March 29, 2021
Dear Fellow Shareholder,
We hope this message finds you safe and well. Since the beginning of the pandemic, we have all been
adapting continuously to a steady flow of information, directives, challenges and opportunities. The
pandemic forced us to move rapidly to limit our branch service to drive-through only, encourage remote
online banking, and transition most of our non-branch work force to working from home. Throughout
these times our primary focus has been to protect our clients and teammates. We believe that this crisis, as
terrible as it’s been, has given us an opportunity to really engage with clients in meaningful and lasting
ways and to make those investments to emerge stronger.
During 2020, we were able to distinguish ourselves by funding $185 million Paycheck Protection
Program (“PPP”) Round-1 loans, through which we helped approximately 1,500 businesses save 20,000
jobs in our community, and added a significant number of new small business clients who were in
desperate need of these funds. Our ability to react nimbly allowed us to fund PPP loans in an aggregate
amount equal to 43% of our outstanding loans as of December 31, 2019. We provided loan payment
deferrals to both consumer and commercial clients struggling with lost jobs or business closures. Our
mortgage company supported our clients through purchasing or refinancing their homes, while achieving
record application volume with a partially remote work force. At the time of this writing, we are
supporting the SBA’s PPP Round-2 loan applications for both new and existing clients and have received
SBA approval on $70.4 million in PPP loans supporting 699 businesses in PPP Round-2. This crisis has
allowed us to prove how we are different from other financial institutions. Village Bank’s resolve to treat
our clients like a neighbor and not a number has never shone brighter.
We will continue to pursue strategies that we believe will help us achieve our goal of delivering long-term
total shareholder returns that rank in the top quartile of a nationwide peer group while pursuing our
purpose to support the economic health of our community and improve our clients’ lives. We will
achieve this goal if we deliver top quartile return on equity, produce sustainable earnings growth, achieve
best quartile earnings volatility in our industry and deliver best quartile asset quality in the worst part of
the economic cycle. We successfully battled to grow earnings in 2020 in a difficult economic
environment where margins were under pressure. Our efforts to fund PPP loans, control expenses, and
leverage our mortgage banking segment allowed us to grow earnings and to add new clients with the
potential to expand these relationships in the future. For the year, we produced a 17.98% return on
average equity, 89% earnings per share growth, and maintained stable asset quality. We are particularly
pleased by the outstanding contribution from our mortgage banking segment, which produced net income
of $3.9 million for 2020 compared to $979,000 for 2019. Finally, we successfully navigated leadership
transitions, both on the executive team and board of directors, mentioned in previous filings.
While this strong momentum has placed us in a more resilient position, we know we will be faced with
economic head winds in 2021 from a continued low rate environment, high levels of liquidity,
competition driving spreads tighter and underwriting standards looser, and the health of the economy as
the virus is brought under control. We recognize that the economic benefit provided by the PPP
opportunity as well the favorable rate environment for residential mortgage loans are not sustainable, but,
we see opportunity in these clients. As described in prior filings, we are expanding our relationships with
the approximately 400 new clients won during the first round of PPP, leveraging our new Treasury
Management Services team, increasing our presence through our new branch in the vibrant Scott’s
Addition area in Richmond, Virginia, encouraging mortgage loan demand, and strategically deploying
excess liquidity to support net interest margin. We are optimistic about 2021 and laying the foundation for
2022.
We cannot close out this letter without expressing our gratitude for the leadership, commitment and
service of Bill Foster and Charlie Walton, our recent retirees as Chief Executive Officer and Director,
respectively. We want to share a few comments on their special contributions:
We thank Bill Foster for his leadership in transforming Village into an organization that performs
exceptionally well for our clients, shareholders, team members and community. His business instincts
and judgment helped to create a path to recovery for the bank after the Great Recession. We are indebted
to Bill for all of those things and will miss him. Charlie Walton infuses every question and observation
with highly developed business instincts and judgment. With his CPA and business background, he
brought a focus on the critical details that drive performance. Charlie was a source of optimism and
positive energy during the difficult years following the recession. We wish them good health and a joyful
journey in the years ahead.
We hope that you share our pride in how Village Bank distinguished itself in 2020 both in terms of
financial results and in the depth of commitment to our community. Please join us at the virtual
shareholders meeting on May 18, 2021, and thank you for your continued support.
Regards,
James E. Hendricks, Jr.
President and Chief Executive Officer
Craig D. Bell
Chairman, Board of Directors
Forward-Looking Statements
In addition to historical information, this letter 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.
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 cause actual results to differ materially from those expressed in the forward-
looking statements including, but not limited to, changes in interest rates, the effects of future economic,
business and market conditions, legislative and regulatory changes, governmental monetary and fiscal
policies, changes in accounting policies, rules and practices, the impact of the ongoing coronavirus
(COVID-19) pandemic, and other factors described from time to time in our reports filed with the
Securities and Exchange Commission (“SEC”). For further information, contact Donald M. Kaloski, Jr.,
Executive Vice President and Chief Financial Officer, at 804-897-3900 or dkaloski@villagebank.com.
Additional Information
This letter may be deemed to be solicitation material in respect of the Company’s 2021 annual meeting of
shareholders. The Company filed a definitive proxy statement with the SEC on April 5, 2021 in
connection with the annual meeting. Shareholders are urged to read the proxy statement and any other
relevant documents that the Company files with the SEC because they will contain important information.
The Company, its directors and certain of its executive officers will be participants in the solicitation of
proxies from shareholders in connection with the annual meeting. Information about the Company’s
directors and executive officers is included in the proxy statement. Investors and shareholders may obtain
a copy of the proxy statement and other documents filed by the Company free of charge from the SEC’s
website at www.sec.gov. Shareholders may obtain a copy of the proxy statement free of charge by writing
to the Company’s Corporate Secretary, Deborah Golding, whose address is P.O. Box 330, Midlothian,
Virginia, 23113-0330, or from the Company’s website at www.villagebank.com.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Commission file number 0-50765
VILLAGE BANK AND TRUST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
16-1694602
(I.R.S. Employer
Identification No.)
13319 Midlothian Turnpike, Midlothian, Virginia 23113
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 804-897-3900
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Common Stock, $4.00 par value
Trading Symbols(s)
VBFC
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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
Non-accelerated filer ☒
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No ☒
The aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the Registrant’s most recent
completed second fiscal quarter was approximately $15,948,000.
The number of shares of common stock outstanding as of March 1, 2021 was 1,466,800.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be used in conjunction with the 2021 Annual Meeting of Shareholders are incorporated by reference
into Part III of this Form 10-K.
Village Bank and Trust Financial Corp.
Form 10-K
TABLE OF CONTENTS
Part I
Business .................................................................................................................... 3
Item 1.
Item 1A. Risk Factors ............................................................................................................ 16
Item 1B. Unresolved Staff Comments .................................................................................. 31
Properties ................................................................................................................ 31
Item 2.
Item 3.
Legal Proceedings .................................................................................................. 31
Item 4. Mine Safety Disclosures ......................................................................................... 31
Part II
Item 5. Market for Registrant’s Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities ................................................. 32
Selected Financial Data .......................................................................................... 32
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations ....................................................................................... 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................... 50
Financial Statements and Supplementary Data ...................................................... 50
Item 8.
Changes In and Disagreements with Accountants
Item 9.
on Accounting and Financial Disclosure ............................................................. 102
Item 9A. Controls and Procedures ...................................................................................... 102
Item 9B. Other Information ................................................................................................. 102
Part III
Item 10 . Directors, Executive Officers, and Corporate Governance .................................. 103
Executive Compensation ...................................................................................... 103
Item 11.
Security Ownership of Certain Beneficial Owners and
Item 12.
Management and Related Shareholder Matters .................................................... 103
Item 13.
Item 14.
Certain Relationships and Related Transactions,
and Director Independence ................................................................................... 103
Principal Accounting Fees and Services ............................................................... 103
Part IV
Item 15.
Item 16
Exhibits, Financial Statement Schedules .............................................................. 104
Form 10-K Summary ... …………………………………………………………..104
Signatures
.............................................................................................................................. 107
2
PART I
In addition to historical information, the following report contains forward-looking statements that are
subject to risks and uncertainties that could cause Village Bank and Trust Financial Corp.’s actual results
to differ materially from those anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s analysis only as of the date of the report. For
discussion of factors that may cause our actual future results to differ materially from those anticipated,
please see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” herein.
ITEM 1. BUSINESS
Village Bank and Trust Financial Corp. (“Company”) was incorporated in January 2003 and was organized
under the laws of the Commonwealth of Virginia as a bank holding company. The Company has three
active wholly owned subsidiaries: Village Bank (the “Bank”), Southern Community Financial Capital Trust
I, and Village Financial Statutory Trust II. The Bank has one active wholly owned subsidiary: Village Bank
Mortgage Corporation (the “Mortgage Company”), a full service mortgage banking company. The
Company is the holding company of and successor to the Bank. Effective April 30, 2004, the Company
acquired all of the outstanding stock of the Bank in a statutory share exchange transaction. Unless the
context suggest otherwise, the terms “we”, “us” and “our” refer collectively to the Company, the Bank, and
the Mortgage Company.
The Bank is the primary operating business of the Company. The Bank offers a wide range of banking and
related financial services, including checking, savings, certificates of deposit and other depository services,
and commercial, real estate and consumer loans, primarily in the Richmond, Virginia and Williamsburg,
Virginia metropolitan areas. The Bank was organized in 1999 as a Virginia chartered bank to engage in a
general banking business to serve the communities in and around Richmond, Virginia and expanded its
services to Williamsburg, Virginia in 2017. Deposits with the Bank are insured to the maximum amount
provided by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a comprehensive range
of financial services and products and specializes in providing customized financial services to small and
medium sized businesses, professionals, and individuals. The Bank provides its customers with personal
customized service utilizing modern technology and delivery channels.
Bank revenues are derived from interest and fees received in connection with loans, deposits, and mortgage
services. Administrative and operating expenses are the major expenses, followed by interest paid on
deposits and borrowings. Revenues from the Mortgage Company consist primarily of gains from the sale
of loans and loan origination fees and its major expenses consist of personnel, occupancy, data processing,
and other operating expenses. In 2020, revenue (after intercompany eliminations) generated by the Bank
totaled $27.7 million and the Mortgage Company generated $13.7 million in revenue.
Segment Reporting
The Company has two reportable segments: traditional commercial banking and mortgage banking. For
more financial data and other information about each of the Company’s operating segments, refer to Item
7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under
“Segment Information – Commercial Banking Segment” and “Segment Information – Mortgage Banking
Segment”, and to Note 19 “Segment Reporting” in the “Notes to Consolidated Financial Statements”
contained in Item 8 of this Form 10-K.
Business Strategy
We are pursuing strategies that we believe will help us achieve our goal of delivering long-term total
shareholder returns that rank in the top quartile of a nationwide peer group. To achieve this goal, we strive
to deliver a top quartile return on equity, produce sustainable earnings growth, achieve best quartile earnings
3
volatility in our industry and deliver best quartile asset quality in the worst part of the economic cycle. Our
current business strategies include the following:
• Build full service banking relationships with high quality local companies by being problem solvers
and business builders, not just bankers. We will continue to field a team of bankers and leaders who
are both great bankers and exceptional business people. We will have the capital, capabilities and
connections to help business owners achieve their goals and overcome obstacles to their success. We
target win-win outcomes. We expect to be disciplined lenders during the good times so that during
difficult times we can support our good clients, win high quality relationships and recruit talented
bankers while other banks focus on their own challenges. Real estate lending will continue to be an
important part of our business. We intend to be diligent in managing overall portfolio concentrations,
and we will focus on real estate sectors and sponsors that we expect to perform better during difficult
times. We target wealth building real estate investors. We will understand the needs and goals of our
business clients and their owners so that we can help them fulfill those needs and achieve those
goals. We will target deposit only relationships as actively as we will target full loan and deposit
relationships. Wherever possible and prudent, we will purchase products and services from the
companies that do business with us to support our clients and thank them for their business.
• Build long-term, mutually beneficial banking relationships with individuals and families in our market
area. We will offer the basic financial products and services individuals and families in our
communities need backed by exceptionally professional and caring service. We offer convenience and
flexibility through in person, online, mobile and telephonic options for enrolling in new services,
handling transactions and seeking service. We want to help our clients thrive on their journey through
life. Through our own team members and business partners, we will help clients develop plans for
handling the big moments they will encounter along the way. We will use technology to understand
our clients, serve their needs and grow our business.
• Grow the Mortgage Company’s profitability and positive contribution to our brand. We intend to add
loan officers and production teams, more fully identify and serve the mortgage needs of bank clients,
appropriately leverage available grant programs, offer portfolio mortgage products, and enhance our
marketing efforts to grow mortgage banking revenues. We plan to continue to treat mortgage banking
as a specialty line of business. We will continue to differentiate ourselves by treating the homeowners,
realtors, builders and financial advisors who refer their clients to us with exceptionally professional and
caring service.
• Build and sustain the economics of our balance sheet, income statement and business model:
o Defend and expand our Net Interest Margin by improving the mix of both assets and funding
wherever possible.
o Build and grow other non-interest income services to leverage our return on assets (“ROA”) and
return on equity (“ROE”).
o Streamline and rationalize our processes and organization to improve productivity and efficiency.
Include a prudent amount of debt in our holding company capital structure to leverage a strong
o
ROA into an even stronger ROE.
• Achieve excellence in risk management. We strive to achieve best quartile performance on credit
quality metrics in the worst part of the business cycle and sustainable earnings growth over the long
term. Risk taking is a fundamental part of banking. Top performing banks are very good at identifying,
understanding, measuring, monitoring, managing, mitigating and getting paid for the risks the
organization takes. We are committed to building and sustaining the culture, talent, tools, policies,
processes and discipline needed to be a top performer in our risk management functions.
• Be the place where exceptional people want to work. We are committed to achieving great things and
need teammates who share that commitment. We will sustain our fun, fulfilling and rewarding work
4
environment built on trust and teamwork. We know that we will achieve our goals by fielding a team
of champions, not by building our business around individual stars. We are a meritocracy where every
individual knows he or she can make a difference every day, where their individual contributions are
valued, where we invest in our teammates, and where we hold people accountable. We will invest in
technology to leverage the talents of our associates and provide the flexibility to allow them to manage
their work and life priorities effectively. We will offer benefits and resources intended to help our team
members be fit to thrive on their journey through life. When we make difficult business decisions, we
will do so with sensitivity to and understanding of the consequences of those decisions.
• Make a lasting difference in our communities. We will invest our work, wisdom and wealth to help
our communities prepare young people for success in life, help families navigate the complex maze of
modern life and support and honor the individuals who serve and protect us. We believe that we can
be particularly effective in serving our many stakeholders by being a leader in education and workforce
development initiatives in our community because success in these areas will help individuals and
families provide for themselves and will provide businesses with the talented employees they need to
grow and prosper.
We strongly believe that there is a continuing need for banks like Village with deep community roots and
that a well-run community based bank can generate attractive returns for shareholders over the long term.
Market Area
The Company, the Bank, and the Mortgage Company are headquartered in Chesterfield County and
primarily serve the Central Virginia region and the Richmond and Williamsburg metropolitan statistical
areas. We currently conduct business from nine full-service branch banking offices, and a mortgage loan
production office in Central Virginia in the counties of Chesterfield, Hanover, Henrico, Powhatan and
James City.
Banking Services
Deposit Services. Deposits are a major source of our funding. The Bank offers a full range of deposit
services that are typically available in most banks and other financial institutions including checking
accounts, savings accounts and other time deposits of various types, ranging from daily money market
accounts to longer term certificates of deposit and Individual Retirement Accounts. These deposit accounts
are offered at rates competitive with other institutions in our market area. We service our deposit clients in
our full-service branches, at drive-up windows, at our ATMs, through our customer care team and through
technology such as online banking, mobile banking applications and remote deposit capture for business
clients. We have not applied for permission to establish a trust department and offer trust services. The
Bank is not a member of the Federal Reserve System. Deposits are insured under the Federal Deposit
Insurance Act of 1950 (the “FDI Act”) to the limits provided thereunder.
Lending Services. We offer a full range of short-to-medium term commercial and personal loans. We also
provide a wide range of real estate finance services. Our primary focus is on making loans in the Central
Virginia and greater Williamsburg markets where we have branch banking offices. We offer residential
construction-to-permanent financing to clients of the Mortgage Company.
• Commercial Business Lending. We make secured and unsecured loans to small- and medium-sized
businesses for purposes such as funding working capital needs (including inventory and receivables),
business expansion (including acquisition of real estate and improvements) and purchase of equipment
and machinery. We also make loans under Small Business Administration and state sponsored business
loan programs. In our underwriting, we evaluate the earnings and cash flows of the business, guarantor
support and both the need for and the protection offered by the collateral for the loan.
• Commercial Real Estate Acquisition, Development, Construction and Mortgage Lending. We make
loans to our clients for the purposes of acquiring, developing, constructing and owning commercial real
5
estate. These properties may be owner-occupied or may be held for investment purposes and repaid
from rental income or from the sale of the property.
• Consumer Lending. Consumer loans include secured and unsecured loans for financing automobiles,
home improvements, education and personal investments. We also originate fixed and variable rate
mortgage loans and real estate construction and acquisition loans. Residential loans originated by our
mortgage company are usually sold in the secondary mortgage market.
• Loan Participations. We sell loan participations in the ordinary course of business when a loan
originated by us exceeds our legal lending limit or we otherwise deem it prudent to share the risk with
another lending institution. Additionally, we purchase loan participations from other banks, usually
without recourse against that bank. We underwrite purchased loan participations in accordance with
normal underwriting practices.
• Loan Purchases. We purchase Federal Rehabilitated Student Loan portfolios when approved by the
board of directors. These loans are guaranteed by the U.S. Department of Education (“DOE”) which
covers approximately 98% of the principal and interest. These loans are serviced by a third party
servicer that specializes in handling these types of loans.
We also purchase the guaranteed portion of United State Department of Agriculture Loans (“USDA”)
which are guaranteed by the USDA for 100% of the principal and interest. The originating institution
holds the unguaranteed portion of the loan and services the loan. These loans are typically purchased
at a premium. In the event of a loan default or early prepayment the Bank may need to write off any
unamortized premium.
Lending Limit. As of December 31, 2020, our legal lending limit for loans to one borrower was
approximately $9,858,000.
Competition
We encounter strong competition from other local commercial banks, credit unions, mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance companies, money market
mutual funds, financial technology companies, and other financial institutions. A number of these
competitors are well-established. Competition for loans is keen, and pricing is important. Most of our
competitors have substantially greater resources and higher lending limits than ours and offer certain
services, such as extensive and established branch networks and trust services, which we do not provide at
the present time. Deposit competition also is strong, and we may have to pay higher interest rates to attract
deposits. Nationwide banking institutions and their branches have increased competition in our markets,
and federal legislation adopted in 1999 allows non-banking companies, such as insurance and investment
firms, to establish or acquire banks. We believe that the Company can capitalize on recent merger activity
to attract customers from the acquired institutions.
At June 30, 2020, the latest date such information is available from the FDIC, the Bank’s deposit market
share in Chesterfield County was 5.27%, 4.61% in Hanover County, 9.04% in Powhatan County, 0.46% in
the Richmond metropolitan statistical area, 0.12% in Henrico County and 0.70% in James City County.
Supervision and Regulation
We are subject to extensive regulation by certain federal and state agencies and receive periodic
examinations by those regulatory authorities. As a consequence, our business is affected by state and
federal legislation and regulations.
The discussion below is only a summary of the principal laws and regulations that comprise the regulatory
framework applicable to us. The descriptions of these laws and regulations, as well as descriptions of laws
6
and regulations contained elsewhere herein, do not purport to be complete and are qualified in their entirety
by reference to applicable laws and regulations.
General. The Company is qualified as a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors
of the Federal Reserve System (the "Federal Reserve"). As a bank holding company, the Company is
subject to supervision, regulation and examination by the Federal Reserve and is required to file various
reports and additional information with the Federal Reserve. The Company is also registered under the
bank holding company laws of Virginia and is subject to supervision, regulation and examination by the
Bureau of Financial Institutions of the Virginia State Corporation Commission (the "BFI"). The Bank is a
Virginia chartered bank and is not a member of the Federal Reserve System. The Bank is subject to
regulation, supervision and examination by the FDIC and the BFI.
The Dodd-Frank Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act represents a significant overhaul of
many aspects of the regulation of the financial services industry, although many of its provisions (e.g., the
interchange and trust preferred capital limitations) apply to companies that are significantly larger than the
Company. The Dodd-Frank Act directs applicable regulatory authorities to promulgate regulations
implementing its provisions, and its effect on the Company and on the financial services industry as a whole
will be clarified as those regulations are issued. Major elements of the Dodd-Frank Act are described
below.
Increased Capital Standards. The Dodd-Frank Act required the federal banking agencies to establish
minimum leverage and risk-based capital requirements for banks and bank holding companies. See “Capital
Adequacy” below for a discussion of these requirements.
Deposit Insurance. The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured
deposits. Amendments to the FDI Act also revised the assessment base against which an insured depository
institution’s deposit insurance premiums paid to the Deposit Insurance Fund (the “DIF”) are calculated.
Under the amendments, the assessment base is no longer the institution’s deposit base, but rather its average
consolidated total assets less its average tangible equity during the assessment period. Additionally, the
Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the
minimum from 1.15% to 1.35% of the estimated amount of total insured deposits and eliminating the
requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain
thresholds. The Dodd-Frank Act also provides that depository institutions may pay interest on demand
deposits.
The Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act established the CFPB, an
independent federal agency with broad rule-making, supervisory, and enforcement powers under various
federal consumer financial protection laws. The CFPB has examination and primary enforcement authority
with respect to depository institutions with $10 billion or more of assets. Smaller institutions, such as the
Company, are subject to rules promulgated by the CFPB but are examined and supervised by federal
banking regulators for consumer compliance purposes.
Recent Amendments to the Dodd-Frank Act. The Economic Growth, Regulatory Relief and Consumer
Protection Act of 2018, which was signed into law on May 24, 2018 (the “EGRRCPA”), amended the
Dodd-Frank Act to provide regulatory relief for certain smaller and regional financial institutions. The
EGRRCPA, among other things, provides financial institutions with less than $10 billion of assets with
relief from certain capital requirements and exempts banks with less than $250 billion of total consolidated
assets from the enhanced prudential standards and the company-run and supervisory stress tests required
under the Dodd-Frank Act. The Dodd-Frank Act has had, and may in the future have, a material impact on
the Company’s operations, particularly through increased compliance costs resulting from new and possible
future consumer and fair lending regulations.
7
The future changes resulting from the Dodd-Frank Act may affect the profitability of business activities,
require changes to certain business practices, impose more stringent regulatory requirements or otherwise
adversely affect the business and financial condition of the Company and the Bank. These changes may
also require the Company to invest significant management attention and resources to evaluate and make
necessary changes to comply with new statutory and regulatory requirements.
Reporting Obligations Under Securities Laws. The Company is subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the
requirement to file with the Securities and Exchange Commission (the “SEC”) annual, quarterly and other
reports on the financial condition and performance of the organization. The Company’s common stock is
listed on the Nasdaq Capital Market and, as a result, the Company is subject to the rules and listing standards
adopted by The Nasdaq Stock Market, LLC (“Nasdaq”). The Company is also affected by the corporate
responsibility and accounting reform legislation signed into law on July 30, 2002, known as the Sarbanes-
Oxley Act of 2002 (the “SOX Act”), and the related rules and regulations. The SOX Act includes provisions
that, among other things, require that periodic reports containing financial statements that are filed with the
SEC be accompanied by chief executive officer and chief financial officer certifications as to the accuracy
and compliance with law, additional disclosure requirements and corporate governance and other related
rules. The Company has expended considerable time and money in complying with the rules and
regulations of the SEC and Nasdaq, and with the SOX Act, and expects to continue to incur additional
expenses in the future.
Bank Holding Company Act. The Federal Reserve has jurisdiction under the BHC Act to approve any
bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The BHC
Act, and other applicable laws and regulations, generally limit the activities of a bank holding company and
its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely
related to banking or to managing or controlling banks as to be a proper incident thereto.
In determining whether a particular activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits to the public that outweigh
possible adverse effects. Despite prior approval, the Federal Reserve may order a bank holding company
or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the
Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that bank holding company may result from such an activity.
Support of Subsidiary Institutions. Under the Dodd-Frank Act, and previously under Federal Reserve
policy, the Company is required to act as a source of financial strength for the Bank and to commit resources
to support the Bank. This support can be required at times when it would not be in the best interest of the
Company’s shareholders or creditors to provide it. In the event of the Company’s bankruptcy, any
commitment by us to a federal bank regulatory agency to maintain the capital of the Bank would be assumed
by the bankruptcy trustee and entitled to a priority of payment. The Company has periodically raised capital
and contributed it to the Bank to support the Bank’s operations.
Privacy Legislation. Several laws, including the Right To Financial Privacy Act and the Gramm-Leach-
Bliley Act, provide protections against the transfer and use of customer information by financial
institutions. Financial Institutions generally are prohibited from disclosing customer information to non-
affiliated third parties, unless the customer has been given the opportunity to object and has not objected to
such disclosure. Financial institutions must disclose their specific privacy policies to their customers
annually and must conduct an internal risk assessment of their ability to protect customer information.
Mergers and Acquisitions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the "Interstate Banking Act"), generally permits well capitalized and adequately managed bank
holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a
bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to
merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states
have not opted out of interstate branching; and permits a bank to acquire branches from an out-of-state bank
8
if the law of the state where the branches are located permits the interstate branch acquisition. Under the
Dodd-Frank Act, a bank holding company or bank must be well capitalized and well managed to engage in
an interstate acquisition. Bank holding companies and banks are required to obtain prior Federal Reserve
approval to acquire more than 5% of a class of voting securities, or substantially all of the assets, of a bank
holding company, bank or savings association. The Interstate Banking Act and the Dodd-Frank Act permit
banks to establish and operate de novo interstate branches to the same extent a bank chartered by the host
state may establish branches. Virginia law permits branching across state lines, provided there is reciprocity
with the state in which the out-of-state bank is based.
Limits on the Payment of Dividends. The Company is a legal entity separate and distinct from the Bank
and its other subsidiaries. Virtually all of the Company’s cash revenues will result from dividends paid to
it by the Bank, which is subject to laws and regulations that limit the amount of dividends that it can pay.
Under Virginia law, a bank may not declare a dividend in excess of its accumulated retained earnings
without approval by the BFI. As of December 31, 2020, the Bank did not have any accumulated retained
earnings. In addition, the Bank may not declare or pay any dividend if, after making the dividend, the Bank
would be "undercapitalized," as defined in FDIC regulations.
The FDIC and the state have the general authority to limit the dividends paid by insured banks if the
payment is deemed an unsafe and unsound practice. Both the FDIC and the state have indicated that paying
dividends that deplete a bank's capital base to an inadequate level would be an unsound and unsafe banking
practice.
In addition, the Company is subject to certain regulatory requirements to maintain capital at or above
regulatory minimums. These regulatory requirements regarding capital affect our dividend policies.
Regulators have indicated that holding companies should generally pay dividends only if the organization's
net income available to common shareholders over the past year has been sufficient to fully fund the
dividends, and the prospective rate of earnings retention appears consistent with the organization's capital
needs, asset quality and overall financial condition. In addition, the Federal Reserve has issued guidelines
that bank holding companies should inform and consult with the Federal Reserve in advance of declaring
or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid
or that could result in a material adverse change to the organization’s capital structure.
Insurance of Accounts, Assessments and Regulation by the FDIC. Our deposits are insured by the FDIC
up to the limits set forth under applicable law, currently $250,000. We are subject to the deposit insurance
assessments of the DIF. The deposit insurance assessment base is average total assets minus average
tangible equity. The FDIC uses a “financial ratios method” based on CAMELS composite ratings to
determine assessment rates for small established institutions with less than $10 billion of assets, such as the
Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect
all financial and operational risks that a bank may face, including capital adequacy, asset quality,
management capability, earnings, liquidity and sensitivity to market risk (“CAMELS”). CAMELS
composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum
assessments for lower rated institutions.
