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

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three month period ended March 31, ~~2019~~2020 is not necessarily indicative of the results to be expected for the full year ending December 31, ~~2019.~~2020. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 as filed with the Securities and Exchange Commission (“SEC”).

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2019 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

~~On January 1, 2019, the Company adopted ASU No. 2016-02~~~~“Leases (Topic 842)”~~ and all subsequent ASUs that modified Topic 842. The Company elected the optional transitional method provided by ASU 2018-11 and did not adjust prior periods for Accounting Standards Codification (“ASC”) Topic 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10-K, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $1.4 million at the date of adoption, which is related to the Company’s leases of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s long-term lease agreements are all classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. See note 8 for additional information.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of ~~operations~~income for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses and its related provision including impaired loans and troubled debt restructurings (“TDRs”), the valuation allowance on the deferred tax asset, valuation of other real estate owned (“OREO”) and the estimate of the fair value of assets held for sale.

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

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 4,155 and 8,650 at March 31, 2020 and ~~7,590~~2019, respectively, of the unvested restricted units included in Note 11 “Stock incentive plan” ~~are~~was dependent upon meeting certain performance criteria. As of March 31, ~~2019~~2020 and ~~2018,~~2019, it was indeterminable whether these unvested restricted units ~~will~~would vest and as such ~~those~~the underlying shares ~~are~~were excluded from common shares issued and outstanding at ~~each~~such date and ~~are~~were not included in the computation of earnings per share for ~~any period presented.~~such period.

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 ~~578~~514 and ~~1,708~~578 shares were not included in computing diluted earnings per share for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, because their effects were anti-dilutive. Additionally, the impact of ~~warrants~~the warrant to acquire shares of the Company’s common stock in connection with the Company’s participation in the Troubled Asset Relief Program is not included for the period ended March 31, 2019, as the ~~warrants were~~warrant was anti-dilutive. The warrant expired on May 1, 2019 and as such was not included in the period ended March 31, 2020.

The amortized cost and fair value of investment securities available for sale as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 are as follows (in thousands):

At March 31, ~~2019 and December 31, 2018,~~2020 the Company had investment securities with a fair value of approximately ~~$8,065,000 and $8,004,000, respectively,~~$6,196,000 pledged to secure borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”). At December 31, 2019, the Company had no investment securities pledged to secure borrowings from the FHLB.

Gross realized gains and losses pertaining to available for sale securities are detailed as follows for the periods indicated (in thousands):

The Company sold approximately ~~$6.5 million~~$7,900,000 and $6,500,000 in 2020 and 2019, respectively, of investment securities available for sale at a ~~gross~~net gain of $12,000 in 2020 and $101,000 ~~during~~in 2019. The sales of these securities, which had fixed interest rates, allowed the ~~three months ended March 31, 2019.~~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 have an unrealized loss position at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 are detailed below (in thousands):

As of March 31, 2020, there were $1.6 million, or six 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 $85,000 and consisted of U.S. Government agency obligations, and subordinated debt.

All of the unrealized losses are attributable to ~~increases~~movements 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 decline in fair value is 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 March 31, ~~2019.~~2020.

The amortized cost and estimated fair value of investment securities available for sale as of March 31, ~~2019,~~2020, by contractual maturity, are as follows (in thousands):

Loans classified by type as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 are as follows (dollars in thousands):

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

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled ~~$40,650,000~~$49,013,000 and ~~$38,751,000~~$49,736,000 as of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due as long as the remaining recorded investment in the loan is deemed fully collectible. 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 to current and future payments are reasonably assured.

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

The Company assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:

The following tables provide information on the risk rating of loans at the dates indicated (in thousands):

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

Loans greater than 90 days past due are 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 when due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, 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. 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):

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

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 borrower’s 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 for the periods indicated (dollars in thousands).

The following table provides information about TDRs identified during the indicated periods (dollars in thousands).

There were no defaults on TDRs that were modified as TDRs during the prior twelve month ~~period.~~period ended March 31, 2020 and 2019.

Activity in the allowance for loan losses is as follows for the periods indicated (in thousands):

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.

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 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 ~~$121,000, $211,000,~~$142,000, $24,000, and ~~$271,000~~$121,000 at March 31, ~~2019,~~2020, December 31, ~~2018,~~2019, and March 31, ~~2018,~~2019, respectively.

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

Deposits as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows (dollars in thousands):

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

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held ~~$1,354,000~~$2,014,000 in FHLB stock at March 31, ~~2019~~2020 and ~~$1,320,000~~$1,694,000 at December 31, ~~2018,~~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. The FHLB borrowings are secured by the pledge of commercial, ~~and~~ 1-4 family residential ~~loans.~~loans and investment securities. The Company had FHLB advances of ~~$21,000,000~~$36,000,000 and $29,000,000 at March 31, ~~2019~~2020 and December 31, ~~2018~~2019, respectively, maturing through 2023.

The Company uses federal funds purchased and repurchase agreements for short-term borrowing needs. Securities sold under agreements to repurchase are classified as borrowings and generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The carrying value of these short term borrowing agreements was $5,317,000 at December 31, 2019. There were no borrowings against the lines at March 31, ~~2019~~2020.

The Company’s unused lines of credit for future borrowings total approximately $49 million at March 31, 2020, which consists of $6.2 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, and ~~December 31, 2018.~~$25 million in repurchase lines of credit with third party financial institutions. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank of Richmond or the FHLB above the current lendable collateral value.

The following tables present information about the Company’s leases (dollars in thousands):

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):

Cash paid for amounts included in the measurement of lease liabilities during the three months ended March 31, 2020 and 2019 was ~~$103,000.~~$106,000 and $103,000, respectively. The Company adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Company measured lease expense in accordance with FASB Accounting Standards Codification Topic 840. During the three months ended March 31, 2018, the Company recognized lease expense of ~~$91,000.~~$107,000 and $103,000 for the three month period ended March 31, 2020 and 2019, respectively.

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at March 31, ~~2019~~2020 was ~~4.75%~~3.25%. 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 March 31, ~~2019~~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 unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at March 31, ~~2019~~2020 was ~~4.01%~~2.50%. 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 March 31, ~~2019~~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 debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

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

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

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 March 31, 2019, the~~The carrying value of the notes totaled ~~$5,571,000.~~$5,604,000 and $5,595,000 at March 31, 2020 and December 31, 2019, respectively.

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:

During the first quarter of ~~2018,~~2020, we granted certain officers ~~1,590~~750 time-based restricted shares of common stock with a weighted average fair market value of ~~$32.42~~$42.99 per share on the date of grant. These restricted stock awards vest ratably over ~~three years.~~a three-year period provided the officer is employed with the Company on the applicable vesting date.

~~Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances.~~ The total number of shares underlying non-vested restricted stock was ~~17,646~~13,060 and ~~21,761~~17,646 at March 31, 2020 and 2019, ~~and 2018,~~ 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 ~~nonvested share based~~non-vested share-based compensation arrangements granted under the stock incentive plan as of March 31, 2020 and 2019 was $346,946 and ~~2018, was~~ $354,185, ~~and $363,379,~~ respectively. ~~The~~As of March 31, 2020, the time based ~~unamortized~~unrecognized compensation expense of ~~$137,005~~$237,471 is expected to be recognized over a weighted average period of ~~1.63~~2.32 years. There were no forfeitures for the period ended March 31, 2020. For the period ended March 31, 2019 there were forfeitures of 2,763 shares of restricted stock awards.

A summary of changes in the Company’s ~~nonvested~~non-vested restricted stock awards for the three months ended March 31, ~~2019~~2020 follows:

Stock-based compensation expense was approximately $54,000 and $46,000 for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

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

Impaired ~~loans~~loans:: The fair values of impaired loans are measured for impairment using the fair value of the collateral for collateral-dependent loans on a nonrecurring basis. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant using observable market data. Likewise, values for inventory and account receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of ~~Operations.~~

Loans held for sale: During the first quarter of 2020, the Company elected to begin using fair value accounting for its entire portfolio of loans held for sale in accordance with ASC 820 - Fair Value Measurement and Disclosures. Fair value of the Company's loans held for sale is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company's portfolio of loans held for sale is classified as Level 2. 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 interest rate lock commitments 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 interest rate lock commitment or mortgage loan held for sale. 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 lower of cost or 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~~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 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 (dollars in thousands):

The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (dollars in thousands):

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally

(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally

(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. ~~Additionally, in~~In accordance with ASU 2016-01, ~~which the Company adopted on January 1, 2018 on a prospective basis,~~ 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 Sheets at fair value.

