loans
Commercial	$	96,099	$	1,590	6.65	%	$	91,462	$	1,369	6.00	%
Real estate - residential		129,858		2,003	6.20	%		101,222		1,448	5.74	%
Real estate - commercial		308,325		3,939	5.14	%		282,440		3,381	4.80	%
Real estate - construction		47,541		700	5.92	%		48,153		528	4.40	%
Student loans		15,042		256	6.85	%		20,149		360	7.17	%
Consumer		4,450		89	8.04	%		4,317		80	7.43	%
Loans net of deferred fees		601,315		8,577	5.74	%		547,743		7,166	5.25	%
Loans held for sale		8,146		135	6.67	%		7,072		100	5.67	%
Investment securities		82,389		905	4.42	%		134,770		719	2.14	%
Federal funds and other		16,927		252	5.99	%		7,529		114	6.07	%
Total interest earning assets		708,777		9,869	5.60	%		697,114		8,099	4.66	%
Allowance for credit losses		(3,657)						(3,276)
Cash and due from banks		10,642						11,908
Premises and equipment, net		11,736						11,851
Other assets		23,774						23,410
Total assets	$	751,272					$	741,007
Interest bearing deposits
Interest checking	$	72,718	$	130	0.72	%	$	79,881	$	102	0.51	%
Money market		213,199		1,674	3.16	%		192,170		860	1.79	%
Savings		31,047		12	0.16	%		43,675		17	0.16	%
Certificates		72,034		636	3.55	%		53,075		207	1.56	%
Total deposits		388,998		2,452	2.54	%		368,801		1,186	0.13	%
Borrowings
Long-term debt - trust
preferred securities		8,764		163	7.48	%		8,764		146	6.68	%
FHLB advances		41,154		507	4.95	%		42,802		512	4.80	%
Subordinated debt, net		5,700		135	9.53	%		5,700		128	9.01	%
Other borrowings		265		2	3.04	%		266		3	4.52	%
Total interest bearing liabilities		444,881		3,259	2.95	%		426,333		1,975	1.86	%
Noninterest bearing deposits		233,813						252,647
Other liabilities		3,511						3,415
Total liabilities		682,205						676,489
Equity capital		69,067						64,518
Total liabilities and capital	$	751,272					$	741,007
Net interest income before provision for credit losses			$	6,610					$	6,124
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities					2.65	%					2.80	%
Net interest margin (net interest income expressed as a percentage of average earning assets)					3.75	%					3.52	%

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	Six Months Ended June 30, 2024						Six Months Ended June 30, 2023
			Interest						Interest
	Average		Income/		Yield		Average		Income/		Yield
	Balance		Expense		Rate		Balance		Expense		Rate
Loans
Commercial	$	93,150	$	3,123	6.74	%	$	89,419	$	2,588	5.84	%
Real estate - residential		129,611		4,034	6.26	%		97,892		2,744	5.65	%
Real estate - commercial		301,229		7,423	4.96	%		282,439		6,561	4.68	%
Real estate - construction		47,306		1,376	5.85	%		48,109		1,151	4.82	%
Student loans		15,960		532	6.70	%		20,315		699	6.94	%
Consumer		4,382		197	9.04	%		4,150		146	7.09	%
Loans net of deferred fees		591,638		16,685	5.67	%		542,324		13,889	5.16	%
Loans held for sale		6,914		227	6.60	%		4,517		140	6.25	%
Investment securities		86,565		1,837	4.27	%		134,890		1,446	2.16	%
Federal funds and other		15,313		455	5.98	%		7,337		207	5.69	%
Total interest earning assets		700,430		19,204	5.51	%		689,068		15,682	4.59	%
Allowance for credit losses		(3,544)						(3,264)
Cash and due from banks		11,024						11,588
Premises and equipment, net		11,760						11,815
Other assets		24,109						23,578
Total assets	$	743,779					$	732,785
Interest bearing deposits
Interest checking	$	72,736	$	247	0.68	%	$	82,059	$	164	0.40	%
Money market		205,482		3,112	3.05	%		186,129		1,307	1.42	%
Savings		32,808		27	0.17	%		46,558		36	0.16	%
Certificates		68,831		1,162	3.39	%		50,544		303	1.21	%
Total deposits		379,857		4,548	2.41	%		365,290		1,810	1.00	%
Borrowings
Long-term debt - trust
preferred securities		8,789		324	7.41	%		8,764		286	6.58	%
FHLB advances		42,511		1,052	4.98	%		36,188		859	4.79	%
Subordinated debt, net		5,700		269	9.49	%		5,697		232	8.21	%
Other borrowings		294		5	3.42	%		279		6	4.34	%
Total interest bearing liabilities		437,151		6,198	2.85	%		416,218		3,193	1.55	%
Noninterest bearing deposits		234,054						276,742
Other liabilities		4,089						3,484
Total liabilities		675,294						696,444
Equity capital		68,485						61,336
Total liabilities and capital	$	743,779					$	757,780
Net interest income before provision for credit losses			$	13,006					$	12,489
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities					2.66	%					3.04	%
Net interest margin (net interest income expressed as a percentage of average earning assets)					3.73	%					3.66	%