The FDIC is authorized to prohibit any DIF-insured institution from engaging in any activity that the FDIC
determines by regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC
may initiate enforcement actions against banks, after first giving the institution’s primary regulatory
authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any
depository institution if it determines, after a hearing, that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent termination of insurance if the
institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the
time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months
to two years, as determined by the FDIC. We are aware of no existing circumstances that could result in
termination of our deposit insurance.
9
Capital Adequacy. Both the Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve, in the case of the Company, and the FDIC, in the case of the
Bank. The Federal Reserve and the FDIC have adopted rules to implement the Basel III capital framework
as outlined by the Basel Committee on Banking Supervision (the “Basel Committee”) and certain
provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). The Basel III Capital Rules implement
minimum capital ratios and establish 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 and bank holding companies 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 phase-in of the capital
conservation buffer requirement was fully implemented at 2.5% on January 1, 2019. 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.
In December 2017, the Basel Committee published standards that it described as the finalization of the
Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among
other things, these standards revise the standardized approach for credit risk (including by recalibrating risk
weights and introducing new capital requirements for certain “unconditionally cancellable commitments,”
such as unused credit card lines of credit) and provide a new standardized approach for operational risk
capital. Under the proposed framework, these standards will generally be effective on January 1, 2022,
with an aggregate output floor phasing-in through January 1, 2027. Under the current capital rules,
operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and
not to the Company. The impact of Basel IV on the Company and the Bank will depend on the manner in
which it is implemented by the federal bank regulatory agencies.
The Company meets the eligibility criteria of a small bank holding company in accordance with the Federal
Reserve’s Small Bank Holding Company Policy Statement (the “SBHC Policy Statement”). On August 28,
2018, the Federal Reserve issued an interim final rule required by the EGRRCPA that expands the
applicability of the SBHC Policy Statement to bank holding companies with total consolidated assets of
less than $3 billion (up from the prior $1 billion threshold). 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 Rules. The SBHC Policy Statement does not apply to
the Bank and the Bank must comply with 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
FDI Act, as described below.
On September 17, 2019, the federal banking agencies jointly issued a final rule required by the EGRRCPA
that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated
assets to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage
calculations (commonly referred to as the community bank leverage ratio or “CBLR”). Under the rule,
which became effective on January 1, 2020, banks and bank holding companies that opt into the CBLR
framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital
requirements under the Basel III Capital Rules and would be deemed to have met the well capitalized ratio
requirements under the “prompt corrective action” framework. These CBLR rules were modified in
response to the COVID-19 pandemic. See “Coronavirus Aid, Relief, and Economic Security Act and
10
Consolidated Appropriations Act, 2021” below. The Bank elected not to opt into the CBLR framework as
of December 31, 2020. The Bank does not expect to opt into the CBLR framework in 2021.
Prompt Corrective Action. Federal banking agencies have broad powers to take prompt corrective action
to resolve problems of insured depository institutions. The extent of these powers depends upon whether
the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” These terms are defined under uniform regulations issued
by each of the federal banking agencies regulating these institutions. An insured depository institution that
is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased
regulatory oversight and is increasingly restricted in the scope of its permissible activities.
To be well capitalized under these regulations, a bank must have the following minimum capital ratios:
(1) a common equity Tier 1 capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least
8.0%; (3) a total risk-based capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%. At
December 31, 2020, the Bank’s common equity Tier 1 capital ratio was 13.35%, its Tier 1 risk-based capital
ratio was 13.35%, its total risk-based capital ratio was 14.20% and its leverage ratio was
9.28%. Accordingly, as of December 31, 2020, the Bank met the minimum ratios to be classified as well
capitalized. More information concerning our regulatory ratios at December 31, 2020 is included in Note
13 to the “Notes to Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
As described above, on September 17, 2019, the federal banking agencies jointly issued a final rule required
by the EGRRCPA that permits qualifying banks and bank holding companies that have less than $10 billion
of consolidated assets to elect to opt into the CBLR framework. Banks opting into the CBLR framework
and maintaining a CBLR of greater than 9% would be deemed to have met the well capitalized ratio
requirements under the “prompt corrective action” framework. These CBLR rules were modified in
response to the COVID-19 pandemic. See “Coronavirus Aid, Relief, and Economic Security Act and
Consolidated Appropriations Act, 2021” below. The Bank elected not to opt into the CBLR framework as
of December 31, 2020. The Bank does not expect to opt into the CBLR framework in 2021.
Restrictions on Transactions with Affiliates. Both the Company and the Bank are subject to the provisions
of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of: (1) a bank’s loans
or extensions of credit, including purchases of assets subject to an agreement to repurchase, to affiliates;
(2) a bank’s investment in affiliates; (3) assets a bank may purchase from affiliates, except for real and
personal property exempted by the Federal Reserve; (4) the amount of loans or extensions of credit to third
parties collateralized by the securities or debt obligations of affiliates; (5) transactions involving the
borrowing or lending of securities and any derivative transaction that results in credit exposure to an
affiliate; and (6) a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s
capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to
the limitation on the amount of these transactions, each of the above transactions must also meet specified
collateral requirements. The Bank must also comply with other provisions designed to avoid acquiring
low-quality assets from its affiliates.
The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act
which, among other things, prohibits an institution from engaging in the above transactions with affiliates
unless the transactions are on terms substantially the same, or at least as favorable to the institution or its
subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal
shareholders and their related interests. These extensions of credit (1) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and (2) must not involve more than the normal risk of repayment or present
other unfavorable features.
11
The Dodd-Frank Act also provides that an insured depository institution may not purchase an asset from,
or sell an asset to a bank insider (or their related interests) unless (1) the transaction is conducted on market
terms between the parties, and (2) if the proposed transaction represents more than 10% of the capital stock
and surplus of the insured institution, it has been approved in advance by a majority of the institution’s non-
interested directors.
Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies issued
guidance that applies to all banking organizations supervised by the agencies (thereby including both the
Company and the Bank). Pursuant to the guidance, to be consistent with safety and soundness principles,
a banking organization’s incentive compensation arrangements should: (1) provide employees with
incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk
management; and (3) be supported by strong corporate governance including active and effective oversight
by the banking organization’s board of directors. Monitoring methods and processes used by a banking
organization should be commensurate with the size and complexity of the organization and its use of
incentive compensation. At December 31, 2020, we had not been made aware of any instances of non-
compliance with this guidance. The Dodd-Frank Act requires the appropriate federal regulators to establish
standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company
or bank that provides an insider or other employee with “excessive compensation” or that could lead to a
material financial loss to such firm. These standards have not yet been established.
Anti-Money Laundering Laws and Regulations. The Company is subject to several federal laws that are
designed to combat money laundering, terrorist financing, and transactions with persons, companies or
foreign governments designated by U.S. authorities (“AML laws”). This category of laws includes the Bank
Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and
the Anti-Money Laundering Act of 2020.
The AML laws and their implementing regulations require insured depository institutions, broker-dealers,
and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and
report money laundering and terrorist financing. The AML laws and their regulations also provide for
information sharing, subject to conditions, between federal law enforcement agencies and financial
institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking
regulators are required, when reviewing bank holding company acquisition and bank merger applications,
to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply
with these obligations, the Company has implemented appropriate internal practices, procedures, and
controls.
Reporting Terrorist Activities. The Office of Foreign Assets Control (“OFAC”), which is a division of the
Department of the Treasury, is responsible for helping to insure that United States entities do not engage in
transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of
Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and
organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any
transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious
activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the
inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC
areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing
software, which is updated each time a modification is made to the lists provided by OFAC and other
agencies of Specially Designated Nationals and Blocked Persons.
Mortgage Banking Regulation. The Mortgage Company is subject to the rules and regulations by the
Department of Housing and Urban Development, the Federal Housing Administration, the Department of
Veteran Affairs and state regulatory authorities with respect to originating, processing, servicing and selling
mortgage loans. Those rules and regulations, among other things, establish standards for loan origination,
prohibit discrimination, provide for inspections and appraisals of property, require credit reports on
prospective borrowers and, in some cases, restrict certain loan features, and fix maximum interest rates and
fees. In addition to other federal laws, mortgage origination activities are subject to the Equal Credit
12
Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real Estate Settlement
Procedures Act, and the Home Ownership Equity Protection Act, and the regulations promulgated
thereunder. These laws prohibit discrimination, require the disclosure of certain basic information to
mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable
value of the services rendered and require the maintenance and disclosure of information regarding the
disposition of mortgage applications based on race, gender, geographical distribution and income level.
Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on
depository institutions by federal law and regulatory policy that are designed to reduce potential loss
exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. The Federal banking agencies also have
broad powers under current Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the institution in question is
well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized, as defined by the law. Federal regulatory authorities also have broad enforcement powers
over us, including the power to impose fines and other civil and criminal penalties, and to appoint a receiver
in order to conserve the assets of any such institution for the benefit of depositors and other creditors. At
December 31, 2020, the Bank met the ratio requirements to be classified as a well capitalized financial
institution.
Loans-to-One Borrower. Under applicable laws and regulations the amount of loans and extensions of
credit which may be extended by a bank to any one borrower, including related entities, generally may not
exceed 15% of the sum of the capital, surplus, and loan loss reserve of the institution.
Community Reinvestment. The requirements of the Community Reinvestment Act (“CRA”) are applicable
to the Company. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet
the credit needs of their local communities, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those institutions. A financial institution’s efforts in meeting
community credit needs currently are evaluated as part of the examination process pursuant to 12
assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility.
In December 2019, the FDIC and the Office of the Comptroller of the Currency jointly proposed rules that
would significantly change existing CRA regulations. The proposed rules are intended to increase bank
activity in low- and moderate-income communities where there is significant need for credit, more
responsible lending, greater access to banking services, and improvements to critical infrastructure. The
proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where
activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA
performance; and (iv) revising CRA-related data collection, record keeping, and reporting. The FDIC has
not finalized the revisions to its CRA rule. We are evaluating what impact this proposed rule, if
implemented, may have on the Company.
Cybersecurity. In March 2015, federal regulators issued two related statements regarding cybersecurity.
One statement indicates that financial institutions should design multiple layers of security controls to
establish lines of defense and to ensure that their risk management processes also address the risk posed by
compromised customer credentials, including security measures to reliably authenticate customers
accessing internet-based services of the financial institution. The other statement indicates that a financial
institution’s management is expected to maintain sufficient business continuity planning processes to
ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack
involving destructive malware. A financial institution is also expected to develop appropriate processes to
enable recovery of data and business operations and address rebuilding network capabilities and restoring
data if the institution or its critical service providers fall victim to this type of cyber-attack. If the Company
fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including
financial penalties.
13
In December 2020, the federal banking agencies issued a notice of proposed rulemaking that would require
banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-
security incident” or a “notification incident.” The proposed rule also would require specific and immediate
notifications by bank service providers that become aware of similar incidents.
To date, we have not experienced a significant compromise, significant data loss or any material financial
losses related to cybersecurity attacks, but our systems and those of our customers and third-party service
providers are under constant threat and it is possible that we could experience a significant event in the
future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable
future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding
use of Internet banking, mobile banking and other technology-based products and services by us and our
customers.
Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021. In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021
(“Appropriations Act”) was signed into law on December 27, 2020. Among other things, the CARES Act
and Appropriations Act include the following provisions impacting financial institutions:
• Community Bank Leverage Ratio. The CARES Act directed federal banking agencies to adopt
interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable
grace period for a community bank that falls below the threshold to regain compliance, in each case
until the earlier of the termination date of the national emergency or December 31, 2020. In April
2020, the federal bank regulatory agencies issued two interim final rules implementing this directive.
One interim final rule provides that, as of the second quarter 2020, banking organizations with
leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to
use the CBLR framework. It also establishes a two-quarter grace period for qualifying community
banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the
banking organization maintains a leverage ratio of 7% or greater. The second interim final rule
provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It
establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021,
and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking
organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR
requirement.
• Temporary Troubled Debt Restructurings Relief. The CARES Act allowed banks to elect to suspend
requirements under U.S. generally accepted accounting principles (“GAAP”) for loan modifications
related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of
December 31, 2019) that would otherwise be categorized as a troubled debt restructuring, including
impairment for accounting purposes, until the earlier of 60 days after the termination date of the
national emergency or December 31, 2020. Federal banking agencies are required to defer to the
determination of the banks making such suspension. The Appropriations Act extended this
temporary relief until the earlier of 60 days after the termination date of the national emergency or
January 1, 2022.
• Small Business Administration Paycheck Protection Program. The CARES Act created the Small
Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and it was extended by the
Appropriations Act. Under the PPP, money was authorized for small business loans to pay payroll
and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest
on other debt. The loans are provided through participating financial institutions, such as the Bank,
that process loan applications and service the loans.
14
Future Legislation and Regulation. Congress may enact legislation from time to time that affects the
regulation of the financial services industry, and state legislatures may enact legislation from time to time
affecting the regulation of financial institutions chartered by or operating in those states. Federal and state
regulatory agencies also periodically propose and adopt changes to their regulations or change the manner
in which existing regulations are applied. The substance or impact of pending or future legislation or
regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation
could impact the regulatory structure under which we operate and may significantly increase costs, impede
the efficiency of internal business processes, require an increase in regulatory capital, require modifications
to business strategy, and limit the ability to pursue business opportunities in an efficient manner.
Employees
As of December 31, 2020, the Company and its subsidiaries had a total of 146 full-time employees and 6
part-time employees. None of the Company’s employees is covered by a collective bargaining agreement.
The Company considers its relations with its employees to be good.
The Company has a Code of Ethics for directors, officers and all employees of the Company and its
subsidiaries, and a Code of Ethics applicable to the Company’s Chief Executive Officer, Chief Financial
Officer and other principal financial officers. The Code addresses such topics as protection and proper use
of Company assets, compliance with applicable laws and regulations, accuracy and preservation of records,
accounting and financial reporting and conflicts of interest. A copy of the Code will be provided, without
charge, to any shareholder upon written request to the Secretary of the Company, whose address is P.O.
Box 330, 13319 Midlothian Turnpike, Midlothian, Virginia 23113.
Additional Information
The Company files annual, quarterly and current reports, proxy statements and other information with the
SEC. Electronic copies of our SEC filings are available on the SEC’s Internet site (http://www.sec.gov).
The Company’s Internet address is http://www.villagebank.com. At that address, we make available, free
of charge, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act (see “Investor Relations” section of website), as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
In addition, we will provide, at no cost, paper or electronic copies of our reports and other filings made with
the SEC (except for exhibits). Requests should be directed to Donald M. Kaloski, Jr., Chief Financial
Officer, Village Bank and Trust Financial Corp., PO Box 330, Midlothian, VA 23113.
The information on the websites listed above is not and should not be considered to be part of this annual
report on Form 10-K and is not incorporated by reference in this document.
15
ITEM 1A. RISK FACTORS
An investment in our common stock is subject to risks inherent to our business. Investors should carefully
consider the risks and uncertainties described below, together with all of the other information included or
incorporated by reference in this report. The risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that management is not aware of or focused on, or that
management currently deems immaterial, may also impair our business and operations. If any of the
following risks adversely affects our business, financial condition or results of operations, the value of our
common stock could decline. The Risk Factor Summary that follows should be read in conjunction with
the detailed description of risk factors below.
Risk Factor Summary
These risks and uncertainties include:
Risk Related to the COVID-19 Pandemic
• The impacts of COVID-19, or the outbreak of another highly infectious or contagious disease,
could adversely affect the Company’s business, financial condition and results of operations.
Risks related to the Company’s Lending Activities
• Our credit standards and on-going credit assessment processes might not protect us from significant
credit losses.
• Our allowance for loan losses may be insufficient.
• Nonperforming assets take significant time to resolve and adversely affect our results of operations
and financial condition.
• We have a high concentration of loans secured by real estate, and a downturn in the local real estate
market could materially and negatively affect our business.
• A portion of our loan portfolio consists of construction and land development loans, and a decline
in real estate values and economic conditions would adversely affect the value of the collateral
securing the loans and have an adverse effect on our financial condition
• We have a significant concentration of credit exposure in commercial real estate, and loans with
this type of collateral are viewed as having more risk of default.
• Our focus on lending to small to mid-sized community-based businesses may increase our credit
risk.
• We rely upon independent appraisals to determine the value of the real estate which secures a
significant portion of our loans, and the values indicated by such appraisals may not be realizable
if we are forced to foreclose upon such loans.
• We are exposed to risk of environmental liabilities with respect to properties to which we take title.
Risk Related to Market Interest Rates
• Our business is subject to interest rate risk, and variations in interest rates may negatively affect
financial performance.
• We may be required to transition from the use of the London Interbank Offered Rate ("LIBOR")
index in the future.
Risks Related to the Company’s Business, Industry and Markets
• We face strong and growing competition from financial services companies and other companies
that offer banking and other financial services, which could negatively affect our business.
• Consumers may decide not to use banks to complete their financial transactions.
• Our ability to operate profitably may be dependent on our ability to integrate or introduce various
technologies into our operations.
• Changes in economic conditions, especially in the areas in which we conduct operations, could
materially and negatively affect our business.
• We may be adversely impacted by changes in market conditions.
16
• Our mortgage banking revenue is cyclical and is sensitive to the level of interest rates, changes in
economic conditions, decreased economic activity, and slowdowns in the housing market, any of
which could adversely impact our profits.
Risk Related to the Company’s Operations
• Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
• We are dependent on key personnel and the loss of one or more of those key personnel may
materially and adversely affect our operations.
• The success of our strategy depends on our ability to identify and retain individuals with experience
•
and relationships in our markets.
If we are unable to successfully implement and manage our growth strategy, our results of
operations and financial condition may be adversely affected.
• We are subject to a variety of operational risks, including reputational risk, legal and compliance
risk, and the risk of fraud or theft by employees or outsiders.
• The soundness of other financial institutions could adversely affect us
• Failure to maintain effective systems of internal and disclosure control could have a material
adverse effect on our results of operation and financial condition.
• We depend on the accuracy and completeness of information about clients and counterparties and
our financial condition could be adversely affected if we rely on misleading information.
• Our information systems may experience an interruption or breach in security.
• We rely on other companies to provide key components of our business infrastructure.
Risks Related to the Company’s Regulatory Environment
• Changes in accounting standards could impact reported earnings.
• We operate in a highly regulated industry and the laws and regulations that govern our operations,
corporate governance, executive compensation and financial accounting, or reporting, including
changes in them or our failure to comply with them, may adversely affect us.
• Regulatory enacted capital standards, including the Basel III Capital Rules, may require the
Company and the Bank to maintain higher levels of capital and liquid assets, which could adversely
affect our profitability and return on equity or require us to raise additional capital and dilute
existing shareholders.
Risk Related to the Company’s Common Stock
• Our common stock is thinly traded which may limit the ability of shareholders to sell their shares
and may increase price volatility.
• Our ability to pay dividends is limited, and we may be unable to pay future dividends.
•
If we fail to pay interest on or otherwise default on our subordinated notes and subordinated debt
securities, we will be prohibited from paying dividends or distributions on our common stock.
• Our governing documents and Virginia law contain anti-takeover provisions that could negatively
impact our shareholders.
• Our largest shareholder, Kenneth R. Lehman, has significant influence over our business through
his share ownership and his interests may not align with the interests of other holders of our
common stock.
If Mr. Lehman acquires more than 66.67% of the Company’s outstanding shares of common stock,
it will cause the acceleration of benefits under certain of our employment and benefit agreements,
which will cause us to incur additional compensation expenses.
•
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Risks Related to the COVID-19 Pandemic
The impacts of COVID-19, or the outbreak of another highly infectious or contagious disease, could
adversely affect the Company’s business, financial condition and results of operations.
The Company’s business is dependent upon the willingness and ability of its customers to conduct banking
and other financial transactions. Since the beginning of January 2020, the COVID-19 outbreak has caused
significant disruption in the financial markets both globally and in the United States. The continuing spread
of COVID-19 and the related government actions to mandate or encourage quarantines and social
distancing has resulted in a significant decrease in commercial activity nationally and in the Company’s
markets, and may cause customers, vendors, and counterparties to be unable to meet existing payment or
other obligations to the Company and the Bank.
The national public health crisis arising from the COVID-19 pandemic (and public expectations about it),
combined with certain pre-existing factors, including, but not limited to, international trade disputes,
inflation risks, and oil price volatility, could further destabilize the financial markets and the markets in
which the Company operates. The resulting impacts on consumers, including the sudden increase in the
unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and
saving habits, which will likely affect the demand for loans and other products and services the Company
offers, as well as the creditworthiness of potential and current borrowers. Borrower loan defaults that
adversely affect the Company’s earnings correlate with deteriorating economic conditions, which, in turn,
may impact borrowers’ creditworthiness and the Bank’s ability to make loans.
The use of quarantines and social distancing methods to curtail the spread of COVID-19 – whether
mandated by governmental authorities or recommended as a public health practice – may adversely affect
the Company’s operations as key personnel, employees and customers avoid physical interaction. In
response to the COVID-19 pandemic, the Bank has been directing branch customers to use drive-thru
windows and online banking services, and many employees are telecommuting. It is not yet known what
impact these operational changes may have on the Company’s financial performance. The spread could
also negatively impact availability of key personnel and employee productivity, as well as the business
operations of third-party service providers who perform critical services for us, which could adversely
impact our ability to deliver products and services to our customers.
As a result, if COVID-19 continues to spread or the response to contain the COVID-19 pandemic is
unsuccessful, the Company could experience a material adverse effect on its business, financial condition,
and results of operations.
Risk Related to the Company’s Lending Activities
Our credit standards and on-going credit assessment processes might not protect us from significant
credit losses.
We take credit risk by virtue of making loans and extending loan commitments and letters of credit. We
manage credit risk through a program of underwriting standards, the review of certain credit decisions and
an ongoing process of assessment of the quality of the credit already extended. In addition, our credit
administration function employs risk management techniques intended to promptly identify problem loans.
While these procedures are designed to provide us with the information needed to implement policy
adjustments where necessary and to take appropriate corrective actions, there can be no assurance that such
measures will be effective in avoiding future undue credit risk, and credit losses will occur in the future and
they may be significant.
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Our allowance for loan losses may be insufficient.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses
charged to expense, that represents our best estimate of probable losses that have been incurred within the
existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for
estimated loan losses and risks inherent in the loan portfolio.
The level of the allowance reflects management’s evaluation of the level of loans outstanding, the level of
nonperforming loans, historical loan loss experience, delinquency trends, underlying collateral values, the
amount of actual losses charged to the reserve in a given period and assessment of present and anticipated
economic conditions. The determination of the appropriate level of the allowance for loan losses inherently
involves a high degree of subjectivity and requires us to make significant estimates of current credit risks
and future trends, all of which may undergo material changes. Although we believe the allowance for loan
losses is a reasonable estimate of known and inherent losses in the loan portfolio, we cannot precisely
predict such losses or be certain that the loan loss allowance will be adequate in the future. Deterioration
of economic conditions affecting borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside our control, may require an increase in
the allowance for loan losses. In addition, bank regulatory agencies and our auditors periodically review
our allowance for loan losses and may require an increase in the provision for loan losses or the recognition
of further loan charge-offs, based on judgments different than those of management. Further, if charge-
offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase
the allowance for loan losses.
In addition, the adoption of Accounting Standards Update (“ASU”) 2016-13, as amended, could result in
an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which
encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss”
model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As
a smaller reporting company, the Company has elected to defer adoption of ASU 2016-13 until January
2023. For information regarding recent accounting pronouncements and their effect on us, see “Recent
Accounting Pronouncements” in Note 1 “Summary of Significant Accounting Policies” in the “Notes to
Consolidated Financial Statements” contained in Item 8 of this Form 10-K. Any increases in the allowance
for loan losses will result in a decrease in net income and, possibly capital, and may have a material adverse
effect on our financial condition and results of operations.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and
financial condition.
Our nonperforming assets adversely affect our net income in various ways. Nonperforming assets, (which
include nonaccrual loans and other real estate owned, but exclude loans past due 90 days and still accruing
as these loans are rehabilitated student loans which have a 98% guarantee by the DOE of principal and
interest), were $1,913,000, or 0.27% of total assets, as of December 31, 2020. When we receive collateral
through foreclosures and similar proceedings, we are required to mark the related loan to the then fair value
of the collateral less estimated selling costs, which may result in a loss. An increased level of nonperforming
assets also increases our risk profile and may impact the capital levels regulators believe are appropriate in
light of such risks. We utilize various techniques such as workouts, restructurings and loan sales to manage
problem assets. Increases in or negative changes in the value of these problem assets, the underlying
collateral, or in the borrowers’ performance or financial condition, could adversely affect our business,
results of operations and financial condition. In addition, the resolution of nonperforming assets requires
significant commitments of time from management and staff, which can be detrimental to the performance
of their other responsibilities, including generation of new loans. There can be no assurance that we will
avoid increases in nonperforming loans in the future.
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We have a high concentration of loans secured by real estate, and a downturn in the local real estate
market could materially and negatively affect our business.
We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate,
construction, residential mortgages, home equity loans and lines of credit, consumer and other loans. Many
of these loans are secured by real estate (both residential and commercial) located principally in the
Commonwealth of Virginia. As of December 31, 2020, 61.92% of all loans were secured by mortgages on
real property. A major change in the real estate market, such as deterioration in the value of this collateral,
or in the local or national economy, could adversely affect our customers’ ability to pay these loans, which
in turn could impact us. If there is a decline in real estate values, especially in our market area, the collateral
for loans would deteriorate and provide significantly less security. The ability to recover on defaulted loans
by selling the real estate collateral could then be diminished and we would be more likely to suffer losses.
A portion of our loan portfolio consists of construction and land development loans, and a decline in
real estate values and economic conditions would adversely affect the value of the collateral securing
the loans and have an adverse effect on our financial condition.
At December 31, 2020, approximately 5.26% of our loan portfolio, or $29,569,000, consisted of
construction and land development loans. Construction financing typically involves a higher degree of
credit risk than financing on improved, owner-occupied real estate and improved, income producing real
estate. Risk of loss on a construction or land development loan is largely dependent upon the accuracy of
the initial estimate of the property’s value at completion of construction or development, the marketability
of the property, and the bid price and estimated cost (including interest) of construction or development. If
the estimate of construction or development costs proves to be inaccurate, we may be required to advance
funds beyond the amount originally committed to permit completion of the project. If the estimate of the
value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project
whose value is insufficient to assure full repayment. When lending to builders and developers, the cost
breakdown of construction or development is provided by the builder or developer. Although our
underwriting criteria are designed to evaluate and minimize the risks of each construction or land
development loan, there can be no guarantee that these practices will have safeguarded against material
delinquencies and losses to our operations. In addition, construction and land development loans are
dependent on the successful completion of the projects they finance. Loans secured by vacant or
unimproved land are generally riskier than loans secured by improved property. These loans are more
susceptible to adverse conditions in the real estate market and local economy.
We have a significant concentration of credit exposure in commercial real estate, and loans with this
type of collateral are viewed as having more risk of default.
As of December 31, 2020, we had approximately $231,224,000 in loans secured by commercial real estate,
representing approximately 41.21% of total loans outstanding at that date. The real estate consists primarily
of non-owner-operated properties and other commercial properties. These types of loans are generally
viewed as having more risk of default than residential real estate loans. They are also typically larger than
residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the
property to service the debt. It may be more difficult for commercial real estate borrowers to repay their
loans in a timely manner, as commercial real estate borrowers’ abilities to repay their loans frequently
depends on the successful rental of their properties. Cash flows may be affected significantly by general
economic conditions, and a downturn in the local economy or in occupancy rates in the local economy
where the property is located could increase the likelihood of default. Because our loan portfolio contains
a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of
these loans could cause a significant increase in our percentage of non-performing loans. An increase in
non-performing loans could result in a loss of earnings from these loans, an increase in the provision for
loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial
condition.
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Our banking regulators generally give commercial real estate lending greater scrutiny, and may require
banks with higher levels of commercial real estate loans to implement improved underwriting, internal
controls, risk management policies and portfolio stress testing, as well as possibly higher levels of
allowances for losses and capital as a result of commercial real estate lending growth and exposures, which
could have a material adverse effect on our results of operations.
Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.