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

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

The following table presents segment information as of and for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):

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 entered into a Letter Agreement and Securities Purchase Agreement—Standard Terms with the Treasury, pursuant to which~~ 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. As a result of the Company’s 1 for 16 reverse stock split completed in August 2014, the number of shares underlying the Warrant and the exercise price per share were adjusted to 31,190 and $70.88, respectively. The Warrant was immediately exercisable and expires ten years from the issuance date.

In November 2013, the Company participated in a successful auction of the Company’s preferred stock by the Treasury that resulted in the purchase of the securities by private and institutional investors.

During the first quarter of 2017, the Company received approval from state and federal regulators allowing the Bank to pay a special dividend to the Company for the sole purpose of paying all accrued and unpaid dividends on the preferred stock through February 15, 2017, as well as to redeem 688 shares of the total 5,715 shares outstanding. The accrued and unpaid dividends paid on February 15, 2017 amounted to $2,911,000. The 688 shares were redeemed on February 24, 2017 at a redemption price of $1,000 per share plus accrued dividends from February 15, 2017 to the redemption date.

During the second quarter of 2017, the Company received approval from the state regulators allowing the Bank to pay a special dividend to the Company for the purpose of paying the preferred stock dividend due on May 15, 2017. No other dividends were paid by the Bank to the Company during 2017.

During the first quarter of 2018, the Company used the proceeds from ~~the~~a subordinated note issuance to redeem the remaining 5,027 outstanding shares ~~($5,027,000 aggregate liquidation value)~~ of preferred stock plus accrued dividends of $56,554. The Warrant expired on May 1, 2019.

The following table presents the cumulative balances of the components of accumulated other comprehensive ~~loss,~~income (loss), net of deferred taxes of ~~$113,000~~$116,000 and ~~$199,000~~$38,000 as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019, respectively (in thousands):

~~Both~~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 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 Rules. The SBHC Policy Statement does not apply to the Bank and the Bank ~~are~~must comply with the Basel III Capital Rules.

The Bank is required to comply with the capital adequacy standards established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), in the case of the Company, and the Federal Deposit Insurance Corporation (“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 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 began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it 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.

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 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 Rules. The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules. As of March 31, ~~2019,~~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 March 31, ~~2019,~~2020, the Bank exceeded the minimum ratios to be classified as well capitalized.

On ~~November 21, 2018,~~September 17, 2019, the federal bank regulators ~~jointly~~ issued a ~~proposed~~final rule required by the EGRRCPA that ~~would permit~~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 ~~proposed~~ 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. ~~The~~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 ~~is in proposed form so the content and scope~~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 ~~its impact on~~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 ~~Company and~~applicable CBLR requirement. The Bank elected not to opt into the ~~Bank (if any), cannot be determined.~~CBLR framework as of March 31, 2020.

The capital amounts and ratios at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 for the Bank are presented in the table below (dollars in thousands):

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

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

At March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

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

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

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

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 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 $17.2 million as of March 31, 2020, of which $16.8 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 March 31, 2020, and totaled $728,000, with a notional amount of $37.6 million and total positions of 158. 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 March 31, 2020. The Company’s IRLCs are classified as Level 2. At March 31, 2020 and December 31, 2019, each IRLC and all LHFS were subject to a forward sales commitment on a best efforts basis.

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 March 31, 2020, and totaled $1.2 million, with a notional amount of $54.8 million and total positions of 235. The fair value of the forward sales commitments was considered immaterial at December 31, 2019.

In June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”)~~ASU No. 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 ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ~~amendments~~FASB has issued multiple updates to ASU 2016-13 as codified in ~~this ASU~~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 ~~effective for SEC filers~~required to apply the guidance for fiscal years, and interim periods within those ~~fiscal~~ years, beginning after December 15, ~~2019.~~2022. While the Company is currently evaluating the provisions of ASU No. 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. This guidance may result in material changes in the Company's accounting for credit losses on financial instruments.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820)~~: Disclosure Framework—~~ - Changes to the Disclosure Requirements for Fair Value ~~Measurement.” The amendments modify~~Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements ~~in Topic 820 to add~~on fair value measurements by requiring that Level 3 fair value disclosures ~~regarding changes in unrealized gains and losses,~~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 and the narrative description of measurement uncertainty.~~measurements. Certain disclosure requirements in Topic 820 ~~are~~were also removed or modified. ~~The amendments are~~ASU 2018-13 was effective for ~~fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of~~ the ~~amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted.~~Company on January 1, 2020. The ~~Company does not expect the~~ adoption of ASU 2018-13 todid not have a material impact on ~~its~~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 August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

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, such as the Company, 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, such as the Company, 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.

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. 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, various regulatory agencies, including the Board of Governors of 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 the Coronavirus. 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. As of March 31, 2020, the Company had a total of $7,565,000 in loans past due greater than 30 days of which $5,346,000 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 deferral 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.

Item 2 -– Management’s Discussion and Analysis OF Financial condition and results of operations

Caution about forward-looking statements

In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include statements regarding profitability, liquidity, allowance for 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 Wall Street Reform and Consumer Protection 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 we do business with;

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;

natural disasters, war, terrorist activities, pandemics, or the outbreak of COVID-19 or similar outbreaks, 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.

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

General

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

Although we endeavor to minimize the credit risk inherent in the Company’s loan portfolio, we must necessarily make various assumptions and judgments about the collectability of the loan portfolio based on our experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for 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, went to drive-thru only at our branches with lobby access by appointment and actively began working with borrowers to defer loan payments for up to six months to allow the COVID-19 pandemic to stabilize and operations return to some level of normalcy. We believe that we are well positioned to weather the storm created by the COVID-19 pandemic and have built the balance sheet around a philosophy of prudent risk taking.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)

The Company was successful in getting SBA PPP funds out to our community under the Coronavirus Aid, Relief, Economic Security (“CARES”) Act, which was designed to protect jobs and provide economic relief to small business that were negatively impacted by the COVID-19 pandemic. The Bank garnered approval for approximately $185 million in PPP loans; however, the final funded amount of loans may be lower as some borrowers may not finalize the closing process. The PPP loans will help to provide essential funds to over 1,300 businesses and nonprofits and will help to protect more than 20,000 jobs in our community. The processing fees we earn on these loans will help to support our loan deferral program and reserve building associated with the crisis. We expect that our community leadership during the crisis and our PPP lending activity will open the door to a number of new commercial and consumer banking relationships.

Supporting customers through payment deferrals

In response to the COVID-19 pandemic, we began deferring payments for up to six months for impacted customers. Below is a breakdown of the loan portfolio as of March 31, 2020 showing the percentage of loans deferred in each category at May 12, 2020 (dollars in thousands).

			Deferred Loans⁽¹⁾⁽²⁾
Loan Type	March 31, 2020		Amount			Number
C&I + Owner occupied commercial real estate	$	149,048		19.93	%		8.48	%
Nonowner occupied commercial real estate		129,474		31.57	%		19.70	%
Acquisition, development and construction		32,170		17.30	%		1.45	%
Total commercial loans		310,692		24.51	%		9.05	%
Consumer/Residential		89,290		7.37	%		4.35	%
Student		32,251		0.00	%		0.00	%
Other		3,001		0.70	%		1.12	%
Total loans	$	435,234		19.01	%		6.11	%

⁽¹⁾Deferrals are as of May 12, 2020 and are expressed as a percentage of the outstanding balance (“Amount” column) and number of loans (“Number” column) per category.

⁽²⁾The SBA is providing a financial reprieve to small business during the COVID-19 pandemic. The SBA will automatically pay the principal, interest, and fees on current loans issued under the SBA’s 7(a) program for a period of six months. These loans have been excluded from the above metrics.