Provision for Credit losses

On January 1, 2023, the Commercial Banking Segment adopted the CECL methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023. The allowance for credit losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.

As of June 30, 2024, the allowance for credit losses was $4.0 million and included an allowance for credit losses on loans of $3.68 million and a reserve for unfunded commitments of $320,000.

The Company did not record a provision for credit losses for the three months ended June 30, 2024. The lack of a provision for credit losses was driven primarily by the recognition of a net-recovery of previously charged-off loans of $107,000 during the period and was supported by stable local economic conditions and credit quality remaining strong during the period.

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The Company did not record a provision for credit losses for unfunded commitments for the three months ended June 30, 2024, which was driven by a stable balance in the total commitments outstanding at June 30, 2024.

The Company recorded a provision for credit losses for loans of $136,700 for the six months ended June 30, 2024, which was the result of loan growth as all credit metrics remained strong compared to year-end 2023. Non-performing loans as a percentage of loans were consistent, 0.06% at June 30, 2024 compared to 0.05% at December 31, 2023.

The Company recorded a provision for credit losses for unfunded commitments of $13,300 for the six months ended June 30, 2024, which was driven by an increase in the total commitments outstanding at June 30, 2024.

The allowance for credit losses on loans to total loans ratio at the Company is 0.61% as of June 30, 2024 compared to the peer average of 1.11%, management considers this level of allowance, when compared to peers, sufficient and appropriate based on the current asset quality metrics of the Company compared to peers and the overall assessment of the Company’s loan portfolio. While higher inflation and the speed at which interest rates have been rising remain a risk to credit quality, we believe our current level of allowance for credit losses is sufficient.

For more financial data and other information about the allowance for credit losses refer to section, “Balance Sheet Analysis” under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Note 5 “Loans and allowance for credit losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Noninterest income

Noninterest income includes service charges and fees on deposit accounts, fee income related to loan origination, and mortgage banking income, net. The most significant noninterest income item has historically been mortgage banking income, net, representing 40% and 31%, for the three month periods ended June 30, 2024 and 2023, respectively.  Service charges and fees represent 47% and 58%, of noninterest income for the three month periods ended June 30, 2024 and 2023, respectively.

	For the Three Months Ended
	June 30,				Change
	2024		2023		$		%
	(dollars in thousands)
Service charges and fees	$	655	$	711	$	(56)	(7.9)	%
Mortgage banking income, net		552		386		166	43.0	%
Other		184		124		60	48.4	%
Total noninterest income	$	1,391	$	1,221	$	170	13.9	%

The increase in noninterest income of $170,000 for the three months ended June 30, 2024, was the result of the following:

● Mortgage banking income, net increased $166,000 as a result of efforts to expand revenue opportunities, control expenses, and improve gross margins on loans sold.  

	For the Six Months Ended
	June 30,				Change
	2024		2023		$		%
	(dollars in thousands)
Service charges and fees	$	1,296	$	1,380	$	(84)	(6.1)	%
Mortgage banking income, net		1,402		864		538	62.3	%
Other		296		234		62	26.5	%
Total noninterest income	$	2,994	$	2,478	$	516	20.8	%

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The decrease in noninterest income of $516,000 for the six months ended June 30, 2024, was the result of the following:

● The $84,000 decrease in service charges and fees was driven by lower interchange fees and non-sufficient funds fees during the period.