Most of our commercial business and commercial real estate loans are made to small business or middle
market customers. These businesses generally have fewer financial resources in terms of capital or
borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If
general economic conditions in the market area in which we operate negatively impact this important
customer sector, our results of operations and financial condition may be adversely affected. Moreover, a
portion of these loans have been made by us in recent years and the borrowers may not have experienced a
complete business or economic cycle. The deterioration of our borrowers’ businesses may hinder their
ability to repay their loans with us, which could have a material adverse effect on our financial condition
and results of operations.
We rely upon independent appraisals to determine the value of the real estate which secures a significant
portion of our loans, and the values indicated by such appraisals may not be realizable if we are forced
to foreclose upon such loans.
A significant portion of our loan portfolio consists of loans secured by real estate. We rely upon independent
appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the
independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of
their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate
to increase or decrease. As a result of any of these factors, the real estate securing some of our loans may
be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan
secured by real estate that is less valuable than originally estimated, we may not be able to recover the
outstanding balance of the loan and will suffer a loss.
We are exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business we may foreclose and take title to real estate, potentially becoming subject to
environmental liabilities associated with the properties. We may be held liable to a governmental entity or
to third parties for property damage, personal injury, investigation and clean-up costs or we may be required
to investigate or clean up hazardous or toxic substances or chemical releases at a property. Costs associated
with investigation or remediation activities can be substantial. If we are the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from the property. These costs and claims could
adversely affect our business.
Risk Related to Market Interest Rates
Our business is subject to interest rate risk, and variations in interest rates may negatively affect financial
performance.
Changes in the interest rate environment may reduce our profits. It is expected that we will continue to
realize income from the differential or “spread” between the interest earned on loans, securities, and other
interest earning assets, and interest paid on deposits, borrowings and other interest bearing liabilities. Net
interest spreads are affected by the difference between the maturities and repricing characteristics of interest
earning assets and interest bearing liabilities. In addition, loan volume and yields are affected by market
interest rates on loans, and rising interest rates generally are associated with a lower volume of loan
originations. Management cannot ensure that it can minimize our interest rate risk. While an increase in the
21
general level of interest rates may increase the loan yield and the net interest margin, it may adversely affect
the ability of certain borrowers with variable rate loans to pay the interest and principal of their obligations.
Also, when the difference between long-term interest rates and short-term interest rates is small or when
short-term interest rates exceed long-term interest rates, our margins may decline and our earnings may be
adversely affected. Accordingly, changes in levels of market interest rates could materially and adversely
affect the net interest spread, asset quality, loan origination volume and our overall profitability.
We may be required to transition from the use of the London Interbank Offered Rate ("LIBOR") index
in the future.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer
compel banks to submit the rates required to calculate LIBOR. In November 2020, the administrator of
LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates
whereby the publication of the one week and two month LIBOR offered rates will cease after December
31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023.
Given consumer protection, litigation, and reputation risks, federal bank regulators have indicated that
entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety
and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies
encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as
practicable and in any event by December 31, 2021.
Regulators, industry groups, and others have, among other things, published recommended replacement
language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR
rates (e.g., the Secured Overnight Financing Rate), and proposed implementations of the recommended
alternatives in floating rate instruments. There is not yet any consensus on what recommendations and
proposals will be broadly accepted.
We have a number of loans, borrowings and other financial instruments with attributes that are either
directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and
additional risk. Since proposed alternative rates are calculated differently, payments under contracts
referencing new rates will differ from those referencing LIBOR. The transition will change our market risk
profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging
strategies. Furthermore, failure to adequately manage this transition process with our customers could
adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of
the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse
effect on our business, financial condition and results of operations.
Risks Related to the Company’s Business, Industry and Markets
We face strong and growing competition from financial services companies and other companies that
offer banking and other financial services, which could negatively affect our business.
We encounter substantial competition from other financial institutions in our market area and competition
is increasing. Ultimately, we may not be able to compete successfully against current and future
competitors. Many competitors offer the same banking services that we offer in our service area. These
competitors include national, regional and community banks. We also face competition from many other
types of financial institutions, including finance companies, mutual and money market fund providers,
brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial
corporations, financial technology (“fintech”) companies and mortgage companies. In particular, the
activity of fintech companies has grown significantly over recent years and is expected to continue to grow.
Fintech companies have and may continue to offer bank or bank-like products and some fintech companies
have applied for bank charters. In addition, other fintech companies have partnered with existing banks to
allow them to offer deposit products to their customers. Increased competition may result in reduced
business for us.
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Additionally, banks and other financial institutions with larger capitalization and financial intermediaries
not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit
needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to
obtain loans and deposits, and range and quality of products and services provided, including new
technology-driven products and services. If we are unable to attract and retain banking customers, we may
be unable to continue to grow loan and deposit portfolios and our results of operations and financial
condition may otherwise be adversely affected.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions through alternative
methods that historically have involved banks. The activity and prominence of so-called marketplace
lenders and other technological financial service companies have grown significantly over recent years and
are expected to continue growing. In addition, consumers can now maintain funds that would have
historically been held as bank deposits in brokerage accounts, mutual funds, digital wallets or general-
purpose reloadable prepaid cards. Consumers can also complete transactions, such as paying bills and/or
transferring funds directly without the assistance of banks. The process of eliminating banks as
intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of
customer deposits and the related income generated from those deposits. If we are unable to address the
competitive pressures that we face, we could lose market share, which could result in reduced net revenue
and profitability and lower returns. The loss of these revenue streams and the lower cost of deposits as a
source of funds could have a material adverse effect on our financial condition and results of operations.
Our ability to operate profitably may be dependent on our ability to integrate or introduce various
technologies into our operations.
The market for financial services, including banking and consumer finance services, is increasingly affected
by advances in technology, including developments in telecommunications, data processing, computers,
automation, online banking and tele-banking. Our ability to compete successfully in our market may depend
on the extent to which we are able to exploit such technological changes. If we are not able to afford such
technologies, properly or timely anticipate or implement such technologies, or effectively train our staff to
use such technologies, our business, financial condition or operating results could be adversely affected.
Changes in economic conditions, especially in the areas in which we conduct operations, could
materially and negatively affect our business.
Our business is directly impacted by economic conditions, legislative and regulatory changes, changes in
government monetary and fiscal policies, and inflation, all of which are beyond our control. A deterioration
in economic conditions, whether caused by global, national or local concerns, especially within our market
area, could result in the following potentially material consequences: loan delinquencies increasing;
problem assets and foreclosures increasing; demand for products and services decreasing; low cost or non-
interest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in
turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with
existing loans. An economic downturn could result in losses that materially and adversely affect our
business.
We may be adversely impacted by changes in market conditions.
We are directly and indirectly affected by changes in market conditions. Market risk generally represents
the risk that values of assets and liabilities or revenues will be adversely affected by changes in market
conditions. As a financial institution, market risk is inherent in the financial instruments associated with
our operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt
and trading account assets and liabilities. A few of the market conditions that may shift from time to time,
thereby exposing us to market risk, include fluctuations in interest rates, equity and futures prices, and price
deterioration or changes in value due to changes in market perception or actual credit quality of issuers.
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Our investment securities portfolio, in particular, may be impacted by market conditions beyond our
control, including rating agency downgrades of the securities, defaults of the issuers of the securities, lack
of market pricing of the securities, and inactivity or instability in the credit markets. Any changes in these
conditions, in current accounting principles or interpretations of these principles could impact our
assessment of fair value and thus the determination of other-than-temporary impairment of the securities in
the investment securities portfolio.
Our mortgage banking revenue is cyclical and is sensitive to the level of interest rates, changes in
economic conditions, decreased economic activity, and slowdowns in the housing market, any of which
could adversely impact our profits.
Mortgage banking income, net of commissions, represented approximately 79.48% of total noninterest
income for the year ended December 31, 2020. The success of our mortgage company is dependent upon
our ability to originate loans and sell them to investors at or near current volumes. Loan production levels
are sensitive to changes in the level of interest rates and changes in economic conditions. Any sustained
period of decreased activity caused by fewer refinancing transactions, higher interest rates, housing price
pressure or loan underwriting restrictions would adversely affect our mortgage originations and,
consequently, could significantly reduce our income from mortgage banking activities. As a result, these
conditions would also adversely affect our results of operations.
Risk Related to the Company’s Operations
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the
Company is used to service its debt. The liquidity of the Bank is used to make loans and leases and to repay
deposit liabilities as they become due or are demanded by customers. Our overall liquidity position is
regularly monitored to ensure that various alternative strategies exist to cover unanticipated events that
could affect liquidity. An inability to raise funds through deposits, borrowings and other sources could
have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to
finance our activities on terms that are acceptable to us could be impaired by factors that affect us
specifically, or the financial services industry or economy in general. Factors that could negatively impact
our access to liquidity sources include a decrease in the level of our business activity as a result of an
economic downturn in the market area in which our loans are concentrated; adverse regulatory action
against us; or our inability to attract and retain deposits.
Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a
disruption in the financial markets or negative views and expectations about the prospects for the financial
services industry.
We are dependent on key personnel and the loss of one or more of those key personnel may materially
and adversely affect our operations.
We are a relationship-driven organization, and currently depend heavily on the services of a number of key
management and business development personnel. These officers have primary contact with our customers
and are extremely important in maintaining personalized relationships with our customer base and
producing new business, which is a key aspect of our business strategy and earnings momentum. The
unexpected loss of key personnel could materially and adversely affect our results of operations and
financial condition.
The success of our strategy depends on our ability to identify and retain individuals with experience and
relationships in our markets.
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In order to be successful, we must identify and retain experienced key management members and sales staff
with local expertise and relationships. Competition for qualified personnel is intense and there is a limited
number of qualified persons with knowledge of and experience in the community banking and mortgage
industry in our chosen geographic market. Even if we identify individuals that we believe could assist us
in building our franchise, we may be unable to recruit these individuals away from their current employers.
In addition, the process of identifying and recruiting individuals with the combination of skills and attributes
required to carry out our strategy is often lengthy. Our inability to identify, recruit and retain talented
personnel could limit our growth and could materially adversely affect our business, financial condition
and results of operations.
If we are unable to successfully implement and manage our growth strategy, our results of operations
and financial condition may be adversely affected.
We may not be able to successfully implement our growth strategy if we are unable to identify attractive
markets, locations or opportunities to expand in the future. In addition, the ability to manage growth
successfully depends on whether we can maintain adequate capital levels, cost controls and asset quality,
and successfully integrate any acquired branch offices or banks. We cannot assure you that any integration
efforts relating to our growth strategy will be successful. In implementing our growth strategy by opening
new branches or acquiring branches or banks, we expect to incur increased personnel, occupancy and other
operating expenses. In the case of new branches, we must absorb those higher expenses while we begin to
generate new deposits; there is also further time lag involved in redeploying new deposits into attractively
priced loans and other higher yielding earning assets.
We may consider acquiring other businesses or expanding into new product lines that we believe will help
us fulfill our strategic objectives. We expect that other banking and financial companies, some of which
have significantly greater resources, will compete with us to acquire financial services businesses. This
competition could increase prices for potential acquisitions that we believe are attractive. Acquisitions may
also be subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals,
we will not be able to consummate acquisitions that we believe are in our best interests.
When we enter into new markets or new lines of business, our lack of history and familiarity with those
markets, clients and lines of business may lead to unexpected challenges or difficulties that inhibit our
success. Our plans to expand could depress earnings in the short run, even if we efficiently execute a growth
strategy leading to long-term financial benefits.
We are subject to a variety of operational risks, including reputational risk, legal and compliance risk,
and the risk of fraud or theft by employees or outsiders.
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk,
the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, operational
errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or
communications systems.
Reputational risk, or the risk to our earnings and capital from negative public opinion, could result from
our actual or alleged conduct in any number of activities, including lending practices, corporate governance,
and from actions taken by government regulators and community organizations in response to those
activities. Negative public opinion can adversely affect our ability to attract and keep customers and
employees and can expose us to litigation and regulatory action.
Further, if any of our financial, accounting, or other data processing systems fail or have other significant
issues, we could be adversely affected. We depend on internal systems and outsourced technology to
support these data storage and processing operations. Our inability to use or access these information
systems at critical points in time could unfavorably impact the timeliness and efficiency of our business
operations. We could be adversely affected if one of our employees causes a significant operational break-
down or failure, either as a result of human error or where an individual purposefully sabotages or
25
fraudulently manipulates our operations or systems. We are also at risk of the impact of natural disasters,
terrorism and international hostilities on our systems and from the effects of outages or other failures
involving power or communications systems operated by others. We may also be subject to disruptions of
our operating systems arising from events that are wholly or partially beyond our control (for example,
computer viruses or electrical or communications outages), which may give rise to disruption of service to
customers and to financial loss or liability. In addition, there have been instances where financial
institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire
and automated clearinghouse transactions out of customer accounts. Although we have policies and
procedures in place to verify the authenticity of our customers, we cannot guarantee that such policies and
procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to
our reputation.
If any of the foregoing risks materialize, it could have a material adverse effect on our business, financial
condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial services institutions are interrelated as a
result of trading, clearing, counterparty or other relationships. We have exposure to many different
industries and counterparties, and we routinely execute transactions with counterparties in the financial
industry. As a result, defaults by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, have led to market-wide liquidity problems and
could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit
risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated
when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the
full amount of the financial instrument exposure due us. There is no assurance that any such losses would
not materially and adversely affect our results of operations.
Failure to maintain effective systems of internal and disclosure control could have a material adverse
effect on our results of operation and financial condition.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports and
effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable
financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our
ongoing monitoring of internal control, we may discover material weaknesses or significant deficiencies in
our internal control that require remediation. A “material weakness” is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of a company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
Our inability to maintain the operating effectiveness of the controls described above could result in a
material misstatement to our financial statements or other disclosures, which could have an adverse effect
on our business, financial condition or results of operations. In addition, any failure to maintain effective
controls or to timely effect any necessary improvement of our internal and disclosure controls could, among
other things, result in losses from fraud or error, harm our reputation or cause investors to lose confidence
in our reported financial information, all of which could have a material adverse effect on our results of
operation and financial condition.
We depend on the accuracy and completeness of information about clients and counterparties and our
financial condition could be adversely affected if we rely on misleading information.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we
may rely on information furnished to us by or on behalf of clients and counterparties, including financial
statements and other financial information, which we do not independently verify. We also may rely on
26
representations of clients and counterparties as to the accuracy and completeness of that information and,
with respect to financial statements, on reports of independent auditors. For example, in deciding whether
to extend credit to clients, we may assume that a client’s audited financial statements conform with GAAP
and present fairly, in all material respects, the financial condition, results of operations and cash flows of
that client. Our financial condition and results of operations could be negatively impacted to the extent we
rely on financial statements that do not comply with GAAP or are materially misleading.
We rely on other companies to provide key components of our business infrastructure.
Third parties provide key components of our business operations such as data processing, recording and
monitoring transactions, online banking interfaces and services, internet connections and network access.
While we have selected these third party vendors carefully, we do not control their actions. Any problem
caused by these third parties, including poor performance of services, failure to provide services, disruptions
in communication services proved by a vendor and failure to handle current or higher volumes, could
adversely affect our ability to deliver products and services to our customers and otherwise conduct our
business, and may harm our reputation. Financial or operational difficulties of a third party vendor could
also hurt our operations if those difficulties interface with the vendor’s ability to serve us. Replacing these
third party vendors could also create significant delay and expense. Accordingly, use of such third parties
creates an unavoidable inherent risk to our business operations.
Our information systems may experience an interruption or breach in security.
In the ordinary course of business, we collect and store sensitive data, including proprietary business
information and personally identifiable information of our customers and employees, in systems and on
networks. The secure processing, maintenance and use of this information is critical to operations and our
business strategy. While we have policies and procedures designed to protect our networks, computers and
data from failure, interruption, damage or unauthorized access, there can be no assurance that a breach will
not occur or, if it does, that it will be adequately addressed. The occurrence of any failure, interruption,
damage or security breach of our communications and information systems could damage our reputation,
result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil
litigation and possible financial liability, any of which could adversely affect our business.
Risk Related to the Company’s Regulatory Environment
Changes in accounting standards could impact reported earnings.
From time to time there are changes in the financial accounting and reporting standards that govern the
preparation of our financial statements. These changes can materially impact how we record and report our
financial condition and results of operations. In some instances, we could be required to apply a new or
revised standard retroactively, resulting in the restatement of prior period financial statements. For
information regarding recent accounting pronouncements and their effect on us, see “Recent Accounting
Pronouncements” in Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated
Financial Statements” contained in Item 8 of this Form 10-K.
We operate in a highly regulated industry and the laws and regulations that govern our operations,
corporate governance, executive compensation and financial accounting, or reporting, including
changes in them or our failure to comply with them, may adversely affect us.
We are subject to extensive regulation and supervision that govern almost all aspects of our operations.
These laws and regulations, among other matters, prescribe minimum capital requirements, impose
limitations on our business activities, limit the dividends or distributions that we can pay, restrict the ability
of institutions to guarantee our debt and impose certain specific accounting requirements that may be more
restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP.
Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often
impose additional compliance costs.
27
We are currently facing increased regulation and supervision of our industry as a result of the financial
crisis in the banking and financial markets. The Dodd-Frank Act instituted major changes to the banking
and financial institutions regulatory regimes. Other changes to statutes, regulations or regulatory policies
or supervisory guidance, including changes in interpretation or implementation of statutes, regulations,
policies or supervisory guidance, could affect us in substantial and unpredictable ways. Such additional
regulation and supervision has increased, and may continue to increase, our costs and limit our ability to
pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the
failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our
business activities, fines and other penalties, any of which could adversely affect our results of operations,
capital base and the price of our securities. Further, any new laws, rules and regulations could make
compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
Regulatory enacted capital standards, including the Basel III Capital Rules, may require the Company
and the Bank to maintain higher levels of capital and liquid assets, which could adversely affect our
profitability and return on equity or require us to raise additional capital and dilute existing
shareholders.
We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum
amounts and types of capital that the Company and the Bank must maintain. From time to time, regulators
implement changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum
capital guidelines and/or other regulatory requirements, our financial condition would be materially and
adversely affected. The Basel III Capital Rules require bank holding companies and their subsidiaries to
maintain significantly more capital as a result of higher required capital levels and more demanding
regulatory capital risk weightings and calculations. While the Company is exempt from these capital
requirements under the SBHC Policy Statement, the Bank is not exempt and must comply. The Bank must
also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant
to Section 38 of the FDI Act. Satisfying capital requirements may require us to limit our banking operations,
retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect
our business, financial condition and results of operations. As described in Item 1 – “Business” under
“Supervision and Regulation – Capital Adequacy,” banks and bank holding companies that opt into the
CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage
capital requirements under the Basel III Capital Rules and would be deemed to have met the well capitalized
ratio requirements under the “prompt corrective action” framework. These CBLR rules were modified in
response to the COVID-19 pandemic. See “Coronavirus Aid, Relief, and Economic Security Act and
Consolidated Appropriations Act, 2021” above. The Bank elected not to opt into the CBLR framework as
of December 31, 2020. The Bank does not expect to opt into the CBLR framework in 2021.
Risk Related to the Company’s Common Stock
Our common stock is thinly traded which may limit the ability of shareholders to sell their shares and
may increase price volatility.
Our common stock is listed on the Nasdaq Capital Market under the symbol “VBFC.” Our common stock
is thinly traded and has substantially less liquidity than the average trading market for many other publicly
traded companies. Mr. Lehman’s significant share ownership also limits the number of shares available to
other investors and the liquidity of our common stock. We cannot assure you that a more active trading
market for our common stock will develop or be sustained. The development of a liquid public market
depends on the existence of willing buyers and sellers, the presence of which is not within our control. The
number of active buyers and sellers of our common stock at any particular time may be limited. Therefore,
our shareholders may not be able to sell their shares at the volume, prices, or times that they desire.
Shareholders should be financially prepared and able to hold shares for an indefinite period.
In addition, thinly traded stocks can be more volatile than more widely traded stocks. Our stock price has
been volatile in the past and several factors could cause the price to fluctuate substantially in the future.
28
These factors include, but are not limited to, changes in analysts’ recommendations or projections,
developments related to our business, operations, stock performance of other companies deemed to be
peers, news reports of trends, concerns, irrational exuberance on the part of investors, and other issues
related to the financial services industry. Our stock price may fluctuate significantly in the future, and these
fluctuations may be unrelated to our performance. General market declines or market volatility in the future,
especially in the financial institutions sector of the economy, could adversely affect the price of our common
stock, and the current market price may not be indicative of future market prices.
Our ability to pay dividends is limited, and we may be unable to pay future dividends.
Our ability to pay dividends is limited by regulatory restrictions and our need to maintain sufficient capital.
The ability of the Bank to pay dividends to the Company also will be limited by the Bank’s obligations to
maintain sufficient capital, earnings and liquidity and by other general restrictions on its dividends under
federal and state bank regulatory requirements. Under Virginia law, a bank may not declare a dividend in
excess of its accumulated retained earnings without approval by the BFI. As of December 31, 2020, the
Bank did not have any accumulated retained earnings. Any future financing arrangements that we enter
into may also limit our ability to pay dividends to our shareholders. If we do not satisfy these regulatory
requirements or arrangements, we will be unable to pay dividends on our common stock. Further, even if
we have earnings and available cash in an amount sufficient to pay dividends to our shareholders, the board
of directors, in its sole discretion, may decide to retain them and therefore not pay dividends in the future.
If we fail to pay interest on or otherwise default on our subordinated notes and subordinated debt
securities, we will be prohibited from paying dividends or distributions on our common stock.
As of December 31, 2020, we had $5,628,000 of net subordinated notes and $8,764,000 of subordinated
debt securities outstanding. The agreements under which the subordinated notes and subordinated debt
securities were issued prohibit us from paying any dividends on our common stock or making any other
distributions to our shareholders upon our failure to make any required payment of principal or interest or
during the continuance of an event of default under the applicable agreement. Events of default generally
consist of, among other things, certain events of bankruptcy, insolvency or liquidation relating to us. If we
were to fail to make a required payment of principal or interest on our subordinated notes or subordinated
debt securities, it could have a material adverse effect on the market value of our common stock.
Our governing documents and Virginia law contain anti-takeover provisions that could negatively
impact our shareholders.
Our articles of incorporation and bylaws and the Virginia Stock Corporation Act contain certain provisions
designed to enhance the ability of our board of directors to deal with attempts to acquire control of the
Company. These provisions, among others, provide that a plan of merger, share exchange, sale of all or
substantially all of our assets, or similar transaction must be approved and recommended by the affirmative
vote of two-thirds of the directors in office or by the affirmative vote of 80% or more of all of the votes
entitled to be cast on such transaction by each voting group entitled to vote, and limit the ability of
shareholders to call a special meeting. These provisions and the ability to set the voting rights, preferences
and other terms of any series of preferred stock that may be issued, may be deemed to have an anti-takeover
effect and may discourage takeovers (which certain shareholders may deem to be in their best interest). To
the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of our
common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also
could discourage or make more difficult a merger, tender offer or proxy contest, even though such
transactions may be favorable to the interests of shareholders, and could potentially adversely affect the
market price of our common stock.
29
Our largest shareholder, Kenneth R. Lehman, has significant influence over our business through his
share ownership and his interests may not align with the interests of other holders of our common stock.
According to the Form 4 filed by Mr. Lehman with the SEC on December 14, 2020, Mr. Lehman owns
768,379 shares, or approximately 52.39%, of the Company’s outstanding common stock. Due to this
ownership, he is able to influence the outcome of any matter submitted to a vote of our shareholders. In
addition, Mr. Lehman previously served on the boards of directors of the Company and the Bank and
management regularly seeks guidance and perspective from him given his extensive industry experience.
Mr. Lehman owns significant shares of other financial institutions, some of which may compete with us.
These affiliations may create conflicts of interest that could incentivize him to take or approve actions with
respect to other institutions that may have a negative impact on us (e.g. marketing efforts, product pricing,
lending policies, business combination transactions, etc.). While we believe Mr. Lehman’s significant
investment in the Company provides some protection in this regard, Mr. Lehman’s interests may not
directly align with the interests of other holders of our common stock.
If Mr. Lehman acquires more than 66.67% of the Company’s outstanding shares of common stock, it
will cause the acceleration of benefits under certain of our employment and benefit agreements, which
will cause us to incur additional compensation expenses.
Certain of our employment and benefit agreements include customary provisions that provide for additional
or accelerated compensation in the event of a change of control of the Company. If Mr. Lehman acquires
more than 66.67% of the Company’s outstanding shares of common stock, it will cause the acceleration of
benefits under some of these agreements. As described above, Mr. Lehman owned approximately 52.39%
of our outstanding common stock as of December 14, 2020.
Our stock incentive plan provides for “single-trigger” acceleration of change of control benefits, which
means certain employees will receive benefits upon a change of control of the Company, regardless of
whether the change of control affects their employment with the Company or any successor. These change
of control benefits include accelerated vesting of restricted stock awards. If Mr. Lehman’s ownership of
the Company’s common stock had exceeded 66.67% as of December 31, 2020, we would have recognized
approximately $837,000 in related compensation expenses in 2020.
Our change of control agreements provide for “double-trigger” acceleration of change of control benefits,
which means the benefits are only payable if the employee experiences a qualifying termination of
employment in connection with a change of control. Mr. Lehman’s acquisition of more than 66.67% of the
Company’s outstanding common stock would not automatically result in the payment or acceleration of
change of control benefits under these agreements. However, under certain circumstances, if the Company
were to terminate these employees or the employees were to voluntarily resign following Mr. Lehman’s
acquisition of more than 66.67% of the Company’s outstanding common stock, the Company would incur
significant additional expenses.
30
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2. PROPERTIES
Our executive and administrative offices are owned by the Bank and are located at 13319 Midlothian
Turnpike, Midlothian, Virginia 23113 in Chesterfield County. The current location also houses the
principal office of the Mortgage Company.
In addition to its executive offices, the Bank owns six full service branch buildings including the land on
those buildings and leases an additional three full service branch buildings. Three of our branch offices are
located in Chesterfield County, with two branch offices in Hanover County, two in Henrico County, one in
Powhatan County and one in James City County.
Our properties are maintained in good operating condition and we believe they are suitable and adequate
for our operational needs.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company is a party to various legal proceedings. As of the date
of this report, there are no pending or threatened proceedings against the Company that, if determined
adversely, would have a material effect on the business, results of operations, or financial position of the
Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
31
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Dividend Information
Shares of the Company’s common stock trade on the Nasdaq Capital Market under the symbol “VBFC”.
The Company has not paid any dividends on its common stock. We intend to retain all of our earnings to
finance the Company’s operations and we do not anticipate paying cash dividends in the near term. Any
decision made by the board of directors to declare dividends in the future will depend on the Company’s
future earnings, capital requirements, financial condition and other factors deemed relevant by the board.
A discussion of certain restrictions and limitations on the ability of the Bank to pay dividends to the
Company, and the ability of the Company to pay dividends to shareholders of its common stock, is set forth
in Item 1 – “Business” under “Supervision and Regulation.”
During 2019, the Company received approval from state and federal regulators allowing the Bank to pay a
special dividend, totaling $1,000,000, to the Company for the purpose of servicing the Company’s trust
preferred securities and subordinated debt.
During 2020, the Company received approval from state and federal regulators allowing the Bank to pay
two special dividends, totaling $1,250,000, to the Company for the purpose of servicing the Company’s
trust preferred securities and subordinated debt.
Holders
At March 1, 2021, there were 1,466,800 shares of common stock outstanding held by approximately 940
shareholders of record.
For information concerning the Company’s Equity Compensation Plans, see Item 12 – “Security Ownership
of Certain Beneficial Owners and Management and Related Shareholder Matters.”
Purchases of Equity Securities
The Company did not repurchase any of its common stock during 2020 or 2019.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and evaluating the financial
condition, changes in financial condition and the results of operations of the Company, consisting of the
parent company and its wholly-owned subsidiary, the Bank. This discussion should be read in conjunction
with the consolidated financial statements and other financial information contained elsewhere in this
report.