Below is a breakdown of a portion of the loan portfolio as of March 31, 2020 organized by industry showing the percentage of loans deferred in each category at May 12, 2020 (dollars in thousands).

			Deferred Loans⁽¹⁾⁽²⁾
Select Industries	March 31, 2020		Amount			Number
Hotels	$	25,721		67.24	%		55.56	%
Food Service		23,796		30.44	%		21.05	%
Retail⁽³⁾		18,073		21.10	%		6.67	%
Medical and Child Care		11,998		34.71	%		16.67	%
Total	$	79,588		40.86	%		15.15	%

⁽¹⁾Deferrals are as of May 12, 2020 and are expressed as a percentage of the outstanding balance (“Amount” column) and number of loans (“Number” column) per category.

⁽³⁾Loans within this group include business such as grocery, convenience stores, drug stores, consumer durables, apparel, and personal services.

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 our liquidity to ensure that we could meet customer demands in the event they made significant deposit withdrawals and fully drew on lines of credit. During the period, it seemed that any number of extreme scenarios were possible, and we thought it prudent to be prepared for them. The Company increased liquid assets by $20,155,000, or 30.12% from $66,904,000 at December 31, 2019 to $87,059,000 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. As of the date of this filing we have not experienced excessive demand for deposit withdrawal or advances under lines of credit, and based on what we know as of this filing we would place a low probability on either occurring in the near term. However, if the need were to arise we are able to pledge additional collateral to the FHLB in order to increase or available borrowing capacity up to 25% of assets, we have two federal funds lines of credit with correspondent banks totaling $15,000,000 for which there were no borrowings against the lines at March 31, 2020 and we could add additional funding through raising internet listing service and brokered time deposits.

Capital Risk Management

The Bank maintains a strong, well capitalized position with a common equity Tier 1 capital ratio of 11.89%, a Tier 1 risk-based capital ratio of 11.89%, a total risk-based capital ratio of 12.64% and a leverage ratio of 10.10% as of March 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.

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 and the results of operations for the Company for the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019. The Company’s first quarter 2020 results of operations were negatively impacted by the deteriorating economic environment as a result of the COVID-19 pandemic, which resulted in the Company recognizing a $400,000 provision for loan losses. For more financial data and other information about the provision for loan losses refer to section, “Provision for Loan Losses” under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

Summary

For the three months ended March 31, ~~2019,~~2020, the Company had net income ~~and net income available to common shareholders~~ of ~~$809,000,~~$898,000, or ~~$0.56~~$0.62 per fully diluted share, compared to net income of ~~$412,000 and net income available to common shareholders of $299,000,~~$809,000 or ~~$0.21~~$0.56 per fully diluted share, for the same period in ~~2018.~~2019. This represents an increase in profitability of $89,000, or 11%.

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.

	For the Three Months Ended March 31,
	2019			2018			Change			For the Three Months Ended March 31,
	(dollars in thousands)									2020			2019			Change
										(dollars in thousands)
Average interest-earning assets	$	472,426		$	434,701		$	37,725		$	502,033		$	472,426		$	29,607
Interest income	$	5,709		$	4,777		$	932		$	5,684		$	5,709		$	(25	)
Yield on interest-earning assets		4.90	%		4.46	%		0.44	%		4.55	%		4.90	%		(0.35	)%
Average interest-bearing liabilities	$	352,430		$	328,871		$	23,559		$	357,989		$	352,430		$	5,559
Interest expense	$	1,243		$	766		$	477		$	1,257		$	1,243		$	14
Cost of interest-bearing liabilities		1.43	%		0.94	%		0.49	%		1.41	%		1.43	%		(0.02	)%
Net interest income	$	4,466		$	4,011		$	455		$	4,427		$	4,466		$	(39	)
Net interest margin		3.83	%		3.74	%		0.09	%		3.55	%		3.83	%		(0.28	)%

The ~~increase~~decrease in net interest income of ~~$455,000~~$39,000 in the first quarter of ~~2019~~2020 was a result of ~~positive movements~~a 35 basis points lower yield on earning assets because of the 225 basis points drop in ~~interest income.~~the Federal Reserve’s target federal funds rate from March 31, 2019. Interest income ~~increased~~decreased by ~~$932,000 with~~$25,000 because of a decrease in interest income on loans held for investment ~~increasing by $861,000 and~~of $41,000, a decrease in interest income on investment securities ~~increasing by $30,000.~~

of $23,000, and an increase in interest income on loans held for sale of $45,000. The ~~increase~~decrease in interest income on loans held for investment was attributable to ~~an increase~~a 28 basis point decrease in ~~average loans outstanding of $40,274,000 and~~the yield with the impact partially offset by an increase in the ~~yield~~average balance outstanding of 38$16,207,000. The decrease in interest income on investment securities was attributable to the 26 basis ~~points.~~point decrease in the yield. The increase in interest income on loans held for sale was attributable to an increase in the average balance outstanding of $5,812,000 with the impact partially offset by a 91 basis point decrease in the yield. Interest expense increased ~~by $477,000~~$14,000 primarily because of an increase in the average interest bearing liabilities of ~~$23,559,000 and an increase~~$5,559,000 with a two basis points decrease in the cost of interest bearing ~~liabilities of 49 basis points.~~liabilities.

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

~~Average Balance Sheets, Income and Expense, Yields and Rates~~

Average Balance Sheets, Income and Expense, Yields and Rates																	Average Balance Sheets, Income and Expense, Yields and Rates
	Three Months Ended March 31, 2019								Three Months Ended March 31, 2018
				Interest		Annualized						Interest		Annualized				Three Months Ended March 31, 2020								Three Months Ended March 31, 2019
	Average			Income/		Yield			Average			Income/		Yield							Interest		Annualized						Interest		Annualized
	Balance			Expense		Rate			Balance			Expense		Rate				Average			Income/		Yield			Average			Income/		Yield
																		Balance			Expense		Rate			Balance			Expense		Rate
Loans net of deferred fees	$	415,404		$	5,302		5.18	%	$	375,130		$	4,441		4.80	%		$	431,611		$	5,261		4.90	%	$	415,404		$	5,302		5.18	%
Loans held for sale		5,305			63		4.82	%		4,255			47		4.48	%			11,117			108		3.91	%		5,305			63		4.82	%
Investment securities		44,152			293		2.69	%		49,054			263		2.17	%			44,763			270		2.43	%		44,152			293		2.69	%
Federal funds and other		7,565			51		2.73	%		6,262			26		1.68	%			14,542			45		1.24	%		7,565			51		2.73	%
Total interest earning assets		472,426			5,709		4.90	%		434,701			4,777		4.46	%			502,033			5,684		4.55	%		472,426			5,709		4.90	%

Allowance for loan losses and deferred fees		(3,048	)							(3,214	)								(3,185	)							(3,048	)
Cash and due from banks		8,944								10,815									9,359								8,944
Premises and equipment, net		12,432								12,985									11,997								12,432
Other assets		21,559								21,166									20,523								21,559
Total assets	$	512,313							$	476,453								$	540,727							$	512,313

Interest bearing deposits
Interest checking	$	47,531		$	20		0.17	%	$	47,418		$	21		0.18	%		$	50,060		$	22		0.18	%	$	47,531		$	20		0.17	%
Money market		89,053			138		0.63	%		83,496			83		0.40	%			106,727			215		0.81	%		89,053			138		0.63	%
Savings		24,174			10		0.17	%		23,698			10		0.17	%			23,691			10		0.17	%		24,174			10		0.17	%
Certificates		157,699			714		1.84	%		152,570			517		1.37	%			137,709			653		1.91	%		157,699			714		1.84	%
Total		318,457			882		1.12	%		307,182			631		0.83	%			318,187			900		1.14	%		318,457			882		1.12	%
Borrowings		33,973			361		4.31	%		21,689			135		2.52	%			39,802			357		3.61	%		33,973			361		4.31	%
Total interest bearing liabilities		352,430			1,243		1.43	%		328,871			766		0.94	%			357,989			1,257		1.41	%		352,430			1,243		1.43	%
Noninterest bearing deposits		115,491								105,075									134,280								115,491
Other liabilities		6,643								3,138									4,595								6,643
Total liabilities		474,564								437,084									496,864								474,564
Equity capital		37,749								39,369									43,863								37,749
Total liabilities and capital	$	512,313							$	476,453								$	540,727							$	512,313