● The $538,000 increase in mortgage banking income net during the six months ended June 30, 2024 was impacted by the following:

o Result of efforts to expand revenue opportunities and improve gross margins on loans sold, and

o The fair value of forward sales commitments associated with the Mortgage Banking Segment’s loans held for sale and interest rate lock commitments was adjusted to properly reflect the timing of income recognition in the life cycle of the interest rate lock commitments and loans held for sale, which resulted in a $233,900 increase to net income for the period.  This increase was a one-time adjustment and is not expected to be recurring.  Mortgage revenue is expected to normalize going forward.

Noninterest expense

	For the Three Months Ended
	June 30,				Change
	2024		2023		$		%
	(dollars in thousands)
Salaries and benefits	$	3,485	$	3,415	$	70	2.0	%
Occupancy		310		307		3	1.0	%
Equipment		302		280		22	7.9	%
Supplies		49		35		14	40.0	%
Data processing		482		492		(10)	(2.0)	%
Professional and outside services		411		346		65	18.8	%
Advertising and marketing		95		140		(45)	(32.1)	%
FDIC insurance premium		82		84		(2)	(2.4)	%
Other operating expense		723		733		(10)	(1.4)	%
Total noninterest expense	$	5,939	$	5,832	$	107	1.8	%

The increase in noninterest expense of $107,000 for the three months ended June 30, 2024, was the result of the following:

● Salaries and benefits were up $70,000 primarily as a result of annual merit increases.

● Professional and outside services expense increased by $65,000 as a result of increased costs associated with the implementation of new licensed software products, consultant fees, and increased fees associated with debit and credit card usage, which were implemented in the latter half of 2023.

● Advertising and marketing expenses decreased by $45,000 as a result of timing of campaigns and cost control.

	For the Six Months Ended
	June 30,				Change
	2024		2023		$		%
	(dollars in thousands)
Salaries and benefits	$	6,949	$	6,863	$	86	1.3	%
Occupancy		642		618		24	3.9	%
Equipment		580		565		15	2.7	%
Supplies		99		84		15	17.9	%
Data processing		921		931		(10)	(1.1)	%
Professional and outside services		829		720		109	15.1	%
Advertising and marketing		178		251		(73)	(29.1)	%
FDIC insurance premium		174		134		40	29.9	%
Other operating expense		1,195		1,423		(228)	(16.0)	%
Total noninterest expense	$	11,567	$	11,589	$	(22)	(0.2)	%

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The decrease in noninterest expense of $22,000 for the six months ended June 30, 2024, was the result of the following

● Salaries and benefits were up $86,000 primarily as a result of annual merit increases.

● Professional and outside services expense increased by $109,000 as a result of increased costs associated with the implementation of new licensed software products, consultant fees, and increased fees associated with debit and credit card usage, which were implemented in the latter half of 2023.

● Advertising and marketing expenses decreased by $73,000 as a result of timing of campaigns and cost control.

● FDIC insurance premium increased by $40,000 as a result of an increase in the assessment rate implemented by the FDIC.

● Other operating expenses decreased by $228,000 primarily as a result of an decrease in check and card fraud during the six months ended June 30, 2024.

Income taxes

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent differences and available tax credits. Income tax expense for the three and six months ended June 30, 2024, was $409,000 and $858,000, resulting in an effective tax rate of 19.8% and 20% respectively compared to $274,000 and $599,000 or 18.1% and 17.7%, respectively for the same periods in 2023. The increase in the effective tax rate was primarily related to a decrease in the tax credit received related to state taxes attributed to the Company and the Mortgage Banking Segment as well as the impact of permanent difference related to the cash surrender value on bank owned life insurance. The Bank is not subject to Virginia income taxes, and instead is subject to a franchise tax based on bank capital.

Balance Sheet Analysis

Investment securities

At June 30, 2024 and December 31, 2023, all of our investment securities were classified as available for sale.

For more financial data and other information about investment securities refer to Note 4 “Investment Securities Available for Sale” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Loans

The Company maintains rigorous underwriting standards coupled with regular evaluation of the creditworthiness of and the designation of lending limits for each borrower. The portfolio strategies include seeking industry, loan type and loan size diversification in order to minimize credit concentration risk. Management also focuses on originating loans in markets with which the Company is familiar. Additionally, as a significant amount of the loan losses we have experienced in the past is attributable to construction and land development loans, our strategy has shifted from reducing this type of lending to closely managing the quality and concentration in these loan types.