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
loan 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 loan 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 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, 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 the Mortgage Company 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;
•
•
•
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;
33
• natural disasters, war, terrorist activities, pandemics, and their effects on economic and business
•
environments in which the Company operates;
adverse effects due to COVID-19 on the Company and its customers, counterparties, employees,
and third-party service providers, and the adverse impacts to our business, financial position, results
of operations, and prospects;
changing trends in customer profiles and behavior; and
•
• other factors described from time to time in our reports filed with the SEC.
For additional information on factors that could materially influence the forward-looking statements
included in this report, see the risk factors in Item 1A – “Risk Factors” in this report. 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 income from mortgage banking
activities, 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 loan 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.
Response to COVID-19
As the circumstances with the COVID-19 pandemic began to unfold, the Company rapidly mobilized over
80% of non-branch team members to work-from-home, went to drive-thru only at our branches with lobby
access by appointment, and actively worked with borrowers to defer loan payments to allow operations to
return to some level of normalcy. With the continued uncertainty around the COVID-19 pandemic, we
continue to take the necessary measures to protect the health and wellbeing of our employees and customers
as well as working with our borrowers who continue to be impacted by the COVID-19 pandemic. We
continue to believe that we are well positioned to weather the economic storm created by the COVID-19
pandemic and have built the balance sheet around a philosophy of prudent risk taking.
Small Business Administration Paycheck Protection Program
The Company was successful in getting SBA PPP funds out to our community under the CARE Act, which
was designed to protect jobs and provide economic relief to small businesses that were negatively impacted
by the COVID-19 pandemic. Through December 31, 2020, the Bank had funded approximately $185
million in PPP loans, which provided essential funds to over 1,500 businesses and nonprofits and protected
more than 20,000 jobs in our community. As of December 31, 2020, the Bank had submitted 413
applications to the SBA for forgiveness totaling $63,251,000 and received proceeds of approximately
$47,987,000 on 345 of those applications. The Bank is participating in the second round of PPP funding
approved by Congress and signed into law by the President of the United States of America on December
27, 2020. The Bank expects the approval for forgiveness on PPP loans to pick up in the first half of 2021.
This will result in the recognition of unamortized deferred fee income, net of deferred cost, associated with
the PPP loans to occur at a higher rate in the first half of 2021 when compared to the second half of 2020.
34
Supporting customers through payment deferrals
In response to the COVID-19 pandemic, we began deferring payments for up to six months for impacted
customers under the CARES Act, as amended by the CAA, which permits financial institutions to suspend
requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise
be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made
between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19
emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31,
2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial
institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial
institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be
required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. As of
December 31, 2020, the Company had approximately $38.0 million in loans still under their modified terms.
The Company’s modification program primarily included payment deferrals and interest only
modifications. Below is a breakdown of the loan portfolio showing the percentage of loans deferred in each
category at the dates indicated (dollars in thousands):
Loan Type
December 31, 2020
Total commercial loans
Consumer/Residential
Student
Other
C&I + Owner occupied commercial real estate
Nonowner occupied commercial real estate
Acquisition, development and construction
Balance
2020(1)
$ 144,198
131,440
29,569
305,207
86,580
29,657
2,885
$ 424,329
September 30, 2020
Deferred Loans(2)
% Def
$ Def
19.22%
$ 27,715
33.97%
44,652
18.72%
5,534
25.52%
77,901
7.43%
6,434
0.00%
-
0.00%
-
19.87%
$ 84,335
(1) The table excludes PPP loans of $136,674 as the inclusion of these loans dilutes the impact of the deferral
program.
(2) The SBA provided a financial reprieve to small business as a result of the COVID-19 pandemic. The SBA
automatically paid the principal, interest, and fees on current SBA 7(a) loans for a period of six months. These
loans have been excluded from the September 30, 2020 metrics; however, as of December 31, 2020, six loans with
a total outstanding balance of $3,407,000 went into a deferred payment status and were included in the deferred
loan amount above.
Deferred Loans(2)
% Def
$ Def
$ 8,988
26,835
-
35,823
2,205
-
-
$ 38,028
6.23%
20.42%
0.00%
11.74%
2.55%
0.00%
0.00%
8.96%
Total loans
Below is a breakdown of the loan portfolio showing the percentage of loans in deferral within select industry
categories at the dates indicated (dollars in thousands):
Select Industries
Hotels
Food Service
Retail(2)
Medical and Child Care
Real Estate and Leasing
Arts and Entertainment
Total
December 31, 2020
Balance
2020
$ 29,718
20,300
20,273
12,149
147,103
7,602
$ 237,145
Deferred Loans(1)
$ Def
$ 24,979
606
3,782
-
2,833
2,024
$ 34,224
Amount
84.05%
2.99%
18.66%
0.00%
1.93%
26.62%
14.43%
September 30, 2020
Deferred Loans(1)
$ Def
20,568
7,413
3,804
2,724
29,329
5,968
$ 69,806
Amount
69.21%
36.52%
18.76%
22.42%
19.94%
78.51%
29.44%
(1) The SBA provided a financial reprieve to small business as a result of the COVID-19 pandemic. The SBA
automatically paid the principal, interest, and fees on current SBA 7(a) loans for a period of six months. These
loans have been excluded from the September 30, 2020 metrics; however, as of December 31, 2020, six loans with
a total outstanding balance of $3,407,000 went into a deferred payment status and were included in the deferred
loan amount and number above.
(2) Loans within this group include business such as grocery, convenience stores, drug stores, consumer durables,
apparel, and personal services.
35
Liquidity Risk Management
Over the past eight years, the Company has worked to fund the balance sheet with core deposits and reserve
wholesale funding capacity for short periods of rapid loan growth or for crises such as the current economic
environment.
During the three month period ended March 31, 2020, the Company took aggressive measures to bolster its
liquidity to ensure it could meet customer demands in the event customers made significant deposit
withdrawals and fully drew on lines of credit. The Company increased liquid assets by $20,155,000, or
30.12% from $66,904,000 at December 31, 2019 to $87,059,000 at March 31, 2020 which was partially
accomplished by raising an additional $3,733,000 in internet listing service time deposits, $15,000,000 in
FHLB advances and $6,136,000 in brokered time deposits, which were at zero at December 31, 2019.
From March 31, 2020 through December 31, 2020, the Company did not experience excessive demand for
deposit withdrawals or advances under lines of credit; however, the Company did experience significant
growth in low cost relationship deposits (i.e. noninterest bearing, NOW, money market and savings). This
growth in low cost relationship deposits was the result of the Company converting a significant portion of
non-customer PPP loan applicants into customers and the migration of customer funds from time deposits
into money market deposits during the periods. During this period, the Company acquired $45,120,000 in
funds through the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to support
the origination of PPP loans. As of December 31, 2020, the PPPLF totaled $41,529,000. As a result of the
growth in low cost relationship deposits, the Company prepaid its remaining $31,000,000 in FHLB
advances during the three month period ended December 31, 2020.
As of December 31, 2020, the Company had on balance sheet liquid assets of $84,295,000, which the
Company believes are sufficient to cover its current liquidity needs. However, if the need were to arise the
Company could access liquidity of approximately $95,145,000 in the PPPLF through March 31, 2021, it
could pledge additional collateral to the FHLB in order to increase its available borrowing capacity up to
25% of assets, it could access the two federal funds lines of credit with correspondent banks totaling
$15,000,000, and it could add additional funding through raising internet listing service and brokered time
deposits. There were no borrowings with the FHLB or against the lines of credit at December 31, 2020.
Capital Risk Management
The Bank remains in a strong, well-capitalized position with a common equity Tier 1 capital ratio of
13.35%, a Tier 1 risk-based capital ratio of 13.35%, a total risk-based capital ratio of 14.20% and a leverage
ratio of 9.28% as of December 31, 2020. The most significant risk to capital as a result of the COVID-19
pandemic is the risk of default within our loan portfolio and the potential loan losses as a result of those
defaults. The Company has taken several steps to mitigate this risk to our capital by building a diversified
loan portfolio over the years to be capable of sustaining through a crisis, working with our customers during
this time to defer loan payments for up to six months to allow time for economic stabilization and
participating in the SBA PPP loan program to help provide much needed funds to our borrowers and the
community. While there will be pressure on capital levels as a result of the COVID-19 pandemic, the
Company believes the actions we are taking will protect our capital levels and allow the Company to support
all stakeholders through this difficult time.
While the long-term economic impacts from the COVID-19 pandemic are unknown at this time, we believe
that our culture of disciplined and conservative risk taking across the balance sheet has the Company well
positioned to not only carry through the current crisis but to be a pillar of support for our employees, our
customers, and our communities.
36
Results of Operations
The following presents management’s discussion and analysis of the financial condition of the Company at
December 31, 2020 and 2019, and results of operations for the Company for the years ended December 31,
2020 and 2019. This discussion should be read in conjunction with the Company’s audited Consolidated
Financial Statements and the notes thereto appearing elsewhere in this Annual Report.
Summary
The Company recorded net income of $8,554,000, or $5.86 per fully diluted share, in 2020, compared to
net income of $4,477,000, or $3.10 per fully diluted share, in 2019.
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”) is calculated by dividing tax equivalent net interest income by average
interest-earning assets. Generally, the net interest margin will exceed the net interest spread because a
portion of interest-earning assets are funded by various noninterest-bearing sources, principally noninterest-
bearing deposits and shareholders’ equity.
2020
Year Ended December 31,
2019
(dollars in thousands)
Change
Average interest-earning assets
Interest income
Yield on interest-earning assets
Average interest-bearing liabilities
Interest expense
Cost of interest-bearing liabilities
Net interest income
Net interest margin
4.12%
$ 626,868 $ 494,003
$ 25,826 $ 23,487
4.75%
$ 420,516 $ 360,560
$ 4,433 $ 5,330
1.48%
$ 18,157
3.68%
1.05%
$ 21,393
3.41%
$ 132,865
$ 2,339
(0.63)%
$ 59,956
$ (897)
(0.42)%
$ 3,236
(0.26)%
Interest income on earning assets increased by $2,339,000 compared to the same period in 2019 as a result
of the following:
• During 2020, the Company originated $185,137,000 in PPP loans which resulted in SBA fees of
$6,584,000. The SBA fee is being amortized, based on the term of the loan through net income, net of
$1,052,000 in deferred costs associated with the origination of the PPP loans. The recognition of the
fees, net of deferred costs, will be accelerated as loans are forgiven by the SBA. As of December 31,
2020, the Bank had recognized through interest income $2,762,000 in SBA fee income, net of deferred
costs as a result of normal amortization and the receipt of $47,987,000 in funds from loans forgiven by
the SBA.
• The yield on average earning assets contracted by 63 basis points to 4.12% for the year-ended December
31, 2020 vs. 4.75% for the year-ended December 31, 2019, primarily because of the 150 basis points
Federal Reserve rate cut in March 2020 and the significant level of PPP loans originated by the Bank
during 2020.
37
Interest expense on interest-bearing liabilities decreased by $897,000 compared to the same period in 2019
as a result of the following:
• The cost of interest bearing liabilities dropped by 42 basis points to 1.05% for the year-ended December
31, 2020 compared to 1.48% for the year-ended December 31, 2019, as a result of the Company’s
continued efforts to build low cost relationship deposits and its disciplined approach to deposit pricing.
Low cost relationship deposits grew by $86,372,000, or 49.42%, from December 31, 2019, while higher
cost time deposits decreased by $32,275,000, or 23.52%, from December 31, 2019.
The following table illustrates 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 have no tax exempt assets for the periods presented.
Average Balance Sheets, Income and Expense, Yields and Rates
Year Ended December 31, 2020
Year Ended December 31, 2019
Loans
Commercial
Real estate – residential
Real estate – commercial
Real estate – construction
Student loans
Consumer
Gross loans
Investment securities
Loans held for sale
Federal funds and other
Total interest earning assets
Allowance for loan losses
Cash and due from banks
Premises and equipment, net
Other assets
Total assets
Interest bearing deposits
Interest checking
Money market
Savings
Certificates
Total deposits
Borrowings
Long-term debt - trust
preferred securities
FHLB advances
Subordinated debt, net
Other borrowings
Total interest bearing liabilities
Noninterest bearing deposits
Other liabilities
Total liabilities
Equity capital
Total liabilities and capital
Net interest income before
provision for loan losses
Interest spread - average yield
on interest earning assets,
less average rate on
interest bearing liabilities
Net interest margin
(net interest income
expressed as a percentage
of average earning assets)
Yield
Rate
Average
Balance
Interest
Income/
Expense
$ 1,935
4,896
11,090
1,624
1,792
169
21,506
1,117
539
325
23,487
Yield
Rate
4.75%
5.47%
5.12%
4.65%
4.94%
7.47%
5.12%
2.49%
4.06%
2.09%
4.75%
$ 40,772
89,542
216,482
34,932
36,312
2,261
420,301
44,853
13,279
15,570
494,003
(3,064)
9,960
13,464
18,843
$ 533,206
Interest
Income/
Expense
$ 5,826
4,304
11,094
1,450
1,339
190
24,203
983
581
59
25,826
Average
Balance
$ 162,160
87,554
227,979
32,789
31,646
2,834
544,962
41,140
18,415
22,351
626,868
(3,618)
9,607
12,735
20,683
$ 666,275
56,817
133,386
28,554
130,643
349,400
96
830
48
2,124
3,098
228
603
403
101
4,433
8,773
27,785
5,610
28,948
420,516
192,660
5,527
618,703
47,572
$ 666,275
3.59%
4.92%
4.87%
4.42%
4.23%
6.70%
4.44%
2.39%
3.16%
0.26%
4.12%
0.17%
0.62%
0.17%
1.63%
0.89%
2.60%
2.17%
7.18%
0.35%
1.05%
48,123
101,037
23,381
150,513
323,054
85
838
40
2,889
3,852
372
692
403
11
5,330
8,779
22,693
5,578
456
360,560
127,667
4,868
493,095
40,111
$ 533,206
0.18%
0.83%
0.17%
1.92%
1.19%
4.24%
3.05%
7.22%
2.41%
1.48%
3.27%
3.68%
$ 21,393
$ 18,157
3.06%
3.41%
38
Interest income and interest expense are affected by changes in both average interest rates and average
volumes of interest-earning assets and interest-bearing liabilities. The following table analyzes changes in
net interest income attributable to changes in the volume of interest-sensitive assets and liabilities compared
to changes in interest rates. Nonaccrual loans are included in average loans outstanding. The changes in
interest due to both rate and volume have been allocated to changes due to volume and changes due to rate
in proportion to the relationship of the absolute dollar amounts of the changes in each (dollars in thousands).
2020 vs. 2019
Increase (Decrease)
Due to Changes in
Rate
Total
Volume
Interest income
Loans
Investment securities
Loans held for sale
Fed funds sold and other
Total interest income
$ 3,925
(90)
99
264
4,198
$ (1,228)
(44)
(57)
(530)
(1,859)
$ 2,697
(134)
42
(266)
2,339
Interest expense
Deposits
Interest checking
Money market accounts
Savings accounts
Certificates of deposit
Total deposits
14
(36)
9
(354)
(367)
(3)
28
(1)
(411)
(386)
11
(8)
8
(765)
(754)
Borrowings
Long-term debt
FHLB Advances
Subordinated debt, net
Other borrowings
Total interest expense
-
(144)
312 (401)
-
-
90
-
(932)
36
(144)
(89)
-
90
(897)
Net interest income
$ 4,162
$ (927)
$ 3,236
Provision for loan losses
The amount of the loan loss provision is determined by an evaluation of the level of loans outstanding, the
level of nonperforming loans, historical loan loss experience, delinquency trends, underlying collateral
values, the amount of actual losses charged to the reserve in a given period and assessment of present and
anticipated economic conditions.
The level of the allowance reflects changes in the size of the portfolio or in any of its components as well
as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, and present economic, political and regulatory conditions.
Portions of the allowance may be allocated for specific credits; however, the entire allowance is available
for any credit that, in management’s judgment, should be charged off. While management utilizes its best
judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of
factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the
economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Company recorded a provision for loan losses of $950,000 for the year ended December 31, 2020, as
a result of growth in the loan portfolio and an increase in the qualitative factors due to the anticipated
economic impact of COVID-19. The increase in the qualitative factors due to COVID-19 were a result of
deterioration in local economic factors such as the higher levels of unemployment and the increased credit
risk due to loan payment deferrals under the CARES Act. The Company believes the current level of
39
allowance for loan loss reserves are adequate to cover incurred losses. However, the full economic impact
of the COVID-19 pandemic remains unknown and the Company will continue to monitor the loan portfolio
for indicators that would warrant additional provisions for loan losses through 2021 and beyond. The
Company recorded a provision for loan losses of $135,000 for the year ended December 31, 2019 because
of an increase in the specific reserves associated with a relationship evaluated individually for impairment.
For more financial data and other information about the provision for loan losses refer to section, “Balance
Sheet Analysis” under this Item 7 – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”, and Note 4 “Allowance for Loan Losses” in the “Notes to Consolidated Financial
Statements” contained in Item 8 of this Form 10-K.
Noninterest income
Noninterest income includes service charges and fees on deposit accounts, fee income related to loan
origination, gains and losses on sale of mortgage loans and securities held for sale. The most significant
noninterest income item has been mortgage banking income, net of commissions, representing 79% for the
year ended December 31, 2020 and 64% for the year ended December 31, 2019.
For the Year Ended
December 31,
2020
2019
Change
$
%
(dollars in thousands)
Service charges and fees
Mortgage banking income, net
Gain on sale of asset held for sale
Gain on sale of investment securities
Gain on sale of SBA loans
Other
Total noninterest income
$ (26)
(1.2)%
$ 2,073 $ 2,099
93.1%
4,693
5,039
9,732
1 100.0%
-
1
(88.1)%
(89)
101
12
(70.1)%
(202)
288
86
(10.5)%
341
(40)
381
54.8%
$ 12,245 $ 7,908 $ 4,337
• The increase in mortgage banking income, net is a result of increased loan originations and sales
compared to the prior year due to the low rate environment.
• The Company sold approximately $8,000,000 and $6,500,000 in investment securities resulting in a
net gain of $12,000 and $101,000 during the years ended December 31, 2020 and 2019, respectively.
• The Company made the decision not to sell any SBA loan guarantee strips after the first quarter of 2020
which resulted in the recognition of $86,000 for the year ended December 31, 2020, compared to the
recognition of $288,000 gain on sale for the year ended December 31, 2019.
Noninterest expense
Noninterest expense includes all expenses of the Company with the exception of interest expense on
deposits and borrowings, provision for loan losses and income taxes. Some of the primary components of
noninterest expense are salaries and benefits, occupancy and equipment costs and professional and outside
services. Over the last two years, the most significant noninterest expense item has been salaries and
benefits, representing 62% and 60% of noninterest expense in 2020 and 2019, respectively.
40
For the Year Ended
December 31,
2020
2019
$
(dollars in thousands)
Change
%
Salaries and benefits
Occupancy
Equipment
Write down of assets held for sale
Supplies
Professional and outside services
Advertising and marketing
Foreclosed assets, net
FDIC insurance premium
Loss on debt extinguishment
Other operating expense
Total noninterest expense
$ 12,920 $ 12,241
1,290 1,346
852
881
22
-
188
193
3,104 3,036
293
365
17
(149)
158
217
-
696
2,137 2,131
$ 21,649 $ 20,289
$ 679
(56)
29
(22)
(5)
68
72
(166)
59
696
6
$ 1,360
5.5%
(4.2)%
3.4%
(100.0)%
(2.6)%
2.2%
24.6%
(976.5)%
37.3%
100%
0.3%
6.7%
• The increase in salaries and benefits expense of $679,000 was primarily driven by an increase in
expenses related to mortgage production, as well as an increase in employee count to support several
initiatives including expanding treasury management services, supporting information technology
growth, and resources supporting PPP loan administration. These increases were offset by the deferral
of $1,052,000 in salary and benefits costs associated with the origination of over 1,500 PPP loans during
2020. The deferred costs will be recognized over the life of the PPP loans as a component of interest
income along with the origination fees. This level of deferred costs is not expected to be recognized in
future quarters and the recognition of the deferred costs and fees will accelerate as PPP loans are
forgiven or repaid.
• The decrease in foreclosed assets, net expense was the result of the sale of two foreclosed properties
resulting in a gain of $175,000 during 2020.
• The increase in the FDIC insurance premium is related to the receipt of the small bank credit from the
FDIC during 2019.
• The Loss on debt extinguishment during 2020 was the result of the Company prepaying the
$31,000,000 outstanding of its FHLB advances during three month period ended December 31, 2020.
This pre-payment resulted in the recognition of approximately $696,000 in prepayment fees. The pre-
payment of the advances will save the Company approximately $983,000 in interest expense over the
remaining life of those advances, and will save approximately $519,000 in interest expense during
2021.
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 difference and available tax credits. Income tax expense for the years
ended December 31, 2020 and 2019, was $2,485,000 and $1,164,000, respectively, resulting in an effective
tax rate of 22.5% and 20.6%, respectively. The increase in the effective tax rate was primarily related to a
reduction in the tax credit received related to state taxes attributed to the Company and the mortgage
banking segment. The Bank is not subject to Virginia income taxes, and instead is subject to a franchise
tax based on bank capital.
The Company has a net deferred tax asset which is included in other assets on the balance sheet. For more
financial data and other information about income taxes refer to Note 1 “Summary of Significant
Accounting Policies” and Note 9 “Income Taxes” in the “Notes to Consolidated Financial Statements”
contained in Item 8 of this Form 10-K.
41
Balance Sheet Analysis
Investment securities
At December 31, 2020 and 2019, all of our investment securities were classified as available for sale.
For more financial data and other information about investment securities refer to Note 1 “Summary of
Significant Accounting Policies” and Note 2 “Investment Securities Available for Sale” in the “Notes to
Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
Loans
One of management’s objectives is to improve the quality of the loan portfolio. The Company seeks to
achieve this objective by maintaining 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.
Approximately 62% of all loans are secured by mortgages on real property located principally in the
Commonwealth of Virginia. Approximately 5% 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 32% 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.
The following tables present the composition of our loan portfolio at the dates indicated (dollars in
thousands).
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
Total loans
Deferred fees and costs, net
Less: allowance for loan losses
December 31, 2020
Amount
%
December 31, 2019
Amount
%
$ 8,103
21,466
29,569
1.44%
3.82%
5.26%
$ 7,887
24,063
31,950
1.84%
5.60%
7.44%
99,784
121,184
9,889
367
231,224
17.79%
21.60%
1.75%
0.07%
41.21%
98,353
116,508
13,332
156
228,349
22.91%
27.14%
3.10%
0.04%
53.19%
18,394
3.28%
21,509
5.01%
57,089
11,097
86,580
10.18%
1.98%
15.44%
55,856
10,411
87,776
13.01%
2.43%
20.45%
181,088
29,657
2,885
32.28%
5.29%
0.52%
45,074
33,525
2,621
10.50%
7.81%
0.61%
100.0%
561,003
(2,048)
(3,970)
$ 554,985
100.0%
429,295
764
(3,186)
$ 426,873
42
The Bank originated $185,137,000 in PPP loans as of December 31, 2020. These loans have provided
essential funds to approximately 1,500 businesses and nonprofits and protected more than 20,000 jobs in
our community. The Bank is participating in the second round of PPP funding approved by Congress and
signed into law by the President of the United States of America on December 27, 2020. The processing
fees earned on the PPP loans will help to support the Bank’s loan deferral program and potential credit
losses associated with the COVID-19 pandemic. Below is a breakdown of PPP loans by loan size as of
December 31, 2020 (dollars in thousands):
Loan Size
< $350,000
$350,000 - $2 million
> $2 million
# of Loans
$ of Loans
1,172 $ 72,526
57 41,046
6 23,102
Total
1,235 $ 136,674
For more financial data and other information about loans refer to Note 1 “Summary of Significant
Accounting Policies” and Note 3 “Loans” in the “Notes to Consolidated Financial Statements” contained
in Item 8 of this Form 10-K.
Allowance for loan losses
We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses inherent in
the loan portfolio. For more financial data and other information about loans refer to Note 1 “Summary of
Significant Accounting Policies” and Note 4 “Allowance for Loan Losses” in the “Notes to Consolidated
Financial Statements” contained in Item 8 of this Form 10-K.
Asset quality
The following table summarizes asset quality information at the dates indicated (dollars in thousands).
Nonaccrual loans
Foreclosed properties
Total nonperforming assets
Restructured loans (not included in
nonaccrual loans above)
Loans past due 90 days and still
accruing (1)
Nonperforming assets to loans (2)
Nonperforming assets to total assets
Allowance for loan losses to
nonaccrual loans
December 31,
2020
2019
$ 1,577 $ 1,868
336
526
$ 1,913 $ 2,394
$ 6,550 $ 7,059
$ 2,193 $ 2,567
0.34%
0.27%
0.56%
0.44%
251.75%
170.57%
(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.
43
Nonperforming assets totaled $1,913,000 at December 31, 2020, compared to $2,394,000 at December 31,
2019. Nonperforming assets at December 31, 2020 consisted primarily of $1,577,000 in nonaccrual loans,
compared to $1,868,000 at December 31, 2019
The following table presents an analysis of the changes in nonperforming assets for 2020 (in thousands).
Nonaccrual
Loans
OREO
Total
Balance December 31, 2019
Additions
Loans placed back on accrual
Transfers to OREO
Repayments
Charge-offs
Sales
$ 2,394
$ 526
$ 1,868
-
1,446
1,446
- (1,080)
(1,080)
-
-
-
- (191)
(191)
(482)
(466)
(16)
(174)
- (174)
Balance December 31, 2020
$ 1,577
$ 336
$ 1,913
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 six 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 nonaccrual 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 in
nonaccrual 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.
There were no specific allowances associated with the total nonaccrual loans of $1,577,000 at December
31, 2020 that were considered impaired. This compares to $1,868,000 in nonaccrual loans at December
31, 2019 of which one loan had specific allowances for loan losses of $135,000. This loan was charged off
during 2020.
Cumulative interest income that would have been recorded had nonaccrual loans been performing would
have been $84,000 and $136,000 for 2020 and 2019, respectively. Student loans totaling $2,193,000 and
$2,567,000 at December 31, 2020 and 2019, 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 loan losses.
44
Deposits
The following table gives the composition of our deposits at the dates indicated (dollars in thousands).
December 31, 2020
%
Amount
December 31, 2019
%
Amount
Demand accounts
Interest checking accounts
Money market accounts
Savings accounts
Time deposits of $250,000 and over
Other time deposits
$ 222,305 37.8%
70,342 11.9%
152,726 26.0%
6.5%
38,083
16,014
2.7%
88,912 15.1%
$ 131,228 29.6%
48,427 10.9%
99,955 22.6%
6.0%
26,396
22,327
5.0%
114,875 25.9%
Total
$ 588,382 100.0%
$ 443,208 100.0%
Total deposits increased by $145,174,000, or 32.76%, from December 31, 2019. Variances of note are as
follows:
• Noninterest bearing demand account balances increased $91,077,000 from December 31, 2019, and
represented 37.78% of total deposits at December 31, 2020 compared to 29.61% as of December 31,
2019. The increase in noninterest bearing deposits from December 31, 2019 was primarily a result of
the Bank converting a significant portion of non-customer PPP loan applicants into customers.
• Low cost relationship deposits (i.e. interest checking, money market, and savings) balances increased
$86,372,000, or 49.42%, from December 31, 2019. The increase in these accounts during 2020 was
primarily a result of continued growth in accounts from non-customer PPP loan applicants and the
migration of customer funds from time deposits.
• Time deposits decreased by $32,275,000, or 23.52%, from December 31, 2019. The decrease in time
deposits was a result of our disciplined approached to deposit pricing to reduce our overall cost of
funds and the migration of customers from time deposits to lower cost deposit products.
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 money market conditions.
Borrowings
The Company prepaid all $31 million of its outstanding FHLB advances during the three month period
ended December 31, 2020. This pre-payment resulted in the recognition of a loss on debt extinguishment
of approximately $696,000. The pre-payment of the advances will save the Company approximately
$983,000 in interest expense over the remaining life of those advances, and will save approximately
$519,000 in interest expense during 2021.
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 8 “Borrowings” in the “Notes to
Consolidated Financial Statements” contained in Item 8 of this Form 10-K.