Net interest income				$	4,466							$	4,011								$	4,427							$	4,466

Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities							3.47	%							3.52	%
Interest spread - average yield on interest
earning assets, less average rate on
interest bearing liabilities																								3.14	%							3.47	%

Annualized net interest margin (net interest income expressed as percentage of average earning assets)							3.83	%							3.74	%
Annualized net interest margin (net
interest income expressed as
percentage of average earning assets)																								3.55	%							3.83	%

Provision for (recovery of) loan losses

The amount of the allowance for loan losses is determined by an evaluation of the level of loans outstanding, the level of non-performing 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 $400,000 for the three month period ended March 31, 2020 as a result of growth in the loan portfolio, an increase in the historical loan loss experience 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 potential impact of elevated loan deferral requests. The Company believes the current level of allowance for loan loss reserves are adequate to cover anticipated losses. However, the full economic impact of the COVID-19 pandemic is currently unknown and the Company will continue to monitor our loan portfolio for loss indicators which may have the potential for further significant provisions for loan losses through the second quarter of 2020 and beyond. The Company did not record a provision for loan losses for the three ~~months~~month period ended March 31, 2019 ~~and 2018~~ because of minimal net charge-offs, no significant changes in qualitative factors and stable asset quality.

~~The provision for (recovery of) loan losses by category is presented following (in thousands):~~

For the Year Ended
Three Months Ended March 31, December 31,
2019 2018 2018
Provision Loans Provision Loans Provision Loans
(Recovery) Outstanding (Recovery) Outstanding (Recovery) Outstanding

Construction and land development $ (45 ) $ 36,383 $ 17 $ 33,284 $ 58 $ 41,608
Commercial real estate 57 213,504 (144 ) 176,901 30 206,969
Consumer real estate - 88,300 113 90,358 (52 ) 87,641
Commercial and industrial 48 40,241 44 41,315 (50 ) 36,639
Guaranteed student loans 33 37,396 31 43,896 118 39,315
Consumer (3 ) 1,986 15 1,973 32 2,258
Unallocated (90 ) - (76 ) - (136 ) -

$ - $ 417,810 $ - $ 387,727 $ - $ 414,430

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

Noninterest income

Noninterest income includes service charges and fees on deposit accounts, fee income related to loan origination, mortgage banking income, net, and gains and losses on securities available for sale. The most significant noninterest income item has been mortgage banking income, net, representing ~~52%~~67% and ~~61%~~52% for the three month periods ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

	For the Three Months Ended
	March 31,				Change
	2020		2019		$			%
	(dollars in thousands)
Service charges and fees	$	518	$	458	$	60			13.1	%
Mortgage banking income, net		1,370		787		583			74.1	%
Gain on sale of investment securities		12		101		(89	)		(88.1	)%
Gain on sale of SBA loans		86		92		(6	)		100.0	%
Other		74		80		(6	)		(7.5	)%
Total noninterest income	$	2,060	$	1,518	$	542			35.7	%

For the Three Months Ended
March 31, Change
2019 2018 $ %
(dollars in thousands)

Service charges and fees $ 458 $ 457 $ 1 0.2 %
Mortgage banking income, net 787 817 (30 ) (3.7 )%
Gain (loss) on sale of investment securities 101 - 101 100.0 %
Other 172 59 113 191.5 %
Total noninterest income $ 1,518 $ 1,333 $ 185 13.9 %

~~The Company sold approximately $6.5 million~~Service charges and fees increased primarily because of the growth in ~~investment securities resulting in a gain of $101,000 during the three months ended March 31, 2019.~~deposit transaction accounts.

The increase in ~~other~~mortgage banking income, net is ~~because~~a result of increased loan originations and sales compared to the prior year.

The Company sold approximately $7,900,000 and $6,500,000 in investment securities resulting in a gain of net $12,000 and $101,000 for the three months ended March 31, 2020 and 2019, respectively. The sales of these securities, which had fixed interest rates, allowed the Company ~~executed~~to decrease its ~~first sale of a Small Business Administration loan guaranteed strip producing a gain on sale of $92,000.~~exposure to upward movement in interest rates that would result in unrealized losses being recognized in shareholders’ equity.

Noninterest expense

	For the Three Months Ended
	March 31,					Change						For the Three Months Ended
	2019		2018			$			%			March 31,				Change
	(dollars in thousands)											2020		2019		$			%
												(dollars in thousands)
Salaries and benefits	$	2,936	$	2,943		$	(7	)		(0.2	)%	$	3,022	$	2,936	$	86			2.9	%
Occupancy		349		330			19			5.8	%		326		349		(23	)		(6.6	)%
Equipment		226		215			11			5.1	%		200		226		(26	)		(11.5	)%
Supplies		41		57			(16	)		(28.1	)%		38		41		(3	)		(7.3	)%
Professional and outside services		809		720			89			12.4	%		716		809		(93	)		(11.5	)%
Advertising and marketing		58		79			(21	)		(26.6	)%		78		58		20			34.5	%
Foreclosed assets, net		1		(69	)		70			(101.4	)%		-		1		(1	)		(100.0	)%
FDIC insurance premium		90		77			13			16.9	%		60		90		(30	)		(33.3	)%
Other operating expense		489		508			(19	)		(3.7	)%		510		489		21			4.3	%
Total noninterest expense	$	4,999	$	4,860		$	139			2.9	%	$	4,950	$	4,999	$	(49	)		(1.0	)%

The ~~increase~~decrease in professional and outside services is ~~a result~~due to the recognition of additional fees paid to our prior external auditors as well as increased consultant ~~fees.~~fees in the three month period ended March 31, 2019 that did not occur in the three month period ended March 31, 2020.

The ~~change~~decrease in ~~expense~~the FDIC insurance premium is related to ~~foreclosed real estate was due to the recognition of~~ a ~~gain sale of $78,000 during the first quarter of 2018. There were no sales of other real estate owned during the first quarter of 2019.~~decrease in our quarterly assessment.

Income taxes

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The Tax Reform Act includes a number of changes in existing tax law impacting businesses. One of the most significant changes is a permanent reduction in the corporate income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018.

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 ~~first quarter of 2019~~three months ended March 31, 2020 was ~~$176,000~~$239,000, resulting in an effective tax rate of ~~17.9%,~~21.0% compared to ~~$72,000,~~$176,000 or ~~14.9%~~17.9% for the ~~first quarter of 2018.~~same period in 2019. 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 Virginia income taxes, and instead is subject to a franchise tax based on bank capital.

Balance Sheet Analysis

Investment securities

At March 31, ~~2019~~2020 and December 31, ~~2018,~~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 4 “Investment Securities Available for Sale” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this From 10-Q.

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. Additionally, as a significant amount of the loan losses we have experienced in the past is attributable to construction and land development loans, our strategy has shifted from reducing this type of lending to closely managing the quality and concentration in these loan types.

Approximately 81% of all loans are secured by mortgages on real property located principally in the Commonwealth of Virginia. ~~We are much less reliant on real estate secured lending than was the case in 2012 when 90% of our loan portfolio consisted of this type of lending.~~ Approximately 9%7% of the loan portfolio consists of rehabilitated student loans purchased by the Bank infrom 2014 to 2017 ~~2016, 2015 and 2014~~ (see discussion following). The Company’s commercial and industrial loan portfolio represents approximately ~~10%~~11% 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.