As of June 30, 2024 approximately 81.0% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. Approximately 2.3% of the loan portfolio consists of rehabilitated student loans purchased by the Bank from 2014 to 2017 (see discussion following). The Company’s commercial and industrial loan portfolio represents approximately 16.1% of all loans.  Loans in this category are typically made to individuals and small and medium-sized businesses, and range between $250,000 and $2.5 million. Based on underwriting standards, commercial and industrial loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory, and real property.  The collateral securing any loan may depend on the type of loan and may vary in value based on market conditions.  The remainder of our loan portfolio is in consumer loans which represent less than 1% of the total.

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Loans classified by type as of June 30, 2024 and December 31, 2023 are as follows (dollars in thousands):

	June 30, 2024				December 31, 2023
	Amount		%		Amount		%
Construction and land development
Residential	$	13,080	2.16	%	$	10,471	1.82	%
Commercial		36,067	5.96	%		37,024	6.44	%
		49,147	8.12	%		47,495	8.26	%
Commercial real estate
Owner occupied		128,783	21.28	%		122,666	21.33	%
Non-owner occupied		162,621	26.86	%		154,855	26.93	%
Multifamily		18,293	3.02	%		12,743	2.22	%
Farmland		315	0.05	%		326	0.06	%
		310,012	51.21	%		290,590	50.54	%
Consumer real estate
Home equity lines		22,281	3.68	%		21,557	3.75	%
Secured by 1-4 family residential,
First deed of trust		95,196	15.72	%		95,638	16.63	%
Second deed of trust		12,808	2.12	%		11,337	1.97	%
		130,285	21.52	%		128,532	22.35	%
Commercial and industrial loans
(except those secured by real estate)		97,363	16.08	%		86,203	14.99	%
Guaranteed student loans		14,156	2.34	%		17,923	3.12	%
Consumer and other		4,445	0.73	%		4,265	0.74	%
Total loans		605,408	100.00	%		575,008	100.00	%
Deferred fees and costs, net		678				803
Less: allowance for credit losses		(3,681)				(3,423)
	$	602,405			$	572,388

For more financial data and other information about loans refer to Note 5 “Loans and allowance for credit losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Allowance for Credit losses

On January 1, 2023, the Commercial Banking Segment adopted the CECL methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023 to $3.52 million. The allowance for credit losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.

As of June 30, 2024, the allowance for credit losses was $4.00 million and included an allowance for credit losses on loans of $3.68 million and a reserve for unfunded commitments of $320,000.

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We monitor and maintain an allowance for credit losses to absorb an estimate of expected losses inherent in the loan portfolio. The following table presents the credit loss experience on loans for the dates indicated (dollars in thousands).

			Provision for
			(Recovery of)										Ratio of Net
	Beginning		Credit Losses						Ending		Average		(Charge-offs) to
	Balance		on Loans		Charge-offs		Recoveries		Balance		Loans		Average Loans
Six Months Ended June 30, 2024
Construction and land development
Residential	$	86	$	(2)	$	—	$	—	$	84	$	10,736	—	%
Commercial		228		(22)		—		—		206		36,570	—	%
		314		(24)		—		—		290		47,306	—	%
Commercial real estate
Owner occupied		409		52		—		—		461		123,183	—	%
Non-owner occupied		1,467		2		—		—		1,469		161,756	—	%
Multifamily		44		40		—		—		84		16,135	—	%
Farmland		3		(2)		—		—		1		155	—	%
		1,923		92		—		—		2,015		301,229	—	%
Consumer real estate
Home equity lines		40		(18)		—		10		32		22,088	0.05	%
Secured by 1-4 family residential
First deed of trust		293		(3)		—		2		292		95,482	—	%
Second deed of trust		99		(109)		—		113		103		12,041	0.94	%
		432		(130)		—		125		427		129,611	0.10	%
Commercial and industrial loans
(except those secured by real estate)		640		79		—		7		726		93,150	0.01	%
Student loans		57		(1)		(11)		—		45		15,960	(0.07)	%
Consumer and other		36		(2)		—		—		34		4,382	—	%
Unallocated		21		123		—		—		144		—	—	%
	$	3,423	$	137	$	(11)	$	132	$	3,681	$	591,638	0.02	%