45
Off-balance sheet arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business
to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.
For more financial data and other information about loans refer to Note 12 “Commitments and
Contingencies” in the “Notes to Consolidated Financial Statements” contained in Item 8 of this Form 10-
K.
Capital resources
Shareholders’ equity at December 31, 2020 was $51,996,000, compared to $42,914,000 at December 31,
2019. The $9,082,000 increase in shareholders’ equity during 2020 is primarily due to net income for the
year of $8,554,000.
The following table presents the composition of regulatory capital and the capital ratios for the Bank at the
dates indicated (dollars in thousands).
Tier 1 capital
Total bank equity capital
Net unrealized gain on available-for-sale securities
Defined benefit postretirement plan
Disallowed deferred tax asset
Total Tier 1 capital
Tier 2 capital
Allowance for loan losses
Tier 2 capital deduction
Total Tier 2 capital
Total risk-based capital
Risk-weighted assets
Average assets
Capital ratios
December 31,
2020
2019
$ 62,183
(466)
36
-
61,753
$ 53,768
(186)
44
(759)
52,867
3,186
3,970
- (1,400)
1,786
3,970
65,723
54,653
$ 462,690
$ 435,082
$ 665,172
$ 545,567
Leverage ratio (Tier 1 capital to average assets)
Common equity tier 1 capital ratio (CET 1)
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Equity to total assets
9.28%
13.35%
13.35%
14.20%
8.81%
9.69%
12.15%
12.15%
12.56%
10.00%
For more financial data and other information about capital resources refer to Note 13 “Shareholders’
Equity and Regulatory Matters” and Note 15 “Trust Preferred Securities” in the “Notes to Consolidated
Financial Statements” contained in Item 8 of this Form 10-K.
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
46
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 December 31, 2020 and 2019, our liquid assets, consisting of cash, cash equivalents and investment
securities available for sale, totaled $84,295,000 and $66,904,000, or 11.94% and 12.38% of total assets,
respectively. Investment securities traditionally provide a secondary source of liquidity since they can be
converted into cash in a timely manner.
Our holdings of liquid assets plus the ability to maintain and expand our deposit base and borrowing
capabilities serve as our principal sources of liquidity. We plan to meet our future cash needs through the
liquidation of temporary investments, the generation of deposits, and from additional borrowings. In
addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities.
We maintain two federal funds lines of credit with correspondent banks totaling $15 million for which there
were no borrowings against at December 31, 2020 and $5,317,000 borrowings against the lines at December
31, 2019.
We are also a member of the Federal Home Loan Bank of Atlanta (“FHLB”), 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 December 31, 2020 was $50.3 million, based on the Bank's
qualifying collateral available to secure any future borrowings. However, we are able to pledge additional
collateral to the FHLB in order to increase our available borrowing capacity up to 25% of assets.
We also have access to the Federal Reserve’s PPPLF, from which applications for borrowings can be made.
The Federal Reserve requires that PPP loans be pledged to secure any advances from the PPPLF. The
Company currently has $41,529,000 in borrowings against the PPPLF and an unused borrowing capacity
of $95,145,000 based on unpledged PPP loans available to secure any future borrowings. The Company
has access to this facility until March 31, 2021 at which time the Federal Reserve will no longer take
requests for borrowings.
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 December 31, 2020, we had commitments to originate $150,974,000 of loans. Fixed commitments to
incur capital expenditures were approximately $400,000 at December 31, 2020. Certificates of deposit
scheduled to mature or reprice in the 12-month period ending December 31, 2021 total $75,413,000. 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
47
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.
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
Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer
persuade or require banks to submit rates for LIBOR after 2021, central banks and regulators around the
world have commissioned working groups to find suitable replacements for Interbank Offered Rates
(“IBOR”) and other benchmark rates and to implement financial benchmark reforms more generally. These
actions have resulted in uncertainty regarding the use of alternative reference rates (“ARRs”) and could
cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial
results.
To facilitate an orderly transition from IBORs and other benchmark rates to ARRs, the Company has
established a company-wide initiative led by senior management. The objective of this initiative is to
identify and assess the Company’s exposure and develop an appropriate action plan to address this exposure
prior to transition.
Critical Accounting Policies and Estimates
General
The accounting and reporting policies of the Company and the Bank are in accordance with GAAP and
conform to general practices within the banking industry. The Company’s financial position and results of
operations are affected by management’s application of accounting policies, including estimates,
assumptions and judgments made to arrive at the carrying value of assets and liabilities, and amounts
reported for revenues, expenses and related disclosures. Different assumptions in the application of these
policies could result in material changes in the Company’s consolidated financial position and/or results of
operations.
The more critical accounting and reporting policies include the Company’s accounting for the allowance
for loan losses and income taxes. The Company’s accounting policies are fundamental to understanding
the Company’s consolidated financial position and consolidated results of operations. Accordingly, the
Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant
48
Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Item 8 of this Form
10-K.
The following is a summary of the Company’s critical accounting policies that are highly dependent on
estimates, assumptions, and judgments.
Allowance for loan losses
We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses inherent in
the loan portfolio. We maintain policies and procedures that address the systems of controls over the
following areas of maintenance of the allowance: the systematic methodology used to determine the
appropriate level of the allowance to provide assurance they are maintained in accordance with GAAP; the
accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in
the loan portfolio; and the loan grading system.
The allowance reflects management’s best estimate of probable losses within the existing loan portfolio
and of the risk inherent in various components of the loan portfolio, including loans identified as impaired
as required by Financial Accounting Standards Board Codification Topic 310: Receivables. Loans
evaluated individually for impairment include nonperforming loans, such as loans on nonaccrual, loans past
due by 90 days or more, restructured loans and other loans selected by management. The evaluations are
based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is
individually impaired, then a specific reserve is established for the amount of impairment.
Loans are grouped by similar characteristics, including the type of loan, the assigned loan classification and
the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived
based upon historical net charge-off rates, the predominant collateral type for the group and the terms of
the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors
and other conditions of the portfolio of loans and leases, including: borrower and industry concentrations;
levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk
selection; level of experience, ability and depth of lending management; and national and local economic
conditions.
The amounts of estimated impairment for individually evaluated loans and groups of loans are added
together for a total estimate of loan losses. This estimate of losses is compared to our allowance for loan
losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional
provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree
to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside
a range of estimates. We recognize the inherent imprecision in estimates of losses due to various
uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate
of losses is derived and evaluated by management. If different assumptions or conditions were to prevail
and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an
additional provision for loan losses would be made, which amount may be material to the financial
statements.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. If current
available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may
be established. Management considers the determination of this valuation allowance to be a critical
accounting policy due to the need to exercise significant judgment in evaluating the amount and timing of
recognition of deferred tax liabilities and assets, including projections of future taxable income. These
49
judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A
valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through
loss carry forwards decline, or if management projects lower levels of future taxable income.
New accounting standards
For information regarding recent accounting pronouncements and their effect on us, see “New Accounting
Pronouncements” in Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated
Financial Statements” contained in Item 8 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related footnotes of the Company are presented following.
50
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Village Bank and Trust Financial Corp.
Midlothian, Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Village Bank and Trust Financial Corp.
and its subsidiary (the Corporation) as of December 31, 2020 and 2019, the related consolidated statements
of income, comprehensive income, shareholders' equity and cash flows for the years then ended, and the
related notes to the consolidated financial statements (collectively, the financial statements). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Corporation as
of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is to
express an opinion on the Corporation’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the
financial statements that was communicated or required to be communicated to the audit committee and
that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
51
especially challenging, subjective, or complex judgments. The communication of critical audit matters does
not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing separate opinions on the critical audit matter or
on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Qualitative Factors
As described in Note 1 – Summary of Significant Accounting Policies and Note 4 – Allowance for Loan
Losses to the consolidated financial statements, the Corporation maintains an allowance for loan losses that
represents management’s best estimate of probable losses inherent in the loan portfolio. For loans that are
not specifically identified for impairment, management determines the allowance for loan losses based on
historical loss experience adjusted for qualitative factors. Qualitative adjustments to the historical loss
experience are established by applying a loss percentage to the loan segments established by management
based on their assessment of shared risk characteristics within groups of similar loans.
Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions
underlying the quality of the loan portfolio. Management evaluates qualitative factors by loan segment,
primarily considering changes in lending policies and procedures, current economic conditions, the nature
and volume of loans, the experience and depth of the lending team, delinquency trends, the loan review
system, collateral values, the existence and effect of concentrations, and other external factors. Qualitative
factors contribute significantly to the allowance for loan losses. Management exercised significant
judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified
the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved
especially complex and subjective auditor judgment in evaluating management’s assessment of the
inherently subjective estimates.
The primary audit procedures we performed to address this critical audit matter included:
• Substantively testing management’s process, including evaluating their judgments and assumptions for
developing the qualitative factors, which included:
o Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.
o Evaluating the reasonableness of management’s judgments related to the determination of
qualitative factors.
o Evaluating the qualitative factors for directional consistency and for reasonableness.
o Testing the mathematical accuracy of the allowance calculation, including the application of the
qualitative factors.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company's auditor since 2018.
Richmond, Virginia
March 19, 2021
52
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
December 31, 2020 and 2019
(in thousands, except share and per share data)
2020
2019
$ 12,709
30,742
43,451
40,844
825
34,421
$ 19,967
-
19,967
46,937
2,035
12,722
561,003
(3,970)
(2,048)
554,985
336
-
11,779
7,806
4,943
6,846
429,295
(3,186)
764
426,873
526
514
12,036
7,612
2,597
8,494
$ 706,236
$ 540,313
$ 222,305
366,077
588,382
-
8,764
5,628
41,529
194
9,743
654,240
$ 131,228
311,980
443,208
29,000
8,764
5,595
5,317
221
5,294
497,399
5,794
54,510
(8,738)
(771)
771
430
51,996
5,779
54,285
(17,292)
(856)
856
142
42,914
$ 706,236
$ 540,313
Assets
Cash and due from banks
Federal funds sold
Total cash and cash equivalents
Investment securities available for sale, at fair value
Restricted stock, at cost
Loans held for sale
Loans
Outstandings
Allowance for loan losses
Deferred fees and costs, net
Total loans, net
Other real estate owned, net of valuation allowance
Assets held for sale
Premises and equipment, net
Bank owned life insurance
Accrued interest receivable
Other assets
Total Assets
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest bearing demand
Interest bearing
Total deposits
Federal Home Loan Bank advances
Long-term debt - trust preferred securities
Subordinated debt, net
Other borrowings
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' equity
Common stock, $4 par value, 10,000,000 shares authorized;
1,466,516 shares issued and outstanding at December 31, 2020 and
1,435,009 shares issued and outstanding at December 31, 2019
Additional paid-in capital
Accumulated deficit
Stock in directors rabbi trust
Directors deferred fees obligation
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
53
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2020 and 2019
(in thousands, except per share data)
2020
2019
$ 24,784
983
59
25,826
$ 22,045
1,117
325
23,487
3,098
1,335
4,433
3,852
1,478
5,330
21,393
950
18,157
135
20,443
18,022
2,073
9,732
1
12
86
341
12,245
2,099
5,039
-
101
288
381
7,908
12,920
1,290
881
-
188
3,104
365
(149)
217
696
2,137
21,649
12,241
1,346
852
22
193
3,036
293
17
158
-
2,131
20,289
11,039
2,485
5,641
1,164
8,554
4,477
$ 5.86
$ 5.86
$ 3.10
$ 3.10
Interest income
Loans
Investment securities
Federal funds sold
Total interest income
Interest expense
Deposits
Borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Noninterest income
Service charges and fees
Mortgage banking income, net
Gain on sale of asset held for sale
Gain on sale of investment securities, net
Gain on sale of Small Business Administration loans
Other
Total noninterest income
Noninterest expense
Salaries and benefits
Occupancy
Equipment
Write down of assets held for sale
Supplies
Professional and outside services
Advertising and marketing
Foreclosed assets, net
FDIC insurance premium
Loss on debt extinguishment
Other operating expense
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per share, basic
Earnings per share, diluted
See accompanying notes to consolidated financial statements.
54
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020 and 2019
(in thousands)
Net income
Other comprehensive income
Unrealized holding gains arising during the period
Tax effect
Net change in unrealized holding gains on
securities available for sale, net of tax
Reclassification adjustment
Reclassification adjustment for gains
realized in income
Tax effect
Reclassification for gains included
in net income, net of tax
Minimum pension adjustment
Tax effect
Minimum pension adjustment, net of tax
Total other comprehensive income
Total comprehensive income
See accompanying notes to consolidated financial statements.
2020
2019
$ 8,554
$ 4,477
365
(77)
1,218
(256)
288
962
(12)
3
(101)
21
(9)
(80)
14
(5)
9
14
(5)
9
288
891
$ 8,842
$ 5,368
55
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2020 and 2019
(in thousands)
Balance, December 31, 2018
Restricted stock redemption
Vesting of restricted stock
Stock based compensation
Expiration of common stock warrant
Net income
Other comprehensive income
Balance, December 31, 2019
Vesting of restricted stock
Stock based compensation
Net income
Other comprehensive income
Balance, December 31, 2020
Common
Stock
$ 5,707
-
72
-
-
-
$ 5,779
15
-
-
-
$ 5,794
Additional
Paid-in
Capital
$ 53,212
-
(72)
413
732
-
-
$ 54,285
(15)
240
-
-
$ 54,510
Accumulated
Deficit
$ (21,769)
-
-
-
4,477
-
$ (17,292)
Common
Stock
Warrant
Stock in
Directors
Rabbi Trust
Directors
Deferred
Fees
Obligation
Accumulated
Other
Comprehensive
Income (Loss)
Total
$ 732
-
-
-
(732)
-
-
$ -
$ (883)
27
-
-
$ 883
(27)
-
-
$ (749)
-
-
-
$ 37,133
-
-
413
-
-
$ (856)
-
-
$ 856
-
891
$ 142
4,477
891
$ 42,914
-
-
8,554
-
$ (8,738)
-
-
-
-
$ -
85
-
-
-
$ (771)
(85)
-
-
-
$ 771
-
-
-
288
$ 430
-
240
8,554
288
$ 51,996
56
Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2020 and 2019
(in thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization
Amortization of debt issuance costs
Deferred income taxes
Provision for loan losses
Write-down of other real estate owned
Gain on sale of investment securities
Gain on sales of loans held for sale
Gain on sale of assets held for sale
Gain on sale of other real estate owned
Losses on debt extinguishment
Stock compensation expense
Proceeds from sale of mortgage loans
Origination of mortgage loans held for sale
Amortization of premiums and accretion of discounts on securities, net
Increase in bank owned life insurance
Net change in:
Interest receivable
Other assets
Interest payable
Other liabilities
Net cash (used in) provided by operating activities
Cash Flows from Investing Activities
Purchases of available for sale securities
Proceeds from the sale of available for sale securities
Proceeds from the sale of assets held for sale
Proceeds from maturities, calls and paydowns of available for sale securities
Net increase in loans
Proceeds from sale of other real estate owned
Purchases of premises and equipment, net
Redemptions (purchase) of restricted stock, net
Net cash used in investing activities
Cash Flows from Financing Activities
Net increase in deposits
Proceeds from issuance (repayments) of Federal Home Loan Bank advances
Net increase in other borrowings
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
2020
2019
$
8,554
$
4,477
586
32
2,393
950
16
(12)
(11,703)
(1)
(175)
696
240
361,393
(371,389)
209
(194)
(2,346)
(810)
(27)
4,449
(7,139)
(11,914)
7,936
515
10,227
(129,062)
349
(329)
1,210
(121,068)
145,174
(29,696)
36,213
151,691
23,484
19,967
644
32
1,197
135
40
(101)
(6,205)
-
-
-
413
203,108
(203,497)
218
(171)
65
(2,366)
-
2,156
145
(13,352)
6,491
-
5,177
(14,916)
-
(225)
(374)
(17,199)
4,161
8,000
5,317
17,478
424
19,543
Cash and cash equivalents, end of period
$
43,451
$
19,967
Supplemental Disclosure of Cash Flow Information
Cash payments for interest
Supplemental Schedule of Non-Cash Activities
Unrealized gains on securities available for sale
Right of use assets obtained in exchange for new operating lease liabilities
Minimum pension adjustment
See accompanying notes to consolidated financial statements.
$
5,156
$
3,958
$
$
$
353
303
14
$
$
$
1,117
1,405
14
57
Village Bank and Trust Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of Village Bank and Trust Financial Corp. and subsidiary (the
“Company”) conform to accounting principles generally accepted in the United States of America
(“GAAP”) and to general practice within the banking industry. The following is a description of the more
significant of those policies:
Business
The Company is the holding company of Village Bank (the “Bank”). The Bank opened to the public on
December 13, 1999 as a traditional community bank offering deposit and loan services to individuals and
businesses in the Richmond, Virginia metropolitan area. In 2017, the Bank entered the Williamsburg,
Virginia market by opening a full service branch. Village Bank Mortgage Corporation (the “Mortgage
Company”) is a full service mortgage banking company wholly-owned by the Bank.
The Bank is subject to regulations of certain federal and state agencies and undergoes periodic examinations
by those regulatory authorities. As a consequence of the extensive regulation of commercial banking
activities, the Bank’s business is susceptible to being affected by state and federal legislation and
regulations.
The majority of the Company’s real estate loans are collateralized by properties in the Richmond, Virginia
metropolitan area. Accordingly, the ultimate collectability of those loans collateralized by real estate is
particularly susceptible to changes in market conditions in the Richmond area.
Basis of presentation and consolidation
The consolidated financial statements include the accounts of the Company, the Bank and the Mortgage
Company. All material intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year financial statements to conform to current year
presentation. The results of the reclassifications are not considered material.
Use of estimates
The preparation of the consolidated financial statements in conformity with 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 balance sheets dates and revenues and expenses during the
reporting 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 loan losses and
its related provision, including impaired loans, the valuation of deferred tax assets, and the estimate of the
fair value of assets held for sale.
Securities
At the time of purchase, debt securities are classified into the following categories: held to maturity,
available for sale or trading. Debt securities that the Company has both the positive intent and ability to
hold to maturity are classified as held to maturity. Held to maturity securities are stated at amortized cost
adjusted for amortization of premiums and accretion of discounts on purchase using a method that
approximates the effective interest method. Investments classified as trading or available for sale are stated
at fair value. Changes in fair value of trading investments are included in current earnings while changes
in fair value of available for sale investments are excluded from current earnings and reported, net of taxes,
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as a separate component of other comprehensive income. Presently, the Company does not maintain a
portfolio of trading securities or held to maturity.
The fair value of investment securities available for sale is estimated based on quoted prices for similar
assets determined by bid quotations received from independent pricing services. Declines in the fair value
of securities below their amortized cost that are other than temporary are reflected in earnings or other
comprehensive income, as appropriate. For those debt securities whose fair value is less than their amortized
cost basis, we consider our intent to sell the security, whether it is more likely than not that we will be
required to sell the security before recovery and if we do not expect to recover the entire amortized cost
basis of the security. In analyzing an issuer’s financial condition, we may consider whether the securities
are issued by the federal government or its agencies, whether downgrades by bond rating agencies have
occurred and the results of reviews of the issuer’s financial condition.
Restricted stock, at cost. The Company is required to maintain an investment in the capital stock of certain
correspondent banks. The Company’s investment in these securities is recorded at cost.
Interest income is recognized when earned. Realized gains and losses for securities classified as available-
for-sale are included in earnings and are derived using the specific identification method for determining
the cost of securities sold.
Mortgage Banking and Derivatives
Loans held for sale. The Company, through the Bank’s mortgage banking subsidiary, the Mortgage
Company, 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. During
the first quarter of 2020, the Company elected to begin using fair value accounting for its entire portfolio
of loans held for sale (“LHFS”) in accordance with Accounting Standards Codification (“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 $34.4 million as of December 31, 2020, of which $32.9 million is related to
unpaid principal. The Company’s portfolio of LHFS is classified as Level 2. These loans were previously
carried as of December 31, 2019 at the lower of cost or estimated fair value on an aggregate basis as
determined by outstanding commitments from investors and totaled $12.7 million.
Interest Rate Lock Commitments and Forward Sales Commitments. The Company, through the
Mortgage Company, 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 (“IRLCs”). 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 December 31,
2020, and totaled $1.6 million, with a notional amount of $38.9 million and total positions of 150. The fair
value of IRLCs was considered immaterial at December 31, 2019. Changes in fair value are recorded as a
component of mortgage banking income, net in the Consolidated Income Statement for the period ended
December 31, 2020. The Company’s IRLCs are classified as Level 2. At December 31, 2020 and December
31, 2019, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.
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During the first quarter of 2020, the Company elected to begin using fair value accounting for its forward
sales commitments related to IRLCs and LHFS under ASC 825-10-15-4(b). The fair value of forward sales
commitments is reported in “Other Liabilities” in the Consolidated Balance Sheet at December 31, 2020,
and totaled $3.1 million, with a notional amount of $71.7 million and total positions of 289. The fair value
of the forward sales commitments was considered immaterial at December 31, 2019.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from
the Bank and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or
other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity
or the ability to unilaterally cause the holder to return specific assets. Our transfers of financial assets are
limited to commercial loan participations sold, which were insignificant for 2020 and 2019, and the sale of
residential mortgage loans in the secondary market; the extent of which are disclosed in the Consolidated
Statements of Cash Flows.
Loans
Loans are stated at the principal amount outstanding, net of unearned income. Loan origination fees and
certain direct loan origination costs are deferred and amortized to interest income over the life of the loan
as an adjustment to the loan’s yield over the term of the loan.
A loan’s past due status is based on the contractual due date of the most delinquent payment dates. Interest
is accrued on outstanding principal balances, unless the Company considers collection to be doubtful.
Commercial and unsecured consumer loans are designated as nonaccrual when payment is delinquent 90
days or at the point which the Company considers collection doubtful, if earlier. Mortgage loans and most
other types of consumer loans past due 90 days or more may remain on accrual status if management
determines that such amounts are collectible. When loans are placed in nonaccrual 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 as long as the remaining recorded investment
in the loan is deemed fully collectible. Loans may be placed back on accrual status when, in the opinion of
management, the circumstances warrant such action such as a history of timely payments subsequent to
being placed on nonaccrual status, additional collateral is obtained or the borrowers cash flows improve.
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. The total contractual amount of standby letters
of credit, whose contract amounts represent credit risk, was approximately $4,934,000 at December 31,
2020 and approximately $6,732,000 at December 31, 2019.
Below is a summary of the current loan segments:
Construction and land development loans consist primarily of loans for the purchase or refinance of
unimproved lots or raw land. Additionally, the Company finances the construction of real estate projects
typically where the permanent mortgage will remain with the Company. Specific underwriting guidelines
are delineated in the Bank’s loan policies. Construction and land development loans carry risks that the
project will not be finished according to schedule, the project will not be finished according to budget and
the value of the collateral may, at any point in time, be less than the principal amount of the loan.
Construction loans also bear the risk that the general contractor, who may or may not be a loan customer,
may be unable to finish the construction project as planned because of financial pressure unrelated to the
project.
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Commercial real estate loans are subject to underwriting standards and processes similar to commercial
and industrial loans, in addition to those specific to real estate loans. These loans are viewed primarily as
cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically
involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on
the successful operation of the property securing the loan or the business conducted on the property securing
the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate
markets or in the general economy. Management monitors and evaluates commercial real estate loans based
on cash flows, collateral, geography and risk grade criteria. Commercial real estate loans carry risks
associated with the successful operation of a business or a real estate project, in addition to other risks
associated with the ownership of real estate, because the repayment of these loans may be dependent upon
the profitability and cash flows of the business or project.
Consumer real estate loans include consumer purpose 1-to-4 family residential properties and home
equity loans. Consumer purpose loans have underwriting standards that are heavily influenced by statutory
requirements, which include, but are not limited to, documentation requirements, limits on maximum loan-
to-value percentages, and collection remedies. Loans to finance 1-4 family investment properties are
primarily dependent upon rental income generated from the property and secondarily supported by the
borrower’s personal income. The Company typically originates residential mortgages through our mortgage
company and these loans are sold to secondary mortgage market correspondents. Consumer real estate
loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value
of the collateral.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s
ability to operate profitably and prudently expand its business. Management examines current and projected
cash flows to determine the ability of borrowers to repay their obligations as agreed. Commercial and
industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on
the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as
expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial
loans are secured by the assets being financed or other business assets such as accounts receivable,
inventory or marketable securities and may incorporate personal guarantees; however, some short-term
loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the
availability of funds for the repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers. Government guaranteed balances represent Small
Business Administration (“SBA”) loans originated by the Bank according to SBA guidelines.
Consumer and other loans are generally small loans spread across many borrowers and are underwritten
after determining the ability of the consumer borrower to repay their obligations as agreed. The
underwriting standards are influenced by credit history, ability to repay, and loan-to-value. Consumer loans
may be secured or unsecured and are comprised of revolving lines, installment loans and other consumer
loans. Consumer and other loans carry risks associated with the continued credit-worthiness of the borrower
and the value of the collateral, or lack thereof. Consumer loans are more likely than real estate loans to be
immediately adversely affected by job loss, divorce, illness or personal bankruptcy.
Guaranteed student loans The Bank purchases Federal Rehabilitated Student Loan portfolios when
approved by the Board of Directors. These loans are guaranteed by the U.S. Department of Education
(“DOE”) which covers approximately 98% of the principal and interest. These loans are serviced by a third
party servicer that specializes in handling these types of loans.
We also purchase the guaranteed portion of United State Department of Agriculture Loans (“USDA”)
which are guaranteed by the USDA for 100% of the principal and interest. The originating institution holds
the unguaranteed portion of the loan and services the loan. These loans are typically purchased at a
premium. In the event of a loan default or early prepayment the Bank may need to write off any unamortized
premium. These loans are included in the commercial and industrial loan segment.
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Allowance for loan losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision
for loan losses charged to earnings. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is probable. Subsequent recoveries, if any, are credited to the
allowance.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable
losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance
is based on evaluations of the collectability of loans while taking into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions which may affect a borrower’s
ability to repay, overall portfolio quality, and review of specific potential losses. This evaluation is
inherently subjective, as it requires estimates that are susceptible to significant revision as more information
becomes available.
The allowance consists of general and specific components. The general component covers non-classified
loans and is based on historical loss experience and risk characteristics (i.e. trends in delinquencies and
other nonperforming loans, changes in economic conditions on both a local and national level, and changes
in the categories of loans comprising the loan portfolio) adjusted for qualitative factors. The specific
component relates to loans that we have concluded, based on the value of collateral, guarantees and any
other pertinent factors, have known losses. For such loans that are also classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to
cover uncertainties that could affect management’s estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment
record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis by either the present value of the expected future cash flows discounted
at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Troubled debt restructurings
A loan or lease is accounted for as a TDR if we, for economic or legal reasons related to the borrower’s
financial condition, grant a significant concession to the borrower that we would not otherwise consider.
A TDR may involve the receipt of assets from the debtor in partial or full satisfaction of the loan or lease,
or a modification of terms such as a reduction of the stated interest rate or balance of the loan or lease, a
reduction of accrued interest, an extension of the maturity date at a stated interest rate lower than the current
market rate for a new loan with similar risk, or some combination of these concessions. TDRs generally
remain categorized as nonperforming loans and leases until a six-month payment history has been
maintained.
In accordance with current accounting guidance, loans modified as troubled debt restructurings are, by
definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-loan basis
similar to other impaired loans as described above under “Allowance for loan losses”. Certain loans
modified as TDRs may have been previously measured for impairment under a general allowance
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methodology (i.e., pooling), thus at the time the loan is modified as a TDR the allowance will be impacted
by the difference between the results of these two measurement methodologies. Loans modified as TDRs
that subsequently default are factored into the determination of the allowance in the same manner as other
defaulted loans.
Loan modifications made under the March 22 Joint Guidance and CARES Act, as amended by the CAA,
were suspended from TDR evaluation.