Loans classified by type as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 are as follows (dollars in thousands):

	March 31, 2019						December 31, 2018						March 31, 2020							December 31, 2019
	Amount			%			Amount			%			Amount			%				Amount			%
Construction and land development
Residential	$	7,840			1.88	%	$	7,704			1.86	%	$	8,143			1.87	%		$	7,887			1.84	%
Commercial		28,543			6.83	%		33,904			8.18	%		24,027			5.52	%			24,063			5.60	%
		36,383			8.71	%		41,608			10.04	%		32,170			7.39	%			31,950			7.44	%
Commercial real estate
Owner occupied		101,926			24.39	%		98,153			23.68	%		103,210			23.71	%			98,353			22.91	%
Non-owner occupied		97,672			23.38	%		95,034			22.93	%		115,278			26.49	%			116,508			27.14	%
Multifamily		13,728			3.29	%		13,597			3.28	%		14,046			3.23	%			13,332			3.10	%
Farmland		178			0.04	%		185			0.04	%		150			0.03	%			156			0.04	%
		213,504			51.10	%		206,969			49.93	%		232,684			53.46	%			228,349			53.19	%
Consumer real estate
Home equity lines		20,004			4.79	%		20,675			4.99	%		20,590			4.73	%			21,509			5.01	%
Secured by 1-4 family residential,
First deed of trust		58,579			14.02	%		57,410			13.85	%		57,352			13.18	%			55,856			13.01	%
Second deed of trust		9,717			2.32	%		9,556			2.31	%		11,348			2.61	%			10,411			2.43	%
		88,300			21.13	%		87,641			21.15	%		89,290			20.52	%			87,776			20.45	%
Commercial and industrial loans (except those secured by real estate)		40,241			9.63	%		36,639			8.84	%
Commercial and industrial loans
(except those secured by real estate)														45,838			10.53	%			45,074			10.50	%
Guaranteed student loans		37,396			8.95	%		39,315			9.49	%		32,251			7.41	%			33,525			7.81	%
Consumer and other		1,986			0.48	%		2,258			0.55	%		3,001			0.69	%			2,621			0.60	%

Total loans		417,810			100.0	%		414,430			100.0	%		435,234			100.0	%			429,295			100.0	%
Deferred fees and costs, net		737						713						704							764
Less: allowance for loan losses		(3,027	)					(3,051	)					(3,444	)						(3,186	)
																			��
	$	415,520					$	412,092					$	432,494						$	426,873

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

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 5 “Loans and allowance for loan losses” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Asset quality

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

	March 31,			December 31,			March 31,
	2019			2018			2018			March 31,			December 31,			March 31,
										2020			2019			2019
Nonaccrual loans	$	2,113		$	2,259		$	2,101		$	1,317		$	1,868		$	2,113
Foreclosed properties		526			526			1,017			526			526			526
Total nonperforming assets	$	2,639		$	2,785		$	3,118		$	1,843		$	2,394		$	2,639

Restructured loans (not included in nonaccrual loans above)	$	8,587		$	8,673		$	10,049
Restructured loans (not included in
nonaccrual loans above)										$	7,472		$	7,059		$	8,587

Loans past due 90 days and stillaccruing⁽¹⁾	$	4,164		$	5,573		$	7,226
Loans past due 90 days and still
accruing⁽¹⁾										$	2,765		$	2,567		$	4,164

Nonperforming assets to loans⁽²⁾		0.63	%		0.67	%		0.80	%		0.42	%		0.56	%		0.63	%

Nonperforming assets to total assets		0.51	%		0.54	%		0.64	%		0.32	%		0.44	%		0.51	%

Allowance for loan losses to nonaccrual loans		143.27	%		135.04	%		159.11	%
Allowance for loan losses to
nonaccrual loans											261.60	%		170.57	%		143.27	%

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

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

Nonperforming assets totaled $1,843,000 at March 31, 2020, compared to $2,394,000 at December 31, 2019. Nonperforming assets at March 31, 2020 consisted primarily of $1,317,000 in nonaccrual loans, compared to $1,868,000 at December 31, 2019. The decrease in nonaccrual loans from December 31, 2019 was primarily the result of $749,000 in loans placed back on accrual.

The following table presents an analysis of the changes in nonperforming assets for the three months ended March 31, ~~2019~~2020 (in thousands):

	Nonaccrual			Foreclosed					Nonaccrual			Foreclosed
	Loans			Properties		Total			Loans			Properties		Total

Balance December 31, 2018	$	2,259		$	526	$	2,785
Balance December 31, 2019									$	1,868		$	526	$	2,394
Additions		2			-		2			342			-		342
Loans placed back on accrual		-			-		-			(749	)		-		(749	)
Transfers to OREO		-			-		-			-			-		-
Repayments		(90	)		-		(90	)		(9	)		-		(9	)
Charge-offs		(58	)		-		(58	)		(135	)		-		(135	)
Sales		-			-		-			-			-		-

Balance March 31, 2019	$	2,113		$	526	$	2,639
Balance March 31, 2020									$	1,317		$	526	$	1,843

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

Of the total nonaccrual loans of ~~$2,113,000~~$1,317,000 at March 31, ~~2019~~2020 that were considered impaired, one loan totaling ~~$8,000~~$132,000 had a specific allowances for loan losses totaling ~~$8,000.~~$48,000. This compares to ~~$2,259,000~~$1,868,000 in nonaccrual loans at December 31, ~~2018~~2019 of which ~~three loans~~one loan totaling ~~$17,000~~$135,000 had specific ~~allowances~~allowance for loan ~~losses~~loss of ~~$17,000.~~$135,000. This loan was charged off during the quarter ended March, 31, 2020.

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately ~~$202,000~~$77,000 and ~~$165,000~~$202,000 for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

Deposits

Deposits as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows (dollars in thousands):

	March 31, 2019					December 31, 2018
	Amount		%			Amount		%			March 31, 2020					December 31, 2019
											Amount		%			Amount		%
Checking accounts
Noninterest bearing demand		122,923		27.7	%	$	119,317		27.2	%	$	139,660		29.8	%	$	131,228		29.6	%
Interest bearing		48,223		10.9	%		49,188		11.2	%		51,008		10.9	%		48,427		10.9	%
Money market accounts		91,585		20.7	%		86,295		19.7	%		114,461		24.4	%		99,955		22.6	%
Savings accounts		27,727		6.3	%		28,694		6.5	%		26,618		5.7	%		26,396		6.0	%
Time deposits of $250,000 and over		25,048		5.6	%		24,160		5.5	%		24,535		5.2	%		22,327		5.0	%
Other time deposits		127,894		28.8	%		131,393		29.9	%		112,561		24.0	%		114,874		25.9	%

Total	$	443,400		100.0	%	$	439,047		100.0	%	$	468,843		100.0	%	$	443,208		100.0	%

Total deposits increased by ~~$4,353,000,~~$25,635,000, or ~~1.0%~~5.78%, from ~~$439,047,000~~$443,208,000 at December 31, ~~2018~~2019 to ~~$443,400,000~~$468,843,000 at March 31, ~~2019,~~2020. Variances of note are as compared to an increase of $9,874,000, or 2.4%, during the first three months of 2018. Checking and savings accounts increased by $1,674,000, money market accounts increased by $5,290,000 and time deposits decreased by $2,611,000. The cost of our interest-bearing deposits increased to 1.12% for the first three months of 2019 compared to 0.83% for the first three months of 2018.follows:

Noninterest bearing demand account balances increased $8,432,000 from December 31, 2019, and represented 29.79% of total deposits at March 31, 2020 compared to 29.61% as of December 31, 2019. The increase in noninterest bearing deposits for the three month period ended March 31, 2020 was a result of growth in business account and business seasonality in a number of business sectors in which we focus.

Low cost relationship deposit account (i.e. interest bearing checking, money market, and savings) balances increased $17,309,000 from December 31, 2019, and represented 40.97% of total deposits at March 31, 2020 compared to 39.43% as of December 31, 2019.

Time deposits decreased by $105,000 from December 31, 2019, and represented 29.24% of total deposits at March 31, 2020 compared to 30.96% as of December 2019. The decrease in time deposits is a result of our continued focus on building low cost relationship deposits and working to improve our deposits mix and cost of funds. Wholesale time deposits were $11,114,000 as of March 31, 2020 compared to $1,494,000 as of December 31, 2019.

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

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

Capital resources

Shareholders’ equity at March 31, ~~2019~~2020 was ~~$38,313,000~~$44,162,000 compared to ~~$37,133,000~~$42,914,000 at December 31, ~~2018.~~2019. The $1.2 million increase in shareholders’ equity during the ~~quarter~~three months ended March 31, 2020 is primarily due to net income of ~~$809,000.~~$898,000.