					Provision for
				Impact of	(Recovery of)										Ratio of Net
	Beginning			adopting	Credit Losses						Ending		Average		(Charge-offs) to
	Balance			ASC 326	on Loans		Charge-offs		Recoveries		Balance		Loans		Average Loans
Year Ended December 31, 2023
Construction and land development
Residential	$	79	$	3	$	4	$	—	$	—	$	86	$	8,153	—	%
Commercial		192		34		2		—		—		228		41,328	—	%
		271		37		6		—		—		314		49,481	—	%
Commercial real estate
Owner occupied		867		(475)		17		—		—		409		119,678	—	%
Non-owner occupied		1,289		192		(14)		—		—		1,467		153,506	—	%
Multifamily		33		7		4		—		—		44		12,385	—	%
Farmland		—		—		3		—		—		3		183	—	%
		2,189		(276)		10		—		—		1,923		285,752	—	%
Consumer real estate
Home equity lines		11		24		5		—		—		40		18,459	—	%
Secured by 1-4 family residential
First deed of trust		131		76		83		—		3		293		79,584	0.00	%
Second deed of trust		43		25		15		—		16		99		9,550	0.17	%
		185		125		103		—		19		432		107,593	0.02	%
Commercial and industrial loans
(except those secured by real estate)		576		1		(110)		—		173		640		86,065	0.20	%
Student loans		52		—		35		(30)		—		57		19,716	(0.15)	%
Consumer and other		37		(5)		7		(3)		—		36		4,270	(0.07)	%
Unallocated		60		(9)		(30)		—		—		21		—	—	%
	$	3,370	$	(127)	$	21	$	(33)	$	192	$	3,423	$	552,877	0.03	%

For more financial data and other information about loans refer to Note 5 “Loans and allowance for credit losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

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Asset quality

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

	June 30,			December 31,
	2024			2023
Nonaccrual loans	$	387		$	291
Foreclosed properties		—			—
Total nonperforming assets	$	387		$	291
Restructured loans (not included in nonaccrual loans above)	$	—		$	—
Loans past due 90 days and still accruing (1)	$	1,050		$	2,228
Nonaccrual loans to total loans (2)		0.06	%		0.05	%
Nonperforming assets to loans (2)		0.06	%		0.05	%
Nonperforming assets to total assets		0.05	%		0.04	%
Allowance for credit losses on loans to
Loans, net of deferred fees and costs		0.61	%		0.59	%
Loans, net of deferred fees and costs (excluding guaranteed loans)		0.62	%		0.61	%
Nonaccrual loans		951.16	%		1,176.29	%

(1) All loans 90 days past due and still accruing are rehabilitated student loans which have a 98% guarantee by the DOE.

(2) Loans are net of unearned income and deferred cost.

Nonperforming assets totaled $387,000 at June 30, 2024 compared to $291,000 at December 31, 2023.  Nonperforming assets, consisting solely of nonaccrual loans, totaled $387,000 at June 30, 2024, compared to $291,000 at December 31, 2023.

The following table presents an analysis of the changes in nonperforming assets for the six months ended June 30, 2024 (in thousands):

	Nonaccrual
	Loans		OREO		Total
Balance December 31, 2023	$	291	$	—	$	291
Additions		115		—		115
Loans placed back on accrual		—		—		—
Repayments		(19)		—		(19)
Charge-offs		—		—		—
Balance June 30, 2024	$	387	$	—	$	387

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

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

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There was $125,000 in loans with an individual allowance of $17,000 that were collateral dependent associated with the total nonaccrual loans of $387,000 at June 30, 2024. There were no individual allowances associated with the total nonaccrual loans of $291,000 at December 31, 2023, that were considered individually evaluated.

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $86,000 and $79,000 for the six months ended June 30, 2024 and 2023, respectively. Student loans totaling $1,050,000 and $2,228,000 at June 30, 2024 and December 31, 2023, respectively, were past due 90 days or more and interest was still being accrued as principal and interest on such loans have a 98% guarantee by the DOE.  The 2% not covered by the DOE guarantee is provided for in the allowance for credit losses.