Other real estate owned
Real estate acquired through or in lieu of foreclosure is initially recorded at estimated fair value less
estimated selling costs establishing a new cost basis. Subsequent to the date of acquisition, it is carried at
the lower of cost or fair value, adjusted for net selling costs. If fair value declines subsequent to foreclosure
a valuation allowance is recorded through expense. Operating costs after acquisition are expensed as
incurred. The valuation allowance was $10,000 and $52,000 at December 31, 2020 and 2019, respectively.
Costs relating to the development and improvement of such property are capitalized when appropriate,
whereas those costs relating to holding the property are expensed.
Assets held for sale
There were no assets held for sale at December 31, 2020. Assets held for sale at December 31, 2019 included
a branch building we previously closed. The Company periodically evaluates the value of assets held for
sale and records an impairment charge for any subsequent declines in fair value less selling costs.
Premises and equipment
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation of buildings and improvements is computed using the straight-line method over
the estimated useful lives of the assets of 39 years. Depreciation of equipment is computed using the
straight-line method over the estimated useful lives of the assets ranging from three to seven years.
Amortization of premises (leasehold improvements) is computed using the straight-line method over the
term of the lease or estimated lives of the improvements, whichever is shorter.
Supplemental Executive Retirement Plan
The Company recognizes the unfunded status of its Supplemental Executive Retirement Plan (the “SERP”)
as a liability in its Consolidated Balance Sheets, measured at the projected benefit obligation as of
December 31, 2020 and 2019. Net periodic pension costs are recorded each period based on actuarially
determined amounts in accordance with GAAP and recognized in salaries and employment benefits in the
Consolidated Statements of Income. Actuarial determinations of net periodic pension cost are based on
assumptions related to discount rates, employee compensation and mortality and interest crediting rates.
Other changes in the status of the plan are recorded in the year in which the changes occur through other
comprehensive income.
Income taxes
Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying
enacted tax rates applicable to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on recorded deferred income taxes of a change
in tax laws or rates is recognized in income in the period that includes the enactment date. To the extent
that available evidence about the future raises doubt about the realization of a deferred income tax asset, a
valuation allowance is established. A tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax examination being presumed
to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of
being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
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is recorded. Interest and penalties associated with unrecognized tax benefits are classified as taxes other
than income in the statement of income. The Company has no uncertain tax positions.
Consolidated statements of cash flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, due from banks
(including cash items in process of collection), interest-bearing deposits with banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods. Cash flows from loans originated by
the Bank for investment and deposits are reported net. The Company did not pay income taxes in 2020 and
2019.
Comprehensive income
Total comprehensive income consists of net income and other comprehensive income. At December 31,
2020 and 2019, the accumulated other comprehensive income was comprised of unrealized gains on
securities available for sale of $466,000 and $186,000 and unfunded pension liability of ($36,000) and
($44,000) net of tax, respectively.
Earnings per common share
Basic earnings per common share represent net income available to common shareholders, which represents
net income less dividends paid or payable to preferred stock shareholders, divided by the weighted-average
number of common shares outstanding during the period, inclusive of unvested restricted shares (Note 10).
For diluted earnings per common share, net income available to common shareholders is divided by the
weighted average number of common shares issued and outstanding for each period plus amounts
representing the dilutive effect of stock options, as well as any adjustment to income that would result from
the assumed issuance. The effects of stock options and warrants are excluded from the computation of
diluted earnings per common share in periods in which the effect would be antidilutive. Stock options and
warrants are antidilutive if the underlying average market price of the stock that can be purchased for the
period is less than the exercise price of the option or warrant. Potential dilutive common shares that may
be issued by the Company relate solely to outstanding stock options and warrants and are determined using
the treasury stock method.
Stock incentive plan
On May 26, 2015, the Company’s shareholders approved the adoption of the Village Bank and Trust
Financial Corp. 2015 Stock Incentive Plan (the “2015 Plan”) authorizing the issuance of up to 60,000 shares
of common stock. On May 19, 2020, the Company’s shareholders approved an amendment to the 2015
Plan authorizing the issuance of up to 120,000 shares of common stock. See Note 14 for more information
on the 2015 Plan.
Fair values of financial instruments
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer
that liability in an orderly transaction between market participants. A fair value measurement assumes that
the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the asset or liability. The price
in the principal (or most advantageous) market used to measure the fair value of the asset or liability (exit
price) shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities that are
usual and customary for transactions involving such assets and liabilities; it is not a forced transaction.
Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able
to transact and willing to transact. See Note 18 for the methods and assumptions the Bank uses in estimating
fair values of financial instruments.
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Revenue recognition
The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as
a result of the adoption of ASU 2014-09. The following discussion is of revenues that are within the scope
of the new revenue guidance:
• Debit and credit interchange fee income - Card processing fees consist of interchange fees from
consumer debit and credit card networks and other card related services. Interchange fees are based
on purchase volumes and other factors and are recognized as transactions occur.
• Service charges on deposit accounts - Revenue from service charges on deposit accounts is earned
through deposit-related services, as well as overdraft, non-sufficient funds, account management
and other deposit related fees. Revenue is recognized for these services either over time,
corresponding with deposit accounts’ monthly cycle, or at a point in time for transactional related
services and fees.
• Service charges on loan accounts - Revenue from loan accounts consists primarily of fees earned
on prepayment penalties. Revenue is recognized for the services at a point in time for transactional
related services and fees.
• Gains/Losses on sale of OREO - The Company records a gain or loss from the sale of OREO when
control of the property transfers to the buyer, which generally occurs at the time of an executed
deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether
the buyer is committed to perform their obligations under the contract and whether collectability
of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized
and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.
• Gains/Losses on sale of assets held for sale – The Company records a gain or loss from the sale of
assets held for sale when control of the property transfers to the buyer, which generally occurs at
the time of an executed deed. When the Company finances the sale of assets held for sale to the
buyer, the Company assess whether the buyer is committed to perform their obligations under the
contract and whether collectability of the transaction price is probably. Once these criteria are met,
the asset held for sale is derecognized and the gain or loss on sale is recorded upon transfer of
control of the property to the buyer.
Segments
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 LHFS, gains on sales of loans in the secondary mortgage market, and loan origination fee
income, net of commissions paid.
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. See additional information at Note 19, Segment Reporting.
Recent accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other
things, require the measurement of all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. Financial
institutions and other organizations will now use forward-looking information to better inform their credit
loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the
inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the
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ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial
assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic
326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have
provided for various minor technical corrections and improvements to the codification as well as other
transition matters. Smaller reporting companies who file with the SEC and all other entities who do not
file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years,
beginning after December 15, 2022. While the Company is currently evaluating the provisions of ASU
2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated
Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such
as forming an internal task force, gathering pertinent data, consulting with outside professionals, and
evaluating its current IT systems. The Company is currently assessing the impact that ASU 2016-13 will
have on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Changes to the
Disclosure Requirements for Fair Value Measurement”. ASU 2018-13 modifies the disclosure requirements
on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted
average of significant unobservable inputs used to develop those fair value measurements. For certain
unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average
if the entity determines that other quantitative information would be a more reasonable and rational method
to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. Certain
disclosure requirements in Topic 820 were also removed or modified. ASU 2018-13 was effective for the
Company on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the
Company’s consolidated financial statements.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) 119. SAB 119 updated
portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit
Losses.” It covers topics including (1) measuring current expected credit losses; (2) development
governance, and documentation of systematic methodology; (3) documenting the results of a systematic
methodology; and (4) validating a systematic methodology.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the
Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the
accounting for income taxes by removing specific exceptions to general principles in Topic 740
(eliminating the need for an organization to analyze whether certain exceptions apply in a given period)
and improving financial statement preparers’ application of certain income tax-related guidance. This ASU
is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to
accounting standards through a series of short-term projects. For public business entities, the amendments
are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal
years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will
have on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321),
Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) –
Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a
consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for
these transactions. ASU 2020-01 amends ASU 2016-01, which made targeted improvements to accounting
for financial instruments, including providing an entity the ability to measure certain equity securities
without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from
observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Among other topics, the amendments in ASU 2020-01 clarify that an entity should consider observable
transactions that require it to either apply or discontinue the equity method of accounting. For public
business entities, the amendments in the ASU are effective for fiscal years beginning after December 31,
2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not
expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.
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In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional
guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional
expedients and exceptions for applying generally accepted accounting principles to contract modifications
and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference
rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference
rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31,
2022. Subsequently, in January 20201, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic
848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for
contract modifications and hedge accounting apply to derivatives that are affected by the
discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to
capture the incremental consequences of the scope clarification and to tailor the existing guidance
to derivative instruments affected by the discounting transition. An entity may elect to apply ASU
No. 2021-01 on contract modifications that change the interest rate used for margining,
discounting, or contract price alignment retrospectively as of any date from the beginning of the
interim period that includes March 12, 2020, or prospectively to new modifications from any date
within the interim period that includes or is subsequent to January 7, 2021, up to the date that
financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to
eligible hedging relationships existing as of the beginning of the interim period that includes March
12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim
period that includes March 12, 2020.The Company has a team to assess ASU 2020-04 and its impact on
the Company’s transition away from LIBOR for its loan and other financial instruments.
In March 2020 (Revised in April 2020), various regulatory agencies, including the Federal Reserve and the
FDIC, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial
institutions working with customers affected by COVID-19. The interagency statement was effective
immediately and impacted accounting for loan modifications. Under ASC 310-40, “Receivables – Troubled
Debt Restructurings by Creditors,” a restructuring of debt constitutes a TDR if the creditor, for economic
or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would
not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications
made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are
not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment
deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
Borrowers considered current are those that are less than 30 days past due on their contractual payments at
the time a modification program is implemented. In August 2020, a joint statement on additional loan
modifications was issued. Among other things, the Interagency Statement addresses accounting and
regulatory reporting considerations for loan modifications, including those accounted for under Section
4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act was signed
into law on March 27, 2020 to help support individuals and businesses through loans, grants, tax changes
and other types of relief. The most significant impacts of the Act related to accounting for loan
modifications and establishment of the Paycheck Protection Program (“PPP”). On December 21, 2020, the
Consolidated Appropriates Act of 2021 (“CAA”) was passed. The CAA extends or modifies many of the
relief programs first created by the CARES Act, including the PPP and treatment of certain loan
modifications related to the COVID-19 pandemic. As of December 31 2020, the Company had a total of
$3,259,000 in loans past due greater than 30 days all of which were rehabilitated student loans which have
a 98% guarantee by the DOE of principal and interest. For more financial data and other information about
loan deferrals refer to section, “Response to COVID-19” under Item 2 – “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”. This interagency guidance is expected to have
an impact on the Company’s financial statements; however, this impact cannot be quantified at this time.
In August 2020, the FASB issued ASU 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for
convertible instruments by removing major separation models required under current GAAP.
67
Consequently, more convertible debt instruments will be reported as a single liability instrument and more
convertible preferred stock as a single equity instrument with no separate accounting for embedded
conversion features. The ASU removes certain settlement conditions that are required for equity contracts
to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The
ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment
updates the disclosure requirements for convertible instruments to increase the information transparency.
For public business entities, excluding smaller reporting companies, the amendments in the ASU are
effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.
For all other entities, including the Company, the standard will be effective for fiscal years beginning after
December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The
Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated
financial statements.
In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20,
Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate
whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting
period. For public business entities, the ASU is effective for fiscal years beginning after December 15,
2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should
apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or
newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to
have a material impact on its consolidated financial statements.
Note 2. Investment Securities Available for Sale
The amortized cost and fair value of investment securities available for sale as of December 31, 2020 and
2019 are as follows (in thousands):
December 31, 2020
U.S. Government agency obligations
Mortgage-backed securities
Subordinated debt
December 31, 2019
U.S. Government agency obligations
Mortgage-backed securities
Subordinated debt
Gross
Gross
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$ 8,048
23,412
8,795
$ 40,255
$ 14,797
25,124
6,779
$ 94
645
37
$ -
(51)
(136)
$ 8,142
24,006
8,696
$ 776
$ (187)
$ 40,844
$ 57
204
91
$ (9)
(26)
(80)
$ 14,845
25,302
6,790
$ 46,700
$ 352
$ (115)
$ 46,937
At December 31, 2020 and December 31, 2019, the Company had no investment securities pledged to
secure borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”).
Gross realized gains and losses pertaining to available for sale securities are detailed as follows for the years
ended December 31, 2020 and 2019 (in thousands):
Gross realized gains
Gross realized losses
December 31,
2020
$ 54
(42)
2019
$ 101
-
$ 12
$ 101
68
The Company sold approximately $8,000,000 and $6,500,000 in 2020 and 2019, respectively, of investment
securities available for sale at a gain of $12,000 in 2020 and $101,000 in 2019. The sales of these securities,
which had fixed interest rates, allowed the Company to decrease its exposure to upward movement in
interest rates that would result in unrealized losses being recognized in shareholders’ equity.
Investment securities available for sale that had an unrealized loss position at December 31, 2020 and
December 31, 2019 are detailed below (in thousands):
Securities in a loss
position for less than
12 Months
Securities in a loss
position for more than
12 Months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
5,475
1,747
(51)
(11)
-
2,807
-
(125)
5,475
4,554
(51)
(136)
$ 7,222
$ (62)
$ 2,807
$ (125)
$ 10,029
$ (187)
December 31, 2020
Mortgage-backed securities
Subordinated debt
December 31, 2019
U.S. Government agency obligations
Mortgage-backed securities
Subordinated debt
$ 2,001
2,747
759
$ (1)
(26)
(6)
$ 5,368
-
940
$ (8)
-
(74)
$ 7,369
2,747
1,699
$ (9)
(26)
(80)
$ 5,507
$ (33)
$ 6,308
$ (82)
$ 11,815
$ (115)
As of December 31, 2020, there were $2.8 million, or five issues, of individual available for sale securities
that had been in a continuous loss position for more than 12 months. These securities had an unrealized
loss of $125,000 and consisted of Subordinated debt.
As of December 31, 2019, there were $6.3 million, or 10 issues, of individual available for sale securities
that had been in a continuous loss position for more than 12 months. These securities had an unrealized
loss of $82,000 and consisted of U.S. Government agency obligations, and subordinated debt.
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 does not consider these investments to be other than temporarily impaired at
December 31, 2020.
The amortized cost and estimated fair value of investment securities available for sale as of December 31,
2020, by contractual maturity, are as follows (in thousands):
Amortized
Cost
Fair Value
Less than one year
One to five years
Five to ten years
More than ten years
$ 6,110 $ 6,145
310
315
10,524 10,473
23,311 23,911
Total
$ 40,255 $ 40,844
69
Note 3. Loans
Loans classified by type as of December 31, 2020 and 2019 are as follows (dollars in thousands):
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
Total loans
Deferred fees and costs, net
Less: allowance for loan losses
December 31, 2020
%
Amount
December 31, 2019
%
Amount
$ 8,103
21,466
29,569
1.44%
3.82%
5.26%
$ 7,887
24,063
31,950
1.84%
5.60%
7.44%
99,784
121,184
9,889
367
231,224
17.79%
21.60%
1.75%
0.07%
41.21%
98,353
116,508
13,332
156
228,349
22.91%
27.14%
3.10%
0.04%
53.19%
18,394
3.28%
21,509
5.01%
57,089
11,097
86,580
10.18%
1.98%
15.44%
55,856
10,411
87,776
13.01%
2.43%
20.45%
181,088
29,657
2,885
32.28%
5.29%
0.52%
45,074
33,525
2,621
10.50%
7.81%
0.61%
100.0%
561,003
(2,048)
(3,970)
$ 554,985
429,295
764
(3,186)
$ 426,873
100.0%
The Bank has a purchased portfolio of rehabilitated student loans guaranteed by the 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.
The Bank originated $185,137,000 in loans under the SBA’s Paycheck Protection Program (“PPP”) as of
December 31, 2020. These loans have provided essential funds to approximately 1,500 businesses and
nonprofits and protected more than 20,000 jobs in our community. The Bank is participating in the second
round of PPP funding approved by Congress and signed into law by the President of the United States of
America on December 27, 2020. The processing fees earned on the PPP loans will help to support the
Bank’s loan deferral program and potential credit losses associated with the COVID-19 pandemic. Below
is a breakdown of PPP loans by loan size as of December 31, 2020 (dollars in thousands):
Loan Size
< $350,000
$350,000 - $2 million
> $2 million
Total
# of Loans
$ of Loans
1,172 $ 72,526
57 41,046
6 23,102
1,235 $ 136,674
Loans pledged as collateral with the FHLB as part of their lending arrangements with the Company totaled
$65,587,000 and $49,736,000 as of December 31, 2020 and 2019, respectively.
70
The following is a summary of loans directly or indirectly with executive officers or directors of the
Company for the years ended December 31, 2020 and 2019 (in thousands):
2020
2019
Beginning balance
Additions
Effect of changes in composition of related parties
Reductions
$ 5,323
11,228
(287)
(11,592)
$ 5,201
8,751
-
(8,629)
Ending balance
$ 4,672
$ 5,323
Executive officers and directors also had unused credit lines totaling $1,507,000 and $2,806,000 at
December 31, 2020 and 2019, respectively. Based on management’s evaluation all loans and credit lines
to executive officers and directors were made in the ordinary course of business at the Company’s normal
credit terms, including interest rate and collateralization prevailing at the time for comparable transactions
with other persons.
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.
The following table provides information on nonaccrual loans segregated by type at the dates indicated
(dollars in thousands):
Commercial real estate
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
December 31,
2020
December 31,
2019
$ 303
303
$ 497
497
300
300
630
317
1,247
842
63
1,205
27
166
Total loans
$ 1,577
$ 1,868
The Company assigns risk rating classifications to its loans. These risk ratings are divided into the
following groups:
• Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These assets
generally are well protected by the current net worth and paying capacity of the obligor or by the value
of the asset or underlying collateral;
• Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close
attention;
71
• Risk rated 6 loans are inadequately protected by the current sound worth and paying capacity of the
obligor or of the collateral pledged, if any; and
• Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics
that the weaknesses make collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable.
The following tables provide information on the risk rating of loans at the dates indicated (in thousands):
December 31, 2020
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
Risk Rated
1-4
Risk Rated
5
Risk Rated
6
Risk Rated
7
Total
Loans
$ 8,103
21,370
29,473
$ -
96
96
$ -
-
-
$ -
-
-
$ 8,103
21,466
29,569
88,066
116,161
9,889
367
214,483
9,405
4,244
-
-
13,649
2,313
779
-
-
3,092
-
-
-
-
-
99,784
121,184
9,889
367
231,224
17,298
796
300
-
18,394
53,731
9,425
80,454
2,212
1,236
4,244
1,146
436
1,882
-
-
-
57,089
11,097
86,580
178,217
29,657
2,844
2,602
-
41
269
-
-
-
-
-
181,088
29,657
2,885
Total loans
$ 536,336
$ 20,632
$ 5,243
$ -
$ 561,003
December 31, 2019
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
Risk Rated
1-4
Risk Rated
5
Risk Rated
6
Risk Rated
7
Total
Loans
$ 7,887
23,758
31,645
$ -
-
-
$ -
305
305
$ -
-
-
$ 7,887
24,063
31,950
90,146
115,781
13,186
71
219,184
8,072
230
146
85
8,533
135
497
-
-
632
-
-
-
-
-
98,353
116,508
13,332
156
228,349
20,486
723
300
-
21,509
53,200
10,130
83,816
1,660
167
2,550
996
114
1,410
-
-
-
55,856
10,411
87,776
41,837
33,525
2,621
2,891
-
-
346
-
-
-
-
-
45,074
33,525
2,621
Total loans
$ 412,628
$ 13,974
$ 2,693
$ -
$ 429,295
72
The following tables present the aging of the recorded investment in past due loans as of the dates indicated
(in thousands):
December 31, 2020
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Current
Total
Loans
Recorded
Investment >
90 Days and
Accruing
$ -
-
-
$ -
-
-
$ -
-
-
$ -
-
-
$ 8,103
21,466
29,569
$ 8,103
21,466
29,569
$ -
-
-
86
-
-
-
86
-
-
-
-
-
-
-
-
-
-
86
-
-
-
86
99,698
121,184
9,889
367
231,138
99,784
121,184
9,889
367
231,224
-
-
-
-
-
-
-
-
-
18,394
18,394
-
133
-
133
57
57
-
-
-
133
57
190
56,956
11,040
86,390
57,089
11,097
86,580
-
-
-
25
1,428
1
-
1,009
-
-
2,193
-
25
4,630
1
181,063
25,027
2,884
181,088
29,657
2,885
-
2,193
-
Total loans
$ 1,673
$ 1,066
$ 2,193
$ 4,932
$ 556,071
$ 561,003
$ 2,193
December 31, 2019
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Guaranteed student loans
Consumer and other
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Current
Total
Loans
Recorded
Investment >
90 Days and
Accruing
$ -
-
-
$ -
-
-
$ -
-
-
$ -
-
-
$ 7,887
24,063
31,950
$ 7,887
24,063
31,950
$ -
-
-
701
-
-
-
701
-
-
-
-
-
-
-
-
-
-
701
-
-
-
701
97,652
116,508
13,332
156
227,648
98,353
116,508
13,332
156
228,349
-
-
-
-
-
52
-
-
52
21,457
21,509
-
290
133
475
-
-
-
-
-
-
290
133
475
55,566
10,278
87,301
55,856
10,411
87,776
-
-
-
773
1,694
4
-
1,309
-
-
2,567
-
773
5,570
4
44,301
27,955
2,617
45,074
33,525
2,621
-
2,567
-
Total loans
$ 3,647
$ 1,309
$ 2,567
$ 7,523
$ 421,772
$ 429,295
$ 2,567
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 are considered impaired when, based on current information and events it is probable the Company
will be unable to collect all amounts due in accordance with the original contractual terms of the loan
agreement, including scheduled principal and interest payments. Loans evaluated individually for
impairment include nonperforming loans, such as loans on nonaccrual, loans past due by 90 days or more,
TDRs and other loans selected by management. The evaluations are based upon discounted expected cash
flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific
73
reserve is established for the amount of impairment. Impairment is evaluated in total for smaller-balance
loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific
valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Interest payments on impaired loans are typically applied to principal
unless collectability of the principal amount is reasonably assured, in which case interest is recognized on
a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Impaired
loans are set forth in the following table as of the dates indicated (in thousands):
With no related allowance recorded
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
With an allowance recorded
Commercial real estate
Owner occupied
Consumer real estate
Secured by 1-4 family residential
First deed of trust
Commercial and industrial loans
(except those secured by real estate)
Total
Construction and land development
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
December 31, 2020
Unpaid
Principal
Related
Balance Allowance
Recorded
Investment
December 31, 2019
Unpaid
Principal
Related
Balance Allowance
Recorded
Investment
$ -
-
$ -
-
$ -
-
$ 337
337
$ 337
337
$ -
-
2,780
1,991
4,771
2,795
1,991
4,786
-
-
-
2,089
2,304
4,393
2,104
2,304
4,408
-
-
-
300
300
-
300
300
-
1,937
699
2,936
1,940
992
3,232
-
-
-
1,752
752
2,804
1,774
960
3,034
-
-
-
141
7,848
141
8,159
-
-
211
7,745
373
8,152
-
-
1,125
1,125
1,125
1,125
9
9
1,414
1,414
1,414
1,414
15
15
74
74
74
74
8
8
78
78
78
78
9
9
-
1,199
-
1,199
-
17
135
1,627
334
1,826
135
159
-
-
-
-
-
-
337
337
337
337
-
-
3,905
1,991
5,896
3,920
1,991
5,911
9
-
9
3,503
2,304
5,807
3,518
2,304
5,822
15
-
15
300
300
-
300
300
-
2,011
699
3,010
2,014
992
3,306
8
-
8
1,830
752
2,882
1,852
960
3,112
9
-
9
141
$ 9,047
141
$ 9,358
-
$ 17
346
$ 9,372
707
$ 9,978
135
$ 159
74
The following is a summary of average recorded investment in impaired loans with and without valuation
allowance and interest income recognized on those loans for periods indicated (in thousands):
With no related allowance recorded
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
With an allowance recorded
Commercial real estate
Owner occupied
Consumer real estate
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Consumer and other
Total
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Home equity lines
Secured by 1-4 family residential,
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Consumer and other
December 31,
2020
2019
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$ -
221
221
$ -
-
-
$ 81
329
410
$ -
-
-
3,189
1,980
5,169
124
89
213
2,695
2,434
5,129
143
128
271
300
23
318
19
2,069
802
3,171
66
46
135
2,280
810
3,408
76
40
135
151
8,712
1
349
626
9,573
17
423
913
913
32
32
1,432
1,432
43
43
76
26
102
4
-
4
166
-
166
6
-
6
129
-
1,144
-
-
36
225
6
1,829
1
-
50
-
221
221
-
-
-
81
329
410
-
-
-
4,102
1,980
6,082
156
89
213
4,127
2,434
6,561
186
128
314
300
23
318
19
2,145
828
3,273
70
46
135
2,446
810
3,574
82
40
141
280
-
$ 9,856
75
1
-
$ 385
851
6
$ 11,402
18
-
$ 473
As of December 31, 2020 and 2019, the Company had impaired loans of $1,577,000 and $1,868,000,
respectively, which were on nonaccrual status. These loans had no valuation allowances as of December
31, 2020 and $135,000 as of December 31, 2019. Cumulative interest income that would have been
recorded had nonaccrual loans been performing would have been $84,000 and $136,000 for 2020 and 2019,
respectively.
Included in impaired loans are loans classified as TDRs. A modification of a loan’s terms constitutes a
TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the
borrowers financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs,
the Company further evaluates the loans as performing or nonaccrual. To restore a nonaccrual loan that
has been formally restructured in a TDR to accrual status, we perform a current, well documented credit
analysis supporting a return to accrual status based on the borrower’s financial condition and prospects for
repayment under the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis
considers the borrower’s sustained historical repayment performance for a reasonable period to the return-
to-accrual date, but may take into account payments made for a reasonable period prior to the restructuring
if the payments are consistent with the modified terms. A sustained period of repayment performance
generally would be a minimum of six months and would involve payments in the form of cash or cash
equivalents.
An accruing loan that is modified in a TDR can remain in accrual status if, based on a current well-
documented credit analysis, collection of principal and interest in accordance with the modified terms is
reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a
reasonable period before modification. The following is a summary of performing and nonaccrual TDRs
and the related specific valuation allowance by portfolio segment as of December 31, 2020 and 2019
(dollars in thousands).
December 31, 2020
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Secured by 1-4 family residential
First deeds of trust
Second deeds of trust
Commercial and industrial loans
(except those secured by real estate)
Specific
Valuation
Performing Nonaccrual Allowance
Total
$ 3,396
1,991
5,387
$ 3,396
1,688
5,084
$ -
303
303
$ -
-
-
1,460
617
2,077
910
556
1,466
550
61
611
9
8
17
27
$ 7,491
-
$ 6,550
27
$ 941
-
$ 17
Number of loans
34
27
7
2
76
December 31, 2019
Commercial real estate
Owner occupied
Non-owner occupied
Consumer real estate
Secured by 1-4 family residential
First deeds of trust
Second deeds of trust
Commercial and industrial loans
(except those secured by real estate)
Specific
Valuation
Performing Nonaccrual Allowance
Total
$ 3,502
2,304
5,806
$ 3,502
1,807
5,309
$ -
497
497
$ 15
-
15
1,641
752
2,393
881
689
1,570
760
63
823
9
-
9
211
$ 8,410
180
$ 7,059
31
$ 1,351
-
$ 24
Number of loans
38
29
9
3
The following table provides information about TDRs identified during the indicated periods (dollars in
thousands).
December 31, 2020
Pre-
Post-
Modification Modification
December 31, 2019
Pre-
Post-
Modification Modification
Number of
Loans
Recorded
Balance
Recorded
Balance
Number of
Loans
Recorded
Balance
Recorded
Balance
Commercial real estate
Non-owner occupied
1
$ 311
$ 311
1
$ 515
$ 515
1
$ 311
$ 311
1
$ 515
$ 515
There were no defaults on TDRs that were modified as TDRs during the twelve month periods ended
December 31, 2020 and 2019.