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

	March 31,			December 31,
	2019			2018			March 31,			December 31,
							2020			2019
Tier 1 capital
Total bank equity capital	$	49,645		$	48,272		$	55,182		$	53,768
Net unrealized loss on available-for-sale securities		373			696
Net unrealized (gain) loss on available-for-sale securities								(480	)		(186	)
Defined benefit postretirement plan		51			53			42			44
Dissallowed deferred tax asset		(1,944	)		(2,146	)		(442	)		(759	)
Total Tier 1 capital		48,125			46,875			54,302			52,867

Tier 2 capital
Allowance for loan losses		3,027			3,051			3,444			3,186
Tier 2 capital deduction								-			(1,400	)
Total Tier 2 capital		3,027			3,051			3,444			1,786

Total risk-based capital		51,152			49,926			57,746			54,653

Risk-weighted assets	$	405,160		$	400,639		$	457,751		$	435,082

Average assets	$	508,804		$	512,558		$	537,884		$	545,567

Capital ratios
Leverage ratio (Tier 1 capital to average assets)		9.46	%		9.15	%		10.10	%		9.69	%
Common equity tier 1 capital ratio (CET 1)		11.88	%		11.70	%		11.86	%		12.15	%
Tier 1 capital to risk-weighted assets		11.88	%		11.70	%		11.86	%		12.15	%
Total capital to risk-weighted assets		12.63	%		12.46	%		12.62	%		12.56	%
Equity to total assets		9.55	%		9.42	%		9.72	%		10.00	%

For more financial data and other information about capital resources, refer to Note 14 “Shareholders’ Equity and Regulatory Matters” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

Liquidity

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

At March 31, ~~2019,~~2020, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale, totaled ~~$67,741,000,~~$87,059,000, or ~~13%~~15.3% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately ~~$8,065,000~~$6,196,000 of these securities ~~are~~were pledged against current and potential fundings.

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 the lines at March 31, ~~2019~~2020 and $5,317,000 borrowings against the line at December 31, ~~2018.~~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 March 31, ~~2019~~2020 was ~~$16.5~~$6.2 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. 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 March 31, ~~2019,~~2020, we had commitments to originate ~~$89,797,000~~$137,694,000 of loans. Fixed commitments to incur capital expenditures were ~~approximately~~less than $100,000 at March 31, ~~2019.~~2020. Certificates of deposit scheduled to mature in the 12-month period ending March 31, ~~2020~~2021 totaled ~~$67,091,000.~~$77,537,000. We believe that a significant portion of such deposits will remain with us. We further believe that deposit growth, loan repayments and other sources of funds will be adequate to meet our foreseeable short-term and long-term liquidity needs.

Interest rate sensitivity

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

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

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

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 the London InterBank Offered Rate (“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 prior to transition.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4 – CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, ~~2019.~~2020. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of March 31, ~~2019~~2020 in ensuring that all material information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed summarized and reported with the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. There were no changes in our internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

~~There~~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 continued spread of COVID-19 (or an outbreak of a similar highly contagious disease) could also negatively impact the business and operations of third-party service providers who perform critical services for the Company’s business.

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.

Except as previously set forth above, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on March ~~29, 2019.~~16, 2020.

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

Not applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

Not applicable.

ITEM 6 – EXHIBITS

3.2

Bylaws of Village Bank and Trust Financial Corp., as amended March 24, 2020 (incorporated herein by reference to Exhibit 3.2 of the Current Report on Form 8-K, filed with the SEC on March 26, 2020).

10.1

Change of Control Agreement, dated March 24, 2020, by and between Village Bank and Trust Financial Corp. and Donald M. Kaloski, Jr. (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on March 26, 2020).

10.2

Change of Control Agreement, dated March 24, 2020, by and between Village Bank and Max C. Morehead, Jr. (incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K, filed with the SEC on March 26, 2020).

31.1

Certification of Chief Executive Officer


31.2	Certification of Chief Financial Officer


32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101

The following materials from the Village Bank and Trust Financial Corp. Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2019~~2020 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, ~~(Loss),~~ (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

SIGNATURES

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

~~VILLAGE BANK AND TRUST FINANCIAL CORP.~~

~~Date:~~	~~May 13, 2019~~ VILLAGE BANK AND TRUST FINANCIAL CORP.
		~~By:~~
Date:May 14, 2020	~~/s/~~By:	/s/ William G. Foster, Jr.
			William G. Foster, Jr.
			President and Chief Executive Officer

~~Date:~~	~~May 13, 2019~~
Date:May 14, 2020	By:	/s/ Donald M. Kaloski, Jr.
			Donald M. Kaloski, Jr.
			Executive Vice President and Chief Financial Officer

Virginia	16-1694602
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

13319 Midlothian Turnpike, Midlothian, Virginia	23113
(Address of principal executive offices)	(Zip code)

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

Large Accelerated Filer¨	Accelerated Filer¨
Non-Accelerated Filerx	Smaller Reporting Companyx
Emerging growth company¨

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

Part I – Financial Information	3

Item 1. Financial Statements	3

Consolidated Balance Sheets
March 31, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	3

Consolidated Statements of Income
For the Three Months Ended
March 31, ~~2019~~2020 and ~~2018~~2019 (unaudited)	4

Consolidated Statements of Comprehensive Income ~~(Loss)~~
For the Three Months Ended
March 31, ~~2019~~2020 and ~~2018~~2019 (unaudited)	5

Consolidated Statements of Shareholders’ Equity
For the Three Months Ended
March 31, ~~2019~~2020 and ~~2018~~2019 (unaudited)	6

Consolidated Statements of Cash Flows
For the Three Months Ended
March 31, ~~2019~~2020 and ~~2018~~2019 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations	3938

Item 3. Quantitative and Qualitative Disclosures About Market Risk	5253

Item 4. Controls and Procedures	5253

Part II – Other Information	54

Item 1. Legal Proceedings	5354

Item 1A. Risk Factors	5354

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5354

Item 3. Defaults Upon Senior Securities	5355

Item 4. Mine Safety Disclosures	5355

Item 5. Other Information	5355

Item 6. Exhibits	5456

Signatures	5557

	Three Months Ended					Three Months Ended
	2019		2018			2020		2019
Interest income
Loans	$	5,365	$	4,488		$	5,369	$	5,365
Investment securities		293		263			270		293
Federal funds sold		51		26			45		51
Total interest income		5,709		4,777			5,684		5,709

Interest expense
Deposits		882		631			900		882
Borrowed funds		361		135			357		361
Total interest expense		1,243		766			1,257		1,243

Net interest income		4,466		4,011			4,427		4,466
Provision for loan losses		-		-			400		-
Net interest income after provision for loan losses		4,466		4,011			4,027		4,466

Noninterest income
Service charges and fees		458		457			518		458
Mortgage banking income, net		787		817			1,370		787
Gain on sale of investment securities		101		-			12		101
Gain on sale of Small Business Administration loans							86		92
Other		172		59			74		80
Total noninterest income		1,518		1,333			2,060		1,518

Noninterest expense
Salaries and benefits		2,936		2,943			3,022		2,936
Occupancy		349		330			326		349
Equipment		226		215			200		226
Supplies		41		57			38		41
Professional and outside services		809		720			716		809
Advertising and marketing		58		79			78		58
Foreclosed assets, net		1		(69	)		-		1
FDIC insurance premium		90		77			60		90
Other operating expense		489		508			510		489
Total noninterest expense		4,999		4,860			4,950		4,999

Income before income tax expense		985		484			1,137		985
Income tax expense		176		72			239		176

Net income		809		412		$	898	$	809

Preferred stock dividends and amortization of discount		-		(113	)
Net income available to common shareholders	$	809	$	299

Earnings per common share, basic	$	0.56	$	0.21
Earnings per common share, diluted	$	0.56	$	0.21
Earnings per share, basic						$	0.62	$	0.56
Earnings per share, diluted						$	0.62	$	0.56