Deposits

Deposits as of June 30, 2024 and December 31, 2023 were as follows (dollars in thousands):

	June 30, 2024				December 31, 2023
	Amount		%		Amount		%
Demand accounts	$	236,063	37.5	%	$	247,624	40.9	%
Interest checking accounts		73,305	11.7	%		76,289	12.6	%
Money market accounts		217,147	34.5	%		195,249	32.3	%
Savings accounts		33,892	5.4	%		39,633	6.5	%
Time deposits of $250,000 and over		32,124	5.1	%		9,145	1.5	%
Other time deposits		36,381	5.8	%		37,405	6.2	%
Total	$	628,912	100.0	%	$	605,345	100.0	%

Total deposits increased by $23,567,000, or 3.89%, from December 31, 2023. Variances of note are as follows:

●Noninterest bearing demand account balances decreased $11,561,000, or 4.67%, from December 31, 2023 and represented 37.5% of total deposits compared to 40.9% as of December 31, 2023. The decrease in noninterest bearing demand deposits was driven by a combination of consumers and businesses drawing down balances due to higher costs associated with continued pressure from inflation, as well as some movement into higher yielding accounts.

●Low cost relationship deposits (i.e. interest checking, money market, and savings) balances increased 13,173,000, or 4.23%, from December 31, 2023. The increase in low-cost relationship deposits from the prior periods was the result of seasonal relationship growth as well as some deposits moving from non-interest bearing to interest bearing.

●Time deposits increased by $21,955,000, or 47.17%, from December 31, 2023. The increase was the result of the Commercial Bank Segment issuing $20.0 million in brokered time deposits, at a weighted average rate of 4.89%, during the six months ended June 30, 2024 to supplement the noninterest-bearing reduction.

The following table presents the average deposits balance and average rate paid for the dates indicated (dollars in thousands).

	Average Balance				Average Cost Rate
	June 30,		December 31,		June 30,		December 31,
	2024		2023		2024		2023
Noninterest bearing deposits	$	234,054	$	249,711
Interest checking		72,736		79,744	0.68	%	0.53	%
Money market		205,482		197,720	3.05	%	1.97	%
Savings		32,808		42,559	0.17	%	0.16	%
Certificates
Less than $250,000		37,198		42,191	3.66	%	1.49	%
$250,000 or more		31,633		9,396	2.71	%	2.94	%
Total interest bearing deposits		379,857		371,610	2.41	%	1.42	%
Total deposits	$	613,911	$	621,321	1.49	%	0.85	%

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The following table presents (in thousands) the scheduled maturities of time deposits greater than $250,000 which is the maximum FDIC insurance limit.

	June 30,		December 31,
	2024		2023
Months to maturity:
Three or less	$	9,290	$	1,268
Over three through six		12,891		3,889
Over six through twelve		8,875		3,449
Over twelve		1,068		539
Total	$	32,124	$	9,145

The variety of deposit accounts that we offer has allowed us to be competitive in obtaining funds and has allowed us to respond with flexibility to, although not to eliminate, the threat of disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment vehicles such as government and corporate securities). Our ability to attract and retain deposits, and our cost of funds, has been, and is expected to continue to be, significantly affected by market conditions.

Borrowings

We utilize borrowings to supplement deposits to address funding or liability duration needs. For more financial data and other information about borrowings refer to Note 7 “Borrowings” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Capital resources

Shareholders’ equity at June 30, 2024 was $70,142,000 compared to $67,556,000 at December 31, 2023. The $2,586,000 increase in shareholders’ equity during the six months ended June 30, 2024, was due primarily to the recognition of net income of $3,425,000 offset by the $515,000 increase in accumulated other comprehensive loss and dividend payouts of $538,000.

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

	June 30,			December 31,
	2024			2023
Tier 1 capital
Total bank equity capital	$	79,754		$	77,151
Net unrealized loss on available-for-sale securities		6,118			5,603
Defined benefit postretirement plan		10			10
Total Tier 1 capital		85,882			82,764
Tier 2 capital
Allowance for credit losses		4,001			3,729
Tier 2 capital deduction		—			—
Total Tier 2 capital		4,001			3,729
Total risk-based capital		89,883			86,493
Risk-weighted assets	$	639,181		$	596,946
Average assets	$	758,142		$	742,655
Capital ratios
Leverage ratio (Tier 1 capital to average assets)		11.33	%		11.14	%
Common equity tier 1 capital ratio (CET 1)		13.44	%		13.86	%
Tier 1 capital to risk-weighted assets		13.44	%		13.86	%
Total capital to risk-weighted assets		14.06	%		14.49	%
Equity to total assets		10.69	%		10.50	%

For more financial data and other information about capital resources, refer to Note 13 “Shareholders’ Equity and Regulatory Matters” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At June 30, 2024, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled $101,615,000, or 13.59% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

At June 30, 2024, the Company had approximately $230.4 million in uninsured deposits, which represents 36.78% of total deposits. Total liquidity sources at June 30, 2024 equal $194.8 million, or 84.55% of uninsured deposits.