The CARES Act, as amended by the CAA, permits financial institutions to suspend requirements under
GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized
as TDRs and suspend any determination related thereto if (i) the loan modification is made between March
1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19 emergency declaration
and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. In addition,
federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan
modifications for borrowers affected by COVID-19 and have assured financial institutions that they will
neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to
automatically categorize COVID-19-related loan modifications as TDRs. As of December 31, 2020, the
Company had approximately $38.0 million in loans still under their modified terms. The Company’s
modification program primarily included payment deferrals and interest only modifications.
77
Note 4. Allowance for Loan Losses
Activity in the allowance for loan losses was as follows for the periods indicated (in thousands):
Year Ended December 31, 2020
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Unallocated
Year Ended December 31, 2019
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Unallocated
Beginning
Balance
Provision for
(Recovery of)
Ending
Loan Losses Charge-offs Recoveries Balance
$ 48
137
185
$ 141
148
289
$ -
-
-
$ 25
-
25
$ 214
285
499
671
831
85
2
1,589
376
590
(38)
-
928
-
-
-
-
-
-
-
-
-
-
1,047
1,421
47
2
2,517
271
(247)
-
-
24
343
64
678
(190)
45
(392)
-
(85)
(85)
13
55
68
166
79
269
572
108
30
24
(58)
27
26
130
(135)
(48)
(24)
-
29
-
4
-
408
87
36
154
$ 3,186
$ 950
$ (292)
$ 126
$ 3,970
Beginning
Balance
Provision for
(Recovery of)
Ending
Loan Losses Charge-offs Recoveries Balance
$ 42
220
262
$ (1)
(85)
(86)
$ -
-
-
$ 7
2
9
$ 48
137
185
673
673
87
2
1,435
(2)
158
(2)
-
154
-
-
-
-
-
-
-
-
-
-
671
831
85
2
1,589
244
50
(35)
12
271
385
51
680
(56)
(56)
(62)
-
-
(35)
14
69
95
343
64
678
308
121
34
211
239
80
(3)
(187)
(64)
(93)
(26)
-
89
-
25
-
572
108
30
24
$ 3,051
$ 135
$ (218)
$ 218
$ 3,186
78
The amount of the loan loss provision (recovery) is determined by an evaluation of the level of loans
outstanding, the level of nonperforming loans, historical loan loss experience, delinquency trends,
underlying collateral values, the amount of actual losses charged to the reserve in a given period and
assessment of present and anticipated economic conditions. Loans originated under PPP are not considered
in the evaluation of the allowance for loan losses because these loans carry a 100% guarantee from the
SBA; however, if the collectability on the guarantee on a loan is at risk that loan will be included in the
evaluation of the allowance for loan losses.
The level of the allowance reflects changes in the size of the portfolio or in any of its components as well
as management’s continuing evaluation of industry concentrations, specific credit risk, loan loss experience,
current loan portfolio quality, and present economic, political and regulatory conditions. Portions of the
allowance may be allocated for specific credits; however, the entire allowance is available for any credit
that, in management’s judgement, should be charged off. While management utilizes its best judgement
and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors
beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy,
changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Company recorded a provision for loan losses of $950,000 for the year ended December 31, 2020. The
provision for loan losses was driven primarily by an increase in the qualitative factors as a result of the
continued economic uncertainty surrounding COVID-19. The increase in the qualitative factors due to
COVID-19 were a result of deterioration in local economic factors such as the higher levels of
unemployment and the increased credit risk due to loan payment deferrals under the CARES Act. The
Company believes the current level of allowance for loan loss reserves are adequate to cover incurred losses.
However, the full economic impact of the COVID-19 pandemic is currently unknown and the Company
must continue to monitor our loan portfolio for loss indicators which may require further provisions for
loan losses. The Company recorded a provision for loan losses of $135,000 for the year ended December
31, 2019 because of an increase in the specific reserves associated with a relationship evaluated individually
for impairment.
The allowance for loan losses at each of the periods presented includes an amount that could not be
identified to individual types of loans referred to as the unallocated portion of the allowance. We recognize
the inherent imprecision in estimates of losses due to various uncertainties and the variability related to the
factors used in calculation of the allowance. The allowance for loan losses included an unallocated portion
of approximately $154,000 and $24,000 at December 31, 2020 and December 31, 2019, respectively.
79
Loans were evaluated for impairment as follows for the periods indicated (in thousands):
Year Ended December 31, 2020
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Year Ended December 31, 2019
Construction and land development
Residential
Commercial
Commercial real estate
Owner occupied
Non-owner occupied
Multifamily
Farmland
Consumer real estate
Home equity lines
Secured by 1-4 family residential
First deed of trust
Second deed of trust
Commercial and industrial loans
(except those secured by real estate)
Student loans
Consumer and other
Recorded Investment in Loans
Allowance
Loans
Ending
Balance
$ 214
285
499
1,047
1,421
47
2
2,517
Individually
Collectively
$ -
-
-
$ 214
285
499
9
-
-
-
9
1,038
1,421
47
2
2,508
Ending
Balance
$ 8,103
21,466
29,569
99,784
121,184
9,889
367
231,224
Individually
Collectively
$ -
-
-
$ 8,103
21,466
29,569
3,905
1,991
-
-
5,896
95,879
119,193
9,889
367
225,328
24
-
24
18,394
300
18,094
166
79
269
408
87
190
$ 3,970
$ 48
137
185
671
831
85
2
1,589
8
-
8
-
-
-
$ 17
158
79
261
408
87
190
$ 3,953
57,089
11,097
86,580
2,011
699
3,010
55,078
10,398
83,570
181,088
29,657
2,885
$ 561,003
141
-
-
$ 9,047
180,947
29,657
2,885
$ 551,956
$ -
-
-
$ 48
137
185
$ 7,887
24,063
31,950
$ -
337
337
$ 7,887
23,726
31,613
15
-
-
-
15
656
831
85
2
1,574
98,353
116,508
13,332
156
228,349
3,503
2,304
-
-
5,807
94,850
114,204
13,332
156
222,542
271
-
271
21,509
300
21,209
343
64
678
9
-
9
334
64
669
55,856
10,411
87,776
1,830
752
2,882
54,026
9,659
84,894
572
108
54
$ 3,186
135
-
-
$ 159
437
108
54
$ 3,027
45,074
33,525
2,621
$ 429,295
346
-
-
$ 9,372
44,728
33,525
2,621
$ 419,923
80
Note 5. Premises and Equipment
The following is a summary of premises and equipment as of December 31, 2020 and 2019 (in thousands):
2020
2019
Land
Buildings and improvements
Furniture, fixtures and equipment
Total premises and equipment
Less: Accumulated depreciation and amortization
$ 4,352
10,796
7,614
22,762
(10,983)
$ 4,352
10,601
7,479
22,432
(10,396)
Premises and equipment, net
$ 11,779
$ 12,036
Depreciation and amortization of premises and equipment for 2020 and 2019 amounted to $586,000 and
$644,000, respectively.
Note 6. Investment in Bank Owned Life Insurance
The Bank is owner and designated beneficiary on life insurance policies in the aggregate face amount of
$13,730,000 covering certain of its directors and executive officers. The earnings from these policies are
used to offset expenses related to retirement plans. The cash surrender value of these policies at December
31, 2020 and 2019 was approximately $7,806,000 and $7,612,000, respectively.
Note 7. Deposits
Deposits as of December 31, 2020 and 2019 were as follows (dollars in thousands):
December 31, 2020
%
Amount
December 31, 2019
%
Amount
Demand accounts
Interest checking accounts
Money market accounts
Savings accounts
Time deposits of $250,000 and over
Other time deposits
$ 222,305 37.8%
70,342 11.9%
152,726 26.0%
6.5%
38,083
16,014
2.7%
88,912 15.1%
$ 131,228 29.6%
48,427 10.9%
99,955 22.6%
6.0%
26,396
22,327
5.0%
114,875 25.9%
Total
$ 588,382 100.0%
$ 443,208 100.0%
The following are the scheduled maturities of time deposits as of December 31, 2020 (in thousands):
Year Ending
December 31,
Less Than
$250,000
Greater Than
or Equal to
$250,000
Total
2021
2022
2023
2024
2025
$ 64,064
15,583
5,786
1,338
2,141
$ 11,349
4,403
262
-
-
$ 75,413
19,986
6,048
1,338
2,141
Total
$ 88,912
$ 16,014
$ 104,926
81
Deposits held at the Company by related parties, which include officers, directors, greater than 5%
shareholders and companies in which directors of the board have a significant ownership interest,
approximated $14,159,000 and $15,067,000 at December 31, 2020 and 2019, respectively.
Note 8. 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 $484,000 in FHLB
stock at December 31, 2020 and $1,694,000 at December 31, 2019, 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. FHLB borrowings are secured by the pledge of commercial loans and 1-4 family
residential loans. The Company had no outstanding FHLB advances at December 31, 2020. The Company
prepaid all of its outstanding FHLB advances during year ended December 31, 2020, which resulted in the
recognition of $696,000 in in prepayment fees. The Company had FHLB advances of $29,000,000 at
December 31, 2019 maturing through 2023.
Through the Federal Reserve Bank, the Company can borrow funds through the Payment Protection
Program Liquidity Fund (“PPPLF”) which are secured by the Company’s PPP loans. As of December 31,
2020, the Company had $41.5 million in outstanding advances under the PPPLF. The Company’s available
borrowing capacity under the PPPLF as of December 31, 2020 was $95.2 million.
The Company had advances from the FHLB for the periods indicated that consisted of the following (dollars
in thousands):
Year Ended December 31, 2019
Type
Maturity
Date
Interest
Rate
Advance
Amount
June 29, 2020
June 28, 2021
July 6, 2020
1.780%
Variable
2.854%
Fixed Rate
Fixed Rate
2.770%
Fixed Rate September 27, 2021 3.102%
Fixed Rate September 25, 2023 3.212%
Fixed Rate November 15, 2021 3.149%
Fixed Rate December 11, 2023 3.289%
$ 8,000
3,000
5,000
2,000
2,000
6,500
2,500
$ 29,000
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 December 31, 2020. The carrying value of these short term borrowing agreements was
$5,317,000 at December 31, 2019.
The Company’s unused lines of credit for future borrowings total approximately $93.1 million at December
31, 2020, which consists of $50.3 million available from the FHLB, $10 million on revolving bank line of
credit, $7.8 million under secured federal funds agreements with third party financial institutions, $25
million in repurchase lines of credit with third party financial institutions. Additional loans and securities
82
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.
Information related to borrowings as of December 31, 2020 and 2019 is as follows (dollars in thousands):
Year Ended December 31,
2020
2019
Balance outstanding at end of year
Maximum outstanding during the year
Federal Funds Purchased
FHLB advances
PPPLF
Balance outstanding at end of year
Federal Funds Purchased
FHLB advances
PPPLF
Average amount outstanding during the year
Federal Funds Purchased
FHLB advances
PPPLF
Average interest rate during the year
Federal Funds Purchased
FHLB advances
PPPLF
Average interest rate at end of year
Federal Funds Purchased
FHLB advances
PPPLF
$ 4,559 $ 6,594
51,000 31,000
45,120 -
5,317
-
-
29,000
41,529 -
91
456
27,785 22,693
28,857 -
1.65%
2.17%
0.35%
0.00%
0.00%
0.35%
2.32%
3.05%
0.00%
2.54%
2.69%
0.00%
Note 9. Income Taxes
The following summarizes the tax effects of temporary differences that comprise deferred tax assets and
liabilities at December 31, 2020 and 2019 (in thousands):
Deferred tax assets
Net operating loss carryforward
Capital loss carryforward
State net operating loss carryforward
AMT credit
Allowance for loan losses
Deferred Cost, net of fees
Interest on nonaccrual loans
Expenses and writedowns related to foreclosed
property
Stock compensation
Employee benefits
Pension expense
Depreciation
Other, net
2020
2019
$ 217 $ 2,995
25
25
97
-
-
11
834 669
-
430
29
18
97
66
34
10
794 792
3
8
31 134
11
29
Total deferred tax assets
2,481 4,878
Deferred tax liabilities
83
Unrealized gain on available for sale securities
124
50
Total deferred tax liabilities
124
50
Net deferred tax asset
$ 2,357 $ 4,828
The net deferred tax asset is included in other assets on the consolidated balance sheet. ASC Topic 740,
Income Taxes, requires that companies assess whether a valuation allowance should be established against
their deferred tax assets based on the consideration of all available evidence using a “more likely than not”
standard. Management considers both positive and negative evidence and analyzes changes in near-term
market conditions as well as other factors which may impact future operating results. In making such
judgments, significant weight is given to evidence that can be objectively verified. The deferred tax assets
are analyzed quarterly for changes affecting realization.
In assessing the Company’s ability to realize its net deferred tax asset, management considers whether it is
more likely than not that some portion or all of the net deferred tax asset will or will not be realized. The
Company’s ultimate realization of the net deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences become deductible. Management
considers the nature and amount of historical and projected future taxable income, the scheduled reversal
of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The
amount of net deferred taxes recognized could be impacted by changes to any of these variables.
Each quarter, the Company weighs both the positive and negative information with respect to realization
of the net deferred tax asset and analyzes its position as to whether or not a valuation allowance is required.
Given the consistent earnings and stable asset quality, the Company’s analysis concluded that, it is more
likely than not that the Company will generate sufficient taxable income within the applicable carry-forward
periods to realize its net deferred tax asset.
The net operating losses available to offset future taxable income amounted to $1,031,000 at December 31,
2020 and will begin expiring in 2028.
The income tax expense charged to operations for the years ended December 31, 2020 and 2019 consists
of the following (in thousands):
2020
2019
Current tax expense (benefit)
Deferred tax expense
$ 92 $ (33)
1,197
2,393
Provision for income taxes
$ 2,485
$ 1,164
A reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes is
as follows for the years ended December 31, 2020 and 2019 (in thousands):
2020
2019
Net income before income taxes
$ 11,039
$ 5,641
Computed "expected" tax expense
State taxes, net of fed
Cash surrender value of life insurance
Other
$ 2,318
201
(41)
7
$ 1,185
15
(37)
1
84
Provision for income taxes
$ 2,485
$ 1,164
Commercial banking organizations conducting business in Virginia are not subject to Virginia income
taxes. Instead, they are subject to a franchise tax based on bank capital. The Company recorded franchise
tax expense, within other operating expense, of approximately $439,000 and $385,000 for the years ended
December 31, 2020 and 2019, respectively. With few exceptions, the Company is no longer subject to U.S.
Federal, State, or local income tax examinations by tax authorities for years prior to 2017.
85
Note 10.
Earnings per Share
The following table presents the basic and diluted earnings per share computations (in thousands except per
share data):
Numerator
Net income - basic and diluted
$ 8,554 $ 4,477
2020
2019
Denominator
Weighted average shares outstanding - basic
Dilutive effect of common stock options
1,459
-
1,445
-
Weighted average shares outstanding - diluted
1,459
1,445
Earnings per share – basic
Earnings per share – diluted
$ 5.86
$ 5.86
$ 3.10
$ 3.10
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 6,573 and 4,155 restricted stock units outstanding as of December 31, 2020 and 2019,
respectively, are dependent upon meeting certain performance criteria. As of December 31, 2020 and
December 31, 2019, it was indeterminable whether these non-vested restricted stock units will vest and as
such those shares are excluded from common shares issued and outstanding at each date and are not
included in the computation of earnings per share for any period presented.
Outstanding options and warrants to purchase common stock were considered in the computation of diluted
earnings per share for the periods presented. Stock options for 592 and 555 shares were not included in
computing diluted earnings per share at December 31, 2020 and 2019, respectively, because their effects
were anti-dilutive.
Note 11.
Lease Commitments
The following tables present information about the Company’s leases (dollars in thousands):
For the years ended December 31,
2020
2019
Lease liabilities
Right-of-use assets
Weighted average remaining lease term
Weighted average discount rate
$ 930 $ 1,027
$ 916 $ 1,015
4.29 years
2.98%
5.05 years
2.39%
Lease cost
Operating lease cost
Total lease cost
For the years ended December 31,
2020
2019
$ 427 $ 427
$ 427 $ 427
86
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the
total of operating lease liabilities is as follows (dollars in thousands):
Lease payments due
Twelve months ending December 31, 2021
Twelve months ending December 31, 2022
Twelve months ending December 31, 2023
Twelve months ending December 31, 2024
Twelve months ending December 31, 2025
Thereafter
Total undiscounted cash flows
Discount
Lease liabilities
As of
December 31, 2020
$ 337
181
106
111
102
154
$ 991
61
$ 930
Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31,
2020 and 2019 was $378,000 and $415,000, respectively. The Company recognized lease expense of
$427,000 for each of the years ended December 31, 2020 and 2019.
Note 12.
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 nonperformance 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 December 31, 2020 and 2019, the Company had outstanding the following approximate off-balance-
sheet financial instruments whose contract amounts represent credit risk (in thousands):
December 31, December 31,
2020
2019
Undisbursed credit lines
Commitments to extend or originate credit
Standby letters of credit
$ 107,130 $ 83,366
38,910 15,722
6,732
4,934
Total commitments to extend credit
$ 150,974 $ 105,820
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, any 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
87
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 3. The distribution of commitments to
extend credit approximates the distribution of loans outstanding.
Note 13.
Shareholders’ Equity and Regulatory Matters
Preferred Stock
On May 1, 2009, as part of the Capital Purchase Program established by the U.S. Department of the
Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008, the Company sold
(i) 14,738 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value
$4.00 per share, having a liquidation preference of $1,000 per share (the “preferred stock”) and (ii) a warrant
(the “Warrant”) to purchase 499,029 shares of the Company’s common stock at an initial exercise price of
$4.43 per share, subject to certain anti-dilution and other adjustments, to the Treasury for an aggregate
purchase price of $14,738,000 in cash. During the first quarter of 2018, the Company used the proceeds
from a subordinated note issuance to redeem the remaining 5,027 outstanding shares of preferred stock plus
accrued dividends of $56,554. The Warrant expired on May 1, 2019.
Accumulated Other Comprehensive Income
The following table presents the cumulative balances of the components of accumulated other
comprehensive income, net of deferred taxes of $114,000 and $38,000 as of December 31, 2020 and 2019,
respectively (in thousands):
Year Ended December 31,
2020
2019
Net unrealized gains on securities
Net unrecognized losses on defined benefit plan
Total other comprehensive income
$ 466
(36)
$ 430
$ 186
(44)
$ 142
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 (the “Federal Reserve”) Small Bank Holding Company
Policy Statement (the “SBHC Policy Statement”). On August 28, 2018, the Federal Reserve issued an
interim final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of
2018, which was signed into law on May 24, 2018 (the “EGRRCPA”), that expands the applicability of the
SBHC Policy Statement to bank holding companies with total consolidated assets of less than $3 billion
(up from the prior $1 billion threshold). 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.
88
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 and was fully phased in as at January 1, 2019. 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 December 31, 2020, the Bank exceeded the minimum ratios under the Basel
III Capital Rules.
The Bank must also comply with the capital requirements set forth in the “prompt corrective action”
regulations pursuant to Section 38 of the Federal Deposit Insurance Act of 1950. To be well capitalized
under these regulations, a bank must have the following minimum capital ratios: (1) a common equity Tier
1 capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least 8.0%; (3) a total risk-based
capital ratio of at least 10.0%; and (4) a leverage ratio of at least 5.0%. As of December 31, 2020, the Bank
exceeded the minimum ratios to be classified as well capitalized.
On September 17, 2019, the federal bank regulators issued a final rule required by the EGRRCPA that
permits qualifying banks and bank holding companies that have less than $10 billion of assets, like the
Company and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less
complex leverage calculations (commonly referred to as the community bank leverage ratio or “CBLR”).
Under the rule, which became effective January 1, 2020, banks and bank holding companies that opt into
the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based
and leverage capital requirements under the Basel III Capital Rules and would be deemed to have met the
well capitalized ratio requirements under the “prompt corrective action” framework. In April 2020, as
required by the Coronavirus Aid, Relief, and Economic Security Act, which was passed in response to the
COVID-19 pandemic, federal bank regulators issued two interim final rules related to the CBLR
framework. One interim final rule provides that, as of the second quarter of 2020, banking organizations
with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use
the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking
organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking
organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition
from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR
of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a
two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no
more than 100 basis points below the applicable CBLR requirement. The Bank elected not to opt into the
CBLR framework as of December 31, 2020.
89
The capital amounts and ratios at December 31, 2020 and 2019 for the Bank are presented in the table
below (dollars in thousands):
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
To be Well Capitalized
Amount
Ratio
December 31, 2020
Total capital (to risk-
weighted assets)
Village Bank
Tier 1 capital (to risk-
weighted assets)
Village Bank
Leverage ratio (Tier 1
capital to average
assets)
Village Bank
Common equity tier 1 (to risk-
weighted assets)
Village Bank
December 31, 2019
Total capital (to risk-
weighted assets)
Village Bank
Tier 1 capital (to risk-
weighted assets)
Village Bank
Leverage ratio (Tier 1
capital to average
assets)
Village Bank
Common equity tier 1 (to risk-
weighted assets)
Village Bank
$ 65,723
14.20%
$ 37,015 8.00% $ 46,269
10.00%
61,753
13.35%
27,761 6.00%
37,015
8.00%
61,753
9.28%
26,607 4.00%
33,259
5.00%
61,753
13.35%
20,821 4.50%
30,075
6.50%
$ 54,653
12.56%
$ 34,807 8.00% $ 43,508
10.00%
52,867
12.15%
26,015 6.00%
34,807
8.00%
52,867
9.69%
21,823 4.00%
27,278
5.00%
52,867
12.15%
19,579 4.50%
28,280
6.50%
90
Note 14.
Stock Incentive Plans
In accordance with accounting standards, the Company measures the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost is recognized over the period during which an employee is required to provide
service in exchange for the award rather than disclosed in the financial statements.
The following table summarizes options outstanding under the Company’s stock incentive plans at the
indicated dates:
2020
2019
Year Ended December 31,
Weighted
Average
Exercise
Price
Options
Fair Value
Per Share
Intrinsic
Value
Options
Weighted
Average
Exercise
Price
Fair Value
Per Share
Intrinsic
Value
Options outstanding,
beginning of period
Granted
Forfeited
Exercised
Options outstanding,
end of period
Options exercisable,
end of period
734
-
-
-
$ 25.63
-
-
-
$ 9.76
-
-
-
734
-
-
-
$ 25.63
-
-
-
$ 9.76
-
-
-
734
$ 25.63
$ 9.76
$ -
734
$ 25.63
$ 9.76
$ -
734
734
The following table summarizes information about stock options outstanding at December 31, 2020:
Outstanding
Weighted
Average
Exercisable
Range of
Exercise Prices Options
Remaining Weighted
Weighted
Average
Average
Years of
Number of Contractual Exercise Number of Exercise
Price
Options
Price
Life
$25.28-$25.76
734
2.57 $ 25.63
734 $ 25.63
734
2.57 25.63
734 25.63
During 2020, we granted certain officers time-based restricted shares of common stock and performance-
based restricted stock units. 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 performance-based units
which have a two-year performance period that began on January 2, 2021, vest based on the Company’s
achievement of performance targets related to return on tangible common equity and the adversely
classified items ratio over the performance period with possible payouts ranging from 0% to 150% of the
target awards.
During 2019, we granted certain officers time-based restricted shares of common stock and performance-
based restricted stock units. The time-based shares vest ratably over a three-year period provided that the
officer is employed with the Company on the applicable vesting date. The performance-based units, which
have a two-year performance period that began on January 2, 2020, vest based on the Company’s
achievement of performance targets related to return on tangible common equity and the adversely
classified items ratio with possible payouts ranging from 0% to 150% of the target awards.
The total number of shares underlying non-vested restricted stock was 24,529 and 12,310 at December 31,
2020 and 2019, 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 December 31,
2020 and 2019 was $593,000 and $364,000, respectively. The time based unrecognized compensation of
91
$455,000 is expected to be recognized over a weighted average period of 2.28 years. During 2020 and
2019, there were forfeitures of 1,094 and 8,274 shares of restricted stock awards, respectively.
A summary of changes in the Company’s non-vested restricted stock awards for the year follows:
December 31, 2019
Granted
Vested
Forfeited
Other(1)
Shares
12,310
17,798
(4,731)
(1,094)
246
Weighted-
Average
Grant-Date
Fair-Value
$ 33.83
29.67
33.83
33.82
33.82
Aggregate
Intrinsic Value
$ 423,341
612,073
(162,699)
(37,623)
8,460
December 31, 2020
24,529
$ 30.87
$ 843,552
(1) Represents the incremental increase in shares that vested based on the
restricted stock units vesting at the maximum potential value as opposed to
the targeted value of the award.
Stock-based compensation expense was $240,000 and $413,000 for the years ended December 31, 2020
and 2019, respectively.
Note 15.
Trust Preferred Securities
During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned 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
LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable,
quarterly. The interest rate was 2.38% and 4.06% at December 31, 2020 and 2019, respectively. 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 December 31, 2020 and there
are no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated
debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.
During the third quarter of 2007, Village Financial Statutory Trust II, a wholly–owned subsidiary of the
Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6
million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have
LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts and is also payable
quarterly. The interest rate was 1.63% and 3.31% at December 31, 2020 and 2019, respectively. 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 December 31, 2020 and there are no plans to do so. The
principal asset of the Trust is $3.6 million of the Company’s junior subordinated 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
92
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 16.
Subordinated Debt Offering
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 accrue interest at a fixed rate of 6.50% for the first five years until March 31,
2023; thereafter, the subordinated notes will accrue interest at an annual floating rate equal to three-month
LIBOR plus a spread of 3.73% until maturity or early redemption. 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.
At December 31, 2020, the carrying value of the notes totaled $5,628,000.
Note 17.
Retirement Plans
401K Plan: The Bank provides a qualified 401K plan to all eligible employees which is administered
through the Virginia Bankers Association Benefits Corporation. Employees are eligible to participate in
the plan after three months of employment. Eligible employees may, subject to statutory limitations,
contribute a portion of their salary to the plan through payroll deduction. Due to economic conditions at
the time, the Bank ceased its matching program in 2009; however, beginning January 2013, the Bank
reinstituted the 401K match. The Bank provided a matching contribution of 100% of the first 1% the
participant contributes, and then 50% of the next 5% of their salary, totaling a maximum 3.5%. Participants
are always fully vested in their own contributions, and the Bank’s matching contributions vest 100% after
two years of service. Total contributions to the plan for the years ended December 31, 2020 and 2019 were
$420,000, and $351,000, respectively.
Supplemental Executive Retirement Plan: The Bank established the Village Bank SERP on January 1,
2005 to provide supplemental retirement income to certain executive officers as designated by the Personnel
Committee, later replaced by the Compensation Committee, and approved by the board of directors. The
SERP is an unfunded employee pension plan under the provisions of the Employee Retirement Income
Security Act of 1974. An eligible employee, once designated by the Committee and approved by the board
of directors in writing to participate in the SERP, becomes a participant in the SERP 60 days following
such approval (unless an earlier participation date is approved). The retirement benefit to be received by a
participant is determined by the Committee and approved by the board of directors and is payable in equal
monthly installments over the period specified in the SERP for each respective participant, commencing on
the first day of the month following a participant’s retirement or termination of employment, provided the
participant has been employed by the Bank for a minimum of 10 years. The Compensation Committee, in
its sole discretion, may choose to treat a participant who has experienced a termination of employment on
or after attaining age 65 but prior to completing his service requirement as having completed his service
requirement. During the second quarter of 2019, the ownership of the Company’s largest shareholder
exceeded 50% of the Company’s outstanding common stock, which triggered change in control provisions
included in the SERP. The SERP provides for the acceleration of the vesting of benefits in the event of a
change in control, which resulted in the three executives participating in the plan becoming fully vested as
of the date of the change in control. At December 31, 2020 and 2019, the Bank’s liability under the SERP
was $2,524,000 and $2,546,000, respectively, and expense for the years ended December 31, 2020 and
2019 was $133,000 and $513,000, respectively. The increase in other comprehensive income related to the
minimum pension adjustment was $9,000 net of tax for the years ended December 31, 2020 and 2019. The
increase in cash surrender value of the bank owned life insurance related to the participants was $194,000
and $171,000 for the years ended December 31, 2020 and 2019, respectively.