							Three Months Ended
	2018			2017			March 31,
							2020			2019
Net income	$	809		$	412		$	898		$	809
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period		510			(537	)
Other comprehensive income
Unrealized holding gains arising during the period								384			510
Tax effect		(107	)		113			(81	)		(107	)
Net change in unrealized holding losses on securities available for sale, net of tax		403			(424	)
Net change in unrealized holding gains on securities available for sale, net of tax								303			403

Reclassification adjustment
Reclassification adjustment for losses realized in net income		(101	)		-
Reclassification adjustment for gains realized in income								(12	)		(101	)
Tax effect		21			-			3			21
Reclassification for losses included in net income (loss), net of tax		(80	)		-
Reclassification for gains included in net income, net of tax								(9	)		(80	)

Minimum pension adjustment		3			3			3			3
Tax effect		(1	)		(1	)		(1	)		(1	)
Minimum pension adjustment, net of tax		2			2			2			2


Total other comprehensive loss		325			(422	)
Total other comprehensive income								296			325

Total comprehensive income (loss)	$	1,134		$	(10	)
Total comprehensive income							$	1,194		$	1,134

																	Directors			Accumulated
						Additional						Common		Stock in			Deferred			Other
	Preferred			Common		Paid-in			Accumulated			Stock		Directors			Fees			Comprehensive
	Stock			Stock		Capital			Deficit			Warrant		Rabbi Trust			Obligation			Loss			Total

Balance, December 31, 2018	$	-		$	5,707	$	53,212		$	(21,769	)	$	732	$	(883	)	$	883		$	(749	)	$	37,133

Restricted stock redemption		-			-		-			-			-		27			(27	)		-			-
Vesting of restricted stock		-			13		(13	)		-			-		-			-			-			-
Stock based compensation		-			-		46			-			-		-			-			-			46
Net income		-			-		-			809			-		-			-			-			809
Other comprehensive income		-			-		-			-			-		-			-			325			325
Balance, March 31, 2019		-			5,720		53,245			(20,960	)		732		(856	)		856			(424	)		38,313

Balance, December 31, 2017	$	20		$	5,672	$	58,055		$	(24,693	)	$	732	$	(1,010	)	$	1,010		$	(452	)	$	39,334
Preferred stock redemption		(20	)		-		(5,007	)		-			-		-			-			-			(5,027	)
Preferred stock dividend		-			-		-			(113	)		-		-			-			-			(113	)
Restricted stock redemption		-			-		-			-			-		12			(12	)		-			-
Vesting of restricted stock		-			10		(10	)		-			-		-			-			-			-
Stock based compensation		-			-		46			-			-		-			-			-			46
Net income		-			-		-			412			-		-			-			-			412
Other comprehensive loss		-			-		-			-			-		-			-			(422	)		(422	)
Balance, March 31, 2018	$	-		$	5,682	$	53,084		$	(24,394	)	$	732	$	(998	)	$	998		$	(874	)	$	34,230

	Three Months Ended March 31,					Three Months Ended March 31,
	2019		2018			2020		2019
Numerator
Net income - basic and diluted	$	809	$	412		$	898	$	809
Preferred stock dividend		-		(113	)
Net income available to common shareholders	$	809	$	299

Denominator
Weighted average shares outstanding - basic		1,435		1,432			1,454		1,435
Dilutive effect of common stock options		-		-			-		-

Weighted average shares outstanding - diluted		1,435		1,432			1,454		1,435

Earnings per share - basic	$	0.56	$	0.21		$	0.62	$	0.56
Earnings per share - diluted	$	0.56	$	0.21		$	0.62	$	0.56

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized					Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value

March 31, 2019
U.S. Government agencies	$	15,434	$	-	$	(174	)	$	15,260
March 31, 2020
U.S. Government agency obligations										$	12,706	$	154	$	(3	)	$	12,857
Mortgage-backed securities		22,287		21		(228	)		22,080		17,989		631		-			18,620
Subordinated debt		4,586		26		(117	)		4,495		7,779		43		(218	)		7,604

	$	42,307	$	47	$	(519	)	$	41,835	$	38,474	$	828	$	(221	)	$	39,081

December 31, 2018
U.S. Government agencies	$	14,120	$	-	$	(269	)	$	13,851
December 31, 2019
U.S. Government agency obligations										$	14,797	$	57	$	(9	)	$	14,845
Mortgage-backed securities		26,924		102		(576	)		26,450		25,124		204		(26	)		25,302
Subordinated debt		4,089		11		(148	)		3,952		6,779		91		(80	)		6,790

	$	45,133	$	113	$	(993	)	$	44,253	$	46,700	$	352	$	(115	)	$	46,937

	Three Months
	Ended March 31,				Three Months
	2019		2018		Ended March 31,
					2020			2019
Gross realized gains	$	101	$	-	$	39		$	101
Gross realized losses		-		-		(27	)		-

	$	101	$	-	$	12		$	101

	Securities in a loss					Securities in a loss										Securities in a loss					Securities in a loss
	position for less than					position for more than										position for less than					position for more than
	12 Months					12 Months					Total					12 Months					12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
March 31, 2019
US Government Agencies	$	-	$	-		$	13,715	$	(174	)	$	13,715	$	(174	)
March 31, 2020
U.S. Government agency obligations																$	-	$	-		$	1,201	$	(3	)	$	1,201	$	(3	)
Subordinated debt																	4,344		(136	)		418		(82	)		4,762		(218	)

																$	4,344	$	(136	)	$	1,619	$	(85	)	$	5,963	$	(221	)

December 31, 2019
U.S. Government agency obligations																$	2,001	$	(1	)	$	5,368	$	(8	)	$	7,369	$	(9	)
Mortgage-backed securities							18,051		(228	)		18,051		(228	)		2,747		(26	)		-		-			2,747		(26	)
Subordinated debt		1,150		(105	)		1,007		(12	)		2,157		(117	)		759		(6	)		940		(74	)		1,699		(80	)

	$	1,150	$	(105	)	$	32,773	$	(414	)	$	33,923	$	(519	)	$	5,507	$	(33	)	$	6,308	$	(82	)	$	11,815	$	(115	)

December 31, 2018
US Government Agencies	$	-	$	-		$	13,851	$	(269	)	$	13,851	$	(269	)
Mortgage-backed securities		-		-			18,397		(576	)		18,397		(576	)
Subordinated debt		1,915		(140	)		512		(8	)		2,427		(148	)

	$	1,915	$	(140	)	$	32,760	$	(853	)	$	34,675	$	(993	)

	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total		Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1-4		5		6		7		Loans		1-4		5		6		7		Loans
March 31, 2019
March 31, 2020
Construction and land development
Residential	$	7,093	$	-	$	747	$	-	$	7,840	$	7,825	$	318	$	-	$	-	$	8,143
Commercial		28,194		-		349		-		28,543		23,542		185		300		-		24,027
		35,287		-		1,096		-		36,383		31,367		503		300		-		32,170
Commercial real estate
Owner occupied		93,318		6,590		2,018				101,926		92,362		8,759		2,089		-		103,210
Non-owner occupied		97,157		-		515		-		97,672		114,560		226		492		-		115,278
Multifamily		13,569		159		-		-		13,728		13,903		143		-		-		14,046
Farmland		79		99		-		-		178		150		-		-		-		150
		204,123		6,848		2,533		-		213,504		220,975		9,128		2,581		-		232,684
Consumer real estate
Home equity lines		19,130		734		140		-		20,004		19,585		705		300		-		20,590
Secured by 1-4 family residential
First deed of trust		55,265		1,849		1,465		-		58,579		54,634		1,594		1,124		-		57,352
Second deed of trust		7,874		1,634		209		-		9,717		11,136		13		199		-		11,348
		82,269		4,217		1,814		-		88,300		85,355		2,312		1,623		-		89,290
Commercial and industrial loans (except those secured by real estate)		37,302		2,509		430		-		40,241		44,026		1,301		511		-		45,838
Guaranteed student loans		37,396		-		-		-		37,396		32,251		-		-		-		32,251
Consumer and other		1,968		8		10		-		1,986		2,954		47		-		-		3,001

Total loans	$	398,345	$	13,582	$	5,883	$	-	$	417,810	$	416,928	$	13,291	$	5,015	$	-	$	435,234