The Company’s internal policy limits wholesale deposits (i.e., brokered deposits and internet listing services) to 15 percent of total funding, representing $112.2 million of additional availability as of June 30, 2024. The Company had $20.2 million in wholesale deposits as of Jume 30, 2024, which were brokered deposits with a weighted average rate of 4.89%.

Our holdings of liquid assets plus the ability to maintain and expand our deposit base and borrowing capabilities serve as our principal sources of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits,

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and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain three federal funds lines of credit with correspondent banks totaling $22.8 million for which there were no borrowings against the lines at June 30, 2024 and December 31, 2023.

We are also a member of the Federal Home Loan Bank of Atlanta, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at June 30, 2024 was $14.7 million, based on the Bank's qualifying collateral available to secure any future borrowings. However, we are able to pledge additional collateral to the FHLB in order to increase our available borrowing capacity up to 25% of assets, which would result in a total remaining credit availability of $156.3 million as of June 30, 2024.

Liquidity provides us with the ability to meet normal deposit withdrawals, while also providing for the credit needs of customers. We are committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.

At June 30, 2024, we had commitments to originate $151,940,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at June 30, 2024. Certificates of deposit scheduled to mature in the 12-month period ending June 30, 2025 totaled $62,362,000. We believe that a significant portion of such deposits will remain with us. We further believe that deposit growth, loan repayments and other sources of funds will be adequate to meet our foreseeable short-term and long-term liquidity needs.

Interest rate sensitivity

An important element of asset/liability management is the monitoring of our sensitivity to interest rate movements. In order to measure the effects of interest rates on our net interest income, management takes into consideration the expected cash flows from the securities and loan portfolios and the expected magnitude of the repricing of specific asset and liability categories. We evaluate interest sensitivity risk and then formulate guidelines to manage this risk based on management’s outlook regarding the economy, forecasted interest rate movements and other business factors. Our goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.

Contractual principal repayments of loans do not necessarily reflect the actual term of our loan portfolio. The average lives of mortgage loans are substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which gives us the right to declare a loan immediately due and payable in the event, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid. In addition, certain borrowers increase their equity in the security property by making payments in excess of those required under the terms of the mortgage.

The sale of fixed rate loans is intended to protect us from precipitous changes in the general level of interest rates. The valuation of adjustable rate mortgage loans is not as directly dependent on the level of interest rates as is the value of fixed rate loans. As with other investments, we regularly monitor the appropriateness of the level of adjustable rate mortgage loans in our portfolio and may decide from time to time to sell such loans and reinvest the proceeds in other adjustable rate investments.

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Impact of inflation and changing prices

The Company’s financial statements included herein have been prepared in accordance with GAAP, which require the Company to measure financial position and operating results primarily in terms of historical dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.

LIBOR and Other Benchmark Rates

The administrator of LIBOR announced that the most commonly used U.S. dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on Secured Overnight Funding Rate (“SOFR”) for contracts governed by U.S. law that have no or ineffective fallbacks. We have a number of borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. As a result of the announced discontinuation of LIBOR on June 30, 2023, the Company replaced the LIBOR leg of the calculated floating rate for these instruments with the corresponding term SOFR plus the applicable tenor spread adjustment as per the guidelines outlined within the final rulings under the Adjustable Interest Rate (LIBOR) Act published by the Board of Governors of the Federal Reserve System.  

This transition did not have a significant impact on the Company’s consolidated financial statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4 – CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2024. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

In the course of its operations, the Company may become a party to legal proceedings. There are no material pending legal proceedings to which the Company is party or of which the property of the Company is subject.

ITEM 1A – RISK FACTORS

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 22, 2024.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES and USE OF PROCEEDS

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

Not applicable.

ITEM 6 – EXHIBITS

31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101	The following materials from the Village Bank and Trust Financial Corp. Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104	Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

		VILLAGE BANK AND TRUST FINANCIAL CORP.
Date:	August 9, 2024	By:	/s/ James E. Hendricks, Jr.
		James E. Hendricks, Jr.
		President and Chief Executive Officer
Date:	August 9, 2024	By:	/s/ Donald M. Kaloski, Jr.
		Donald M. Kaloski, Jr.
		Executive Vice President and Chief Financial Officer

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