93
Directors’ Deferral Plan: The Bank established the Village Bank Outside Directors Deferral Plan (the
“Directors Deferral Plan”) on January 1, 2005 under which non-employee directors of the Bank have the
opportunity to defer receipt of all or a portion of certain compensation until retirement or departure from
the board of directors. Deferral of compensation under the Directors Deferral Plan is voluntary by non-
employee directors and to participate in the plan a director must file a deferral election as provided in the
plan. A director shall become an active participant with respect to a plan year (as defined in the plan) only
if he is expected to have compensation during the plan year and he timely files a deferral election. A
separate account is established for each participant in the plan and each account shall, in addition to
compensation deferred at the election of the participant, be credited with interest on the balance of the
account, the rate of such interest to be established by the board of directors in its sole discretion at the
beginning of each plan year. For those directors electing to purchase stock, the obligation will only be
settled by delivery of the fixed number of shares they purchased. At December 31, 2020 and 2019, the
Bank’s liability under the Directors Deferral Plan was $524,000 and $419,000, respectively, and expense
for the years ended December 31, 2020 and 2019 was $111,000 and $109,000, respectively. In the first
quarter of 2015 and the fourth quarter of 2013, certain directors elected to purchase common stock with
funds from their deferred compensation accounts causing the December 31, 2015 and December 31, 2013
liability to be lower than the December 31, 2014 liability. A rabbi trust was established to hold the shares.
At December 31, 2020 and 2019, the trust held 37,290 and 40,875 shares, respectively, of Company
common stock totaling $771,000 and $856,000, respectively.
Note 18. 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
94
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).
Impaired loans: 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 impaired and an allowance for loan losses is
established. The Company measures impairment either based on the fair value of the loan using the loan’s
obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the
present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a
fair value measurement. The Company maintains a valuation allowance to the extent that this measure of
the impaired loan is less than the recorded investment in the loan. When an impaired loan is measured at
fair value based solely on observable market prices or a current appraisal without further adjustment for
unobservable inputs, the Company records the impaired loan as a nonrecurring fair value measurement
classified as Level 2. However, if based on management’s review, additional discounts to observed market
prices or appraisals are required or if observable inputs are not available, the Company records the impaired
loan as a nonrecurring fair value measurement classified as Level 3. Impaired loans that are measured based
on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of
interest, are not recorded at fair value and are therefore excluded from fair value disclosure requirements
Loans held for sale: During the first quarter of 2020, the Company elected to begin using fair value
accounting for its entire portfolio of LHFS in accordance with ASC 820 - Fair Value Measurement and
Disclosures. Fair value of the Company's LHFS 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 LHFS is classified as Level 2. At December 31, 2019, these loans were carried at the lower of
cost or estimated fair value on an aggregate basis as determined by outstanding commitments from
investors. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the
Consolidated Statements of Income.
Derivative asset – IRLCs: Beginning with the first quarter of 2020, 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. The fair value of IRLC was considered
immaterial at December 31, 2019.
Derivative asset/liability – forward sale commitments: During the first quarter of 2020, the Company
elected to begin using fair value accounting for its forward sales commitments related to IRLCs and LHFS.
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 best efforts commitments are valued using the committed price
to the counter-party against the current market price of the IRLC or mortgage LHFS. All of the Company’s
forward sale commitments are classified as Level 2.
Other Real Estate Owned: OREO assets are initially recorded at fair value less costs to sell when acquired,
establishing a new cost basis. Subsequently, OREO assets are carried at fair value less estimated costs to
sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s
estimation of the value of the collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level
2. When an appraised value is not available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market price, the Company records
the foreclosed asset as nonrecurring Level 3.
Assets held for sale: Assets held for sale were transferred from premises and equipment at the lower of cost
less accumulated depreciation or fair value at the date of transfer. The Company periodically evaluates the
value of assets held for sale and records an impairment charge for any subsequent declines in fair value less
selling costs. Fair value is based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the assets held for sale as
95
nonrecurring Level 2. When an appraised value is not available or management determines the fair value
of the collateral is further impaired below the appraised value and there is no observable market price, the
Company records the asset held for sale as nonrecurring Level 3.
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 December 31, 2020 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ -
-
-
-
-
$ 8,142
24,006
8,446
34,421
1,552
$ -
-
250
-
-
Carrying
Value
$ 8,142
24,006
8,696
34,421
1,552
3,105
-
3,105
-
336
-
-
336
Fair Value Measurement
at December 31, 2019 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
$ 14,845
25,302
6,790
$ -
-
-
$ 14,845
25,302
6,540
$ -
-
250
1,468
514
526
-
-
-
-
-
-
1,468
514
526
Financial Assets – Recurring
US Government Agencies
Mortgage-backed securities
Subordinated debt
Loans held for sale
IRLC
Financial Liabilities - Recurring
Forward sales commitment
Financial Assets - Non-Recurring
Other real estate owned
Financial Assets - Recurring
US Government Agencies
Mortgage-backed securities
Subordinated debt
Financial Assets - Non-Recurring
Impaired loans
Assets held for sale
Other real estate owned
The following table presents qualitative information about Level 3 fair value measurements for financial
instruments measured at fair value for the years ended December 31, 2020 and 2019 (dollars in thousands):
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
Range
(Weighted
Average)
December 31, 2020
Other real estate owned
$ 336
Appraisal (1) or
Internal Valuation (2)
Selling costs
6%-10% (7%)
(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally
includes various level 3 inputs which are not identifiable
(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances
December 31, 2019
96
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
Range
(Weighted
Average)
Impaired loans - real estate secured
$ 1,468
Appraisal (1) or
Internal Valuation (2)
Selling costs
6%-10% (7%)
Discount for lack of
marketability and age
of appraisal
6%-30% (10%)
Assets held for sale
$ 514
Appraisal (1) or
Internal Valuation (2)
Selling costs
6%-10% (7%)
Discount for lack of
marketability and age
of appraisal
6%-30% (15%)
Other real estate owned
$ 526
Appraisal (1) or
Internal Valuation (2)
Selling costs
6%-10% (7%)
(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally
includes various level 3 inputs which are not identifiable
(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances
FASB 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
ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating
the fair values of financial instruments not measured at fair value on a recurring basis.
The following tables reflect the carrying amounts and estimated fair values of the Company’s financial
instruments whether or not recognized on the Consolidated Balance Sheet at fair value.
December 31,
2020
December 31,
2019
Level in Fair
Value
Hierarchy
Carrying
Value
Financial assets
Cash
Cash equivalents
Investment securities available for sale
Investment securities available for sale
Investment securities available for sale
Federal Home Loan Bank stock
Loans held for sale
Loans
Impaired loans
Assets held for sale
Other real estate owned
Bank owned life insurance
Accrued interest receivable
Interest rate lock commitments
Financial liabilities
Deposits
FHLB borrowings
Trust preferred securities
Other borrowings
Accrued interest payable
Forward sales commitment
Level 1
Level 2
Level 1
Level 2
Level 3
Level 2
Level 2
Level 3
Level 3
Level 3
Level 3
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Estimated
Fair Value
(In thousands)
$ 12,709
30,742
1,193
39,401
250
484
34,421
562,362
-
-
336
7,806
4,943
1,552
Carrying
Value
Estimated
Fair Value
$ 19,967
-
-
46,687
250
1,694
12,722
427,827
1,468
514
526
7,612
2,597
-
$ 19,967
-
-
46,687
250
1,694
12,722
429,254
1,468
514
526
7,612
2,597
-
$ 12,709
30,742
1,193
39,401
250
484
34,421
561,003
-
-
336
7,806
4,943
1,552
588,382
-
8,764
47,157
194
3,105
589,017
-
9,697
47,157
194
3,105
443,208
29,000
8,764
10,912
221
-
443,645
29,285
9,812
10,912
221
-
97
Note 19. 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 LHFS, 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.
The following table presents segment information as of and for the years ended December 31, 2020 and
2019 (in thousands):
Year Ended December 31, 2020
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Provision for loan losses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Income before income taxes
Income tax expense
Net income
Commercial
Banking
Mortgage
Banking
Eliminations
Consolidated
Totals
$ 25,404
-
2,688
28,092
$ 581
11,703
1,408
13,692
$ (159)
-
(242)
(401)
$ 25,826
11,703
3,854
41,383
950
4,433
8,867
-
7,784
22,034
6,058
1,439
$ 4,619
-
159
4,053
3,312
1,187
8,711
4,981
1,046
$ 3,935
-
(159)
-
-
(242)
(401)
-
-
$ -
950
4,433
12,920
3,312
8,729
30,344
11,039
2,485
$ 8,554
Total assets
$ 704,258
$ 18,604
$ (16,626)
$ 706,236
Commercial
Banking
Mortgage
Banking
Eliminations
Consolidated
Totals
Year Ended December 31, 2019
Revenues
Interest income
Gain on sale of loans
Other revenues
Total revenues
Expenses
Provision for loan losses
Interest expense
Salaries and benefits
Commissions
Other expenses
Total operating expenses
Income before income taxes
Income tax expense
Net income
Total assets
$ 23,079
-
3,044
26,123
$ 539
6,205
754
7,498
$ (131)
-
(220)
(351)
$ 23,487
6,205
3,578
33,270
135
5,330
9,047
-
7,209
21,721
-
131
3,194
1,875
1,059
6,259
-
-(131)
-
-
(220)
(351)
135
5,330
12,241
1,875
8,048
27,629
4,402
904
$ 3,498
1,239
260
$ 979
-
-
$ -
5,641
1,164
$ 4,477
$ 542,053
$ 10,924
$ (12,664)
$ 540,313
98
Note 20.
Parent Corporation Only Financial Statements
Village Bank and Trust Financial Corp.
(Parent Corporation Only)
Condensed Balance Sheet
(in thousands)
Assets
Cash and due from banks
Investment in subsidiaries
Investment in special purpose subsidiary
Prepaid expenses and other assets
Liabilities and Shareholders' Equity
Liabilities
Balance due to nonbank subsidiaries
Other borrowings
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' equity
Common stock
Additional paid-in capital
Accumulated deficit
Stock in directors rabbi trust
Directors deferred fees obligation
Accumulated other comprehensive income
Total stockholders' equity
December 31, December 31,
2020
2019
$ 1,549
62,183
264
2,438
$ 1,007
53,768
264
2,284
$ 66,434
$ 57,323
$ 8,764
5,628
46
-
14,438
$ 8,764
5,595
47
3
14,409
5,794
54,510
(8,738)
(771)
771
430
51,996
5,779
54,285
(17,292)
(856)
856
142
42,914
$ 66,434
$ 57,323
99
Village Bank and Trust Financial Corp.
(Parent Corporation Only)
Condensed Statements of Operations and Comprehensive Income
Years Ended December 31, 2020 and 2019
(in thousands)
Income
Interest income
Dividends received from subsidiaries
Total Income
Interest expense
Interest on borrowed funds
Total interest expense
Net interest expense
Noninterest expense
Supplies
Professional and outside services
Other
Total noninterest expense
Net loss before undistributed income
(loss) of subsidiary
Undistributed income (loss) of subsidiary
Net income before income tax
benefit
Income tax benefit
Net income
2020
2019
4
$
1,250
1,254
3
$
1,000
1,003
631
631
623
30
39
43
112
511
7,888
8,399
(155)
775
775
228
30
61
42
133
(905)
4,192
4,287
(190)
$
8,554
$
4,477
Total comprehensive income
$
8,842
$
5,368
100
Village Bank and Trust Financial Corp.
(Parent Corporation Only)
Condensed Statements of Cash Flows
Years Ended December 31, 2020 and 2019
(in thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income
to net cash used in operating activities
Amortization of debt issuance costs
Undistributed income of subsidiary
Net change in:
Other assets
Interest Payable
Other liabilities
Net cash used in operating activities
Cash Flows from Investing Activities
Dividend from subsidiary
Net cash provided by investing activities
Cash Flows from Financing Activities
Net cash provided by financing activities
Net increase in cash
Cash, beginning of year
Cash, end of year
2020
2019
$ 8,554
$ 4,477
33
(9,138)
32
(5,192)
(154)
-
(3)
(708)
(190)
-
3
(870)
1,250
1,250
1,000
1,000
-
542
1,007
-
130
877
$ 1,549
$ 1,007
101
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and the Chief Financial
Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end
of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that as of December 31, 2020, the Company’s disclosure controls and
procedures were effective to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission 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. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect
or uncover every situation involving the failure of persons within the Company or its subsidiaries to disclose
material information otherwise required to be set forth in the Company’s periodic reports.
Management’s Report on Internal Control over Financial Reporting. Management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over
financial reporting is designed to provide reasonable assurance to the Company’s management and board
of directors regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2020. In making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework
(2013). Based on our assessment, we believe that, as of December 31, 2020, the Company’s internal control
over financial reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting. There has been no change in the Company’s
internal control over financial reporting during the fourth quarter of the fiscal year ended December 31,
2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation
by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company
to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
102
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required to be disclosed in this Item 10 is contained in the Company’s Proxy Statement
for the 2021 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be disclosed in this Item 11 is contained in the Company’s Proxy Statement
for the 2021 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required to be disclosed in this Item 12 is contained in the Company’s Proxy Statement
for the 2021 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required to be disclosed in this Item 13 is contained in the Company’s Proxy Statement
for the 2021 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required to be disclosed in this Item 14 is contained in the Company’s Proxy Statement
for the 2021 Annual Meeting of Shareholders and is incorporated herein by reference.
103
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements and reports are included in Part II, Item 8, of this report on
Form 10-K.
Reports of Independent Registered Public Accounting Firm (Yount, Hyde & Barbour, P.C.)
Consolidated Balance Sheets – December 31, 2020 and 2019
Consolidated Statements of Income – Years Ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income – Years Ended
December 31, 2020 and 2019
Consolidated Statements of Shareholders’ Equity – Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows – Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information is
shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2
Description
Articles of Incorporation of Village Bank and Trust Financial Corp., as amended
(incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form
10-Q for the period ended September 30, 2014, filed with the Securities and
Exchange Commission on October 31, 2014).
Amended and Restated Bylaws of Village Bank and Trust Financial Corp.
(incorporated herein by reference to Exhibit 3.2 of the Current Report on Form 8-
K, filed with the Securities and Exchange Commission on March 26, 2020).
Specimen of Certificate for Village Bank and Trust Financial Corp. common stock
(incorporated by reference to Exhibit 4.1 of the Form S-1 Registration Statement
filed with the Securities and Exchange Commission on November 12, 2014 (SEC
File No. 333-200147)).
Form of Subordinated Note (incorporated by reference to Exhibit 4.1 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on March
21, 2018).
Description of Village Bank and Trust Financial Corp.’s Securities.
Employment Agreement, dated October 1, 2017, by and between Village Bank and
Trust Financial Corp. and William G. Foster (incorporated by reference to Exhibit
10.1 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 4, 2017).*
Transition and Consulting Agreement, dated August 4, 2020, by and between
Village Bank and Trust Financial Corp. and William G. Foster, Jr. (incorporated
104
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 10, 2020).*
Employment Agreement, dated July 28, 2020, by and between Village Bank and
Trust Financial Corp. and James E. Hendricks, Jr. (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 31, 2020).*
Supplemental Executive Retirement Plan, dated December 30, 2020, by and
between Village Bank and Trust Financial Corp. and James E. Hendricks, Jr.
(incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed
with the Securities and Exchange Commission on March 2, 2021). *
Employment Agreement, dated September 4, 2020, by and between Village Bank
and Max C. Morehead, Jr. (incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
September 10, 2020).*
Amended and Restated Change of Control Agreement, dated March 24, 2020, by
and between Village Bank and Trust Financial Corp. and Donald M. Kaloski, Jr.
(incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed
with the Securities and Exchange Commission on March 26, 2020).*
Change of Control Agreement, dated August 24, 2020, by and between Village
Bank and Christy F. Quesenbery (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission
on August 28, 2020).*
Incentive Plan, as amended June 18, 2014 (incorporated by reference to Exhibit
99.1 of the Form S-8 Registration Statement filed with the Securities and Exchange
Commission on June 18, 2014 (SEC File No. 333-196893)).*
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit
10.5 of the Annual Report on Form 10-KSB for the year ended December 31,
2004).*
Form of Non-Employee Director Non-Qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.6 of the Annual Report on Form 10-KSB
for the year ended December 31, 2004).*
Village Bank and Trust Financial Corp. 2015 Stock Incentive Plan, as amended
(incorporated by reference to Appendix A of the Proxy Statement for the Annual
Meeting of Shareholders held on May 19, 2020, filed with the Securities and
Exchange Commission on April 6, 2020).*
Form of Performance-Based Restricted Stock Unit Award Agreement under the
Village Bank and Trust Financial Corp. 2015 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 8, 2015).*
Form of Time-Based Restricted Stock Award Agreement under the Village Bank
and Trust Financial Corp. 2015 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 8, 2015).*
105
10.14
10.15
10.16
10.17
21
23.1
31.1
31.2
32
101
Village Bank and Trust Financial Corp. Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 22, 2019).*
Outside Directors Deferral Plan, dated January 1, 2005 (incorporated by reference
to Exhibit 10.9 of the Annual Report on Form 10-K for the year ended December
31, 2010).*
Supplemental Executive Retirement Plan, dated January 1, 2005 (incorporated by
reference to Exhibit 10.10 of the Annual Report on Form 10-K for the year ended
December 31, 2010).*
Form of Subordinated Note Purchase Agreement (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 21, 2018).
Subsidiaries of Village Bank and Trust Financial Corp.
Consent of Yount, Hyde & Barbour, P.C. Accounting Firm.
Section 302 Certification by Chief Executive Officer.
Section 302 Certification by Chief Financial Officer.
Section 906 Certification.
The following materials from the Village Bank and Trust Financial Corp. Annual
Report on Form 10-K for the year ended December 31, 2020 formatted in
eXtensible Business Reporting (XBRL) (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Operations, (iii) Consolidated Statements of
Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity, (v)
Consolidated Statements of Cash Flows, and (vi) Notes to Condensed
Consolidated Financial Statements.
_____________________________
* Management contracts and compensatory plans and arrangements.
ITEM 16. FORM 10-K Summary
None.
106
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
VILLAGE BANK AND TRUST FINANCIAL CORP.
Date: March 19, 2021
By: /s/ James E. Hendricks, Jr.
James E. Hendricks, Jr.
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ James E. Hendricks, Jr.
James E. Hendricks, Jr.
/s/ Donald M. Kaloski, Jr.
Donald M. Kaloski, Jr.
/s/ R.T. Avery, III
R.T. Avery, III
/s/ Craig D. Bell
Craig D. Bell
/s/ Michael A. Katzen
Michael A. Katzen
/s/ George R. Whittemore
George R. Whittemore
/s/ Michael L. Toalson
Michael L. Toalson
/s/ Frank E Jenkins, Jr.
Frank E Jenkins, Jr.
/s/ Devon M. Henry
Devon M. Henry
President, Chief Executive
Officer and Director
(Principal Executive Officer)
March 19, 2021
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
March 19, 2021
Director
March 19, 2021
Director and
Chairman of the Board
March 19, 2021
Director
March 19, 2021
Director
March 19, 2021
Director
March 19, 2021
Director
Director
March 19, 2021
March 19, 2021
/s/ Mary Margaret Kastelberg
Mary Margaret Kastelberg
Director
March 19, 2021
107
DESCRIPTION OF VILLAGE BANK AND TRUST FINANCIAL CORP.’S SECURITIES
As of December 31, 2020, the common stock of Village Bank and Trust Financial Corp. (the
“Company”) was the only class of its securities registered under Section 12 of the Securities Exchange Act
of 1934. The following summary description of the material features of the Company’s common stock
does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Company’s
articles of incorporation and bylaws, each as amended. For more information, refer to the Company’s
articles of incorporation and bylaws and any applicable provisions of relevant law, including the Virginia
Stock Corporation Act and federal laws governing banks and bank holding companies.
General
The Company is authorized to issue 10,000,000 shares of common stock, par value $4.00 per share.
Each share of the Company’s common stock has the same relative rights as, and is identical in all respects
to, each other share of the Company’s common stock. The Company’s common stock is listed on the
Nasdaq Capital Market under the symbol “VBFC.” Computershare, Inc., 250 Royall Street, Canton,
Massachusetts, is the transfer agent for the Company’s common stock.
Voting Rights
Except as otherwise provided by law, each holder of the Company’s common stock has one vote
per share on all matters voted upon by shareholders. Directors are elected by a plurality of the votes cast
and shareholders do not have the right to accumulate their votes in the election of directors.
Dividends
Holders of shares of the Company’s common stock are entitled to receive dividends when and as
declared by the Company’s board of directors out of funds legally available therefor. The payment of
distributions by the Company is subject to the restrictions of Virginia law applicable to the declaration of
distributions by a corporation. A Virginia corporation generally may not authorize and make distributions
if, after giving effect to the distribution, it would be unable to meet its debts as they become due in the usual
course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus
the amount that would be needed, if it were dissolved at that time, to satisfy the preferential rights of
shareholders whose rights are superior to the rights of those receiving the distribution. In addition, the
payment of distributions to shareholders is subject to any prior rights of outstanding preferred stock.
As a bank holding company, the Company’s ability to pay dividends is affected by the ability of
Village Bank, the Company’s bank subsidiary, to pay dividends to the Company. The ability of Village
Bank to pay dividends is influenced by bank regulatory requirements and capital guidelines.
Liquidation Rights
In the event of the Company’s liquidation, dissolution or winding up, the holders of shares of the
Company’s common stock are entitled to receive, in cash or in kind, the Company’s assets available for
distribution remaining after payment or provision for payment of the Company debts and liabilities and
after satisfaction of all liquidation preferences applicable to any preferred stock.
108
Classes of Directors
The Company’s board of directors is divided into three classes, apportioned as evenly as possible,
with directors serving staggered three-year terms.
No Preemptive or Conversion Rights; Redemption and Assessment
Holders of shares of the Company’s common stock do not have preemptive rights to purchase
additional shares of common stock and have no conversion or redemption rights. The Company’s common
stock is not subject to redemption or any sinking fund and the outstanding shares are fully paid and
nonassessable.
Preferred Stock
The Company’s board of directors may, from time to time, without shareholder approval, issue
shares of the Company’s authorized, undesignated preferred stock, in one or more classes or series. In
connection with any such issuance, the board of directors may by resolution determine the designation,
voting rights, preferences as to dividends, in liquidation or otherwise, participation, redemption, sinking
fund, conversion, dividend or other special rights or powers, and the limitations, qualifications and
restrictions of such shares of preferred stock. The creation and issuance of any series of preferred stock,
and the relative rights, designations and preferences of such series, if and when established, will depend
upon, among other things, the future capital needs of the Company, then existing market conditions and
other factors that, in the judgment of the Company’s board, might warrant the issuance of preferred stock.
Anti-takeover Considerations
Certain provisions of the Company’s articles of incorporation and bylaws may discourage attempts
to acquire control of the Company. These provisions also may render the removal of one or all directors
more difficult or deter or delay corporate changes of control that the Company’s board of directors did not
approve. These provisions include the following:
Classified Board of Directors. The Company’s board of directors is divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-third of the board of directors
will be elected at each annual meeting of shareholders. The classification of directors, together with the
provision in the articles of incorporation that permits the remaining directors to fill any vacancies on the
board of directors, will have the effect of making it more difficult for shareholders to change the
composition of the board of directors. As a result, at least two annual meetings of shareholders may be
required for the shareholders to change a majority of the directors, whether or not a change in the board of
directors would be beneficial and whether or not a majority of shareholders believe that such a change
would be desirable.
Authorized Preferred Stock. The Company’s articles of incorporation authorize the board of
directors, subject to applicable Virginia law and federal banking regulations, to authorize the issuance of
preferred stock at such times, for such purposes and for such consideration as the board may deem advisable
without further shareholder approval. The issuance of preferred stock under certain circumstances may have
the effect of discouraging an attempt by a third party to acquire control of the Company by, for example,
authorizing the issuance of a series of preferred stock with rights and preferences designed to impede the
proposed transaction.
Supermajority Voting Provisions. The Company’s articles of incorporation state that certain
significant corporate actions must be approved by a majority of all the votes entitled to be cast on the action
by each voting group entitled to vote at a meeting at which a quorum of the voting group is present, provided
that the action has been approved and recommended by at least two-thirds of the directors in office at the
time of such approval and recommendation. If the action is not so approved and recommended by two-
thirds of the directors in office, then the action must be approved by the affirmative vote of 80% or more
109
of all of the votes entitled to be cast on such action by each voting group entitled to vote. These significant
corporate actions include: adoption of amendments to the Company’s articles of incorporation; adoption of
plans of merger or share exchange; sales of all or substantially all of the Company’s assets other than in the
ordinary course of business; and adoption of plans of dissolution.
No Cumulative Voting. The Company’s articles of incorporation do not provide for cumulative
voting for any purpose. The absence of cumulative voting may afford anti-takeover protection by making
it more difficult for the Company’s shareholders to elect nominees opposed by the board of directors.
Shareholder Meetings. Pursuant to the Company’s bylaws, special meetings of shareholders may
be called only by the Company’s president or board of directors. As a result, shareholders are not able to
act on matters other than at annual shareholders’ meetings unless they are able to persuade the president or
a majority of the board of directors to call a special meeting.
Advance Notification Requirements. The Company’s bylaws require a shareholder who desires to
raise new business, or nominate a candidate for election to the board of directors, at an annual meeting of
shareholders to provide advance notice of at least 60 days and not more than 90 days before the date of the
scheduled annual meeting; provided that in the event that less than 70 days’ notice or prior public disclosure
of the date of the scheduled annual meeting is given or made, notice by a shareholder, to be timely, must
be received not later than the close of business on the 10th day following the earlier of the date on which
such notice of the meeting was mailed or the date public disclosure of the meeting was made. The bylaws
require a shareholder who desires to raise new business to provide certain information to the Company
concerning the nature of the new business, the shareholder and the shareholder’s interest in the business
matter. Similarly, a shareholder wishing to nominate any person for election as a director must provide the
Company with certain information concerning the nominee and the proposing shareholder. Such
requirements may discourage the Company’s shareholders from submitting nominations and proposals.
110
Exhibit 21
Subsidiaries of Village Bank and Trust Financial Corp.
Name of Subsidiary
State of Organization
Village Bank
Village Bank Mortgage Corporation
(wholly-owned subsidiary of Village Bank)
Village Insurance Agency, Inc.
(wholly-owned subsidiary of Village Bank)
Village Financial Services Corporation
(wholly-owned subsidiary of Village Bank)
Virginia
Virginia
Virginia
Virginia
Southern Community Financial Capital Trust I
Virginia
Village Financial Statutory Trust II
Virginia
111
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements on Form S-8 (No. 333-205407,
No. 333-196893, No. 333-192408 and No. 333-239454) and Form S-3 (No. 333-159594) of Village Bank
and Trust Financial Corp. of our report dated March 19, 2021, relating to our audit of the consolidated
financial statements included in the Annual Report on Form 10-K of Village Bank and Trust Financial
Corp. and Subsidiary for the year ended December 31, 2020.
/s/ Yount, Hyde & Barbour, P.C.
Richmond, Virginia
March 19, 2021
112
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James E. Hendricks, Jr., certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
I have reviewed this Annual Report on Form 10-K of Village Bank and Trust Financial Corp. for the year ended
December 31, 2020;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 19, 2021
By: /s/ James E. Hendricks, Jr.
James E. Hendricks, Jr.
President and
Chief Executive Officer
113
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Donald M. Kaloski, Jr., certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
I have reviewed this Annual Report on Form 10-K of Village Bank and Trust Financial Corp. for the year ended
December 31, 2020;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 19, 2021
By: /s/ Donald M. Kaloski, Jr.
Donald M. Kaloski, Jr.
Executive Vice President and
Chief Financial Officer
114
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Village Bank and Trust Financial Corp. (the “Company”) on Form
10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the
Company hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that based on their knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company as of and for the periods covered in the Report.
/s/ James E. Hendricks, Jr.
James E. Hendricks, Jr.
President and Chief Executive Officer
/s/ Donald M. Kaloski, Jr.
Donald M. Kaloski, Jr.
Executive Vice President and Chief Financial Officer
March 19, 2021
Date
March 19, 2021
Date
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