December 31, 2018
Construction and land development
Residential	$	6,957	$	-	$	747	$	-	$	7,704
Commercial		33,432		6		466		-		33,904
		40,389		6		1,213		-		41,608
Commercial real estate
Owner occupied		88,484		6,540		3,129		-		98,153
Non-owner occupied		94,519		-		515		-		95,034
Multifamily		13,436		161		-		-		13,597
Farmland		81		104		-		-		185
		196,520		6,805		3,644		-		206,969
Consumer real estate
Home equity lines		19,601		934		140		-		20,675
Secured by 1-4 family residential
First deed of trust		53,994		1,612		1,804		-		57,410
Second deed of trust		9,167		175		214		-		9,556
		82,762		2,721		2,158		-		87,641
Commercial and industrial loans (except those secured by real estate)		32,776		3,349		499		15		36,639
Guaranteed student loans		39,315		-		-		-		39,315
Consumer and other		2,239		8		11		-		2,258

Total loans	$	394,001	$	12,889	$	7,525	$	15	$	414,430

													Recorded														Recorded
					Greater								Investment >						Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and		30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing		Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
March 31, 2019
March 31, 2020
Construction and land development
Residential	$	-	$	-	$	-	$	-	$	7,840	$	7,840	$	-	$	-	$	-	$	-	$	-	$	8,143	$	8,143	$	-
Commercial		117		-		-		117		28,426		28,543		-		-		-		-		-		24,027		24,027		-
		117		-		-		117		36,266		36,383		-		-		-		-		-		32,170		32,170		-
Commercial real estate
Owner occupied		673		-		-		673		101,253		101,926		-		758		-		-		758		102,452		103,210		-
Non-owner occupied		-		-		-		-		97,672		97,672		-		-		-		-		-		115,278		115,278		-
Multifamily		-		-		-		-		13,728		13,728		-		-		-		-		-		14,046		14,046		-
Farmland		-		-		-		-		178		178		-		-		-		-		-		150		150		-
		673		-		-		673		212,831		213,504		-		758		-		-		758		231,926		232,684		-
Consumer real estate
Home equity lines		378		-		-		378		19,626		20,004		-		120		-		-		120		20,470		20,590		-
Secured by 1-4 family residential
First deed of trust		274		-		-		274		58,305		58,579		-		227		217		-		444		56,908		57,352		-
Second deed of trust		118		-		-		118		9,599		9,717		-		49		-		-		49		11,299		11,348		-
		770		-		-		770		87,530		88,300		-		396		217		-		613		88,677		89,290		-
Commercial and industrial loans (except those secured by real estate)		-		434		-		434		39,807		40,241		-		417		427		-		844		44,994		45,838		-
Guaranteed student loans		1,274		1,007		4,164		6,445		30,951		37,396		4,164		1,929		652		2,765		5,346		26,905		32,251		2,765
Consumer and other		11		9		-		20		1,966		1,986		-		-		4		-		4		2,997		3,001		-

Total loans	$	2,845	$	1,450	$	4,164	$	8,459	$	409,351	$	417,810	$	4,164	$	3,500	$	1,300	$	2,765	$	7,565	$	427,669	$	435,234	$	2,765

							Specific								Specific
							Valuation								Valuation
	Total		Performing		Nonaccrual		Allowance		Total		Performing		Nonaccrual		Allowance
March 31, 2019
March 31, 2020
Commercial real estate
Owner occupied	$	4,026	$	4,026	$	-	$	25	$	3,462	$	3,462	$	-	$	13
Non-owner occupied		2,566		2,051		515		-		2,128		2,128		-		-
		6,592		6,077		515		25		5,590		5,590		-		13
Consumer real estate
Secured by 1-4 family residential
First deeds of trust		2,196		1,516		680		19		1,630		1,128		502		9
Second deeds of trust		783		718		65		3		816		754		62		-
		2,979		2,234		745		22		2,446		1,882		564		9
Commercial and industrial loans (except those secured by real estate)		310		276		34		-		210		-		210		48
	$	9,881	$	8,587	$	1,294	$	47	$	8,246	$	7,472	$	774	$	70

Number of loans		42		33		9		6		37		28		9		4

	March 31, 2019						March 31, 2018						Three Months Ended						Three Months Ended
			Pre-		Post-				Pre-		Post-		March 31, 2020						March 31, 2019
			Modification		Modification				Modification		Modification				Pre-		Post-				Pre-		Post-
	Number of		Recorded		Recorded		Number of		Recorded		Recorded				Modification		Modification				Modification		Modification
	Loans		Balance		Balance		Loans		Balance		Balance		Number of		Recorded		Recorded		Number of		Recorded		Recorded
													Loans		Balance		Balance		Loans		Balance		Balance
Commercial real estate
Non-owner occupied		1	$	515	$	515		-	$	-	$	-		-	$	-	$	-		1	$	515	$	515
		1	$	515	$	515		-	$	-	$	-		-	$	-	$	-		1	$	515	$	515

			Provision for												Provision for
	Beginning		(Recovery of)								Ending		Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance		Balance		Loan Losses			Charge-offs			Recoveries		Balance

Three Months Ended March 31, 2019
Three Months Ended March 31, 2020
Construction and land development
Residential	$	42	$	3		$	-		$	1	$	46	$	48	$	170		$	-		$	1	$	219
Commercial		220		(48	)		-			1		173		137		133			-			-		270
		262		(45	)		-			2		219		185		303			-			1		489
Commercial real estate
Owner occupied		673		37			-			-		710		671		188			-			-		859
Non-owner occupied		673		19			-			-		692		831		227			-			-		1,058
Multifamily		87		1			-			-		88		85		(17	)		-			-		68
Farmland		2		-			-			-		2		2		(1	)		-			-		1
		1,435		57			-			-		1,492		1,589		397			-			-		1,986
Consumer real estate
Home equity lines		244		(10	)		-			6		240		271		(231	)		-			-		40
Secured by 1-4 family residential
First deed of trust		385		8			-			2		395		343		(189	)		-			3		157
Second deed of trust		51		2			-			4		57		64		8			-			4		76
		680		-			-			12		692		678		(412	)		-			7		273
Commercial and industrial loans (except those secured by real estate)		308		48			(15	)		11		352
Commercial and industrial loans
(except those secured by real estate)														572		(31	)		(135	)		3		409
Student loans		121		33			(33	)		-		121		108		16			(20	)		-		104
Consumer and other		34		(3	)		(2	)		1		30		30		9			(1	)		3		41
Unallocated		211		(90	)		-			-		121		24		118			-			-		142

	$	3,051	$	-		$	(50	)	$	26	$	3,027	$	3,186	$	400		$	(156	)	$	14	$	3,444

	Recorded Investment in Loans												Recorded Investment in Loans
	Allowance						Loans						Allowance								Loans
	Ending						Ending						Ending						Ending
	Balance		Individually		Collectively		Balance		Individually		Collectively		Balance		Individually		Collectively		Balance		Individually		Collectively

Three Months Ended March 31, 2019
Three Months Ended March 31, 2020
Construction and land development
Residential	$	46	$	-	$	46	$	7,840	$	323	$	7,517	$	219	$	-	$	219	$	8,143	$	-	$	8,143
Commercial		173		-		173		28,543		356		28,187		270		-		270		24,027		300		23,727
		219		-		219		36,383		679		35,704		489		-		489		32,170		300		31,870
Commercial real estate
Owner occupied		710		25		685		101,926		4,026		97,900		859		13		846		103,210		3,985		99,225
Non-owner occupied		692		-		692		97,672		2,566		95,106		1,058		-		1,058		115,278		2,128		113,150
Multifamily		88		-		88		13,728		-		13,728		68		-		68		14,046		-		14,046
Farmland		2		-		2		178		-		178		1		-		1		150		-		150
		1,492		25		1,467		213,504		6,592		206,912		1,986		13		1,973		232,684		6,113		226,571
Consumer real estate
Home equity lines		240		-		240		20,004		123		19,881		40		-		40		20,590		300		20,290
Secured by 1-4 family residential
First deed of trust		395		19		376		58,579		3,155		55,424		157		9		148		57,352		2,205		55,147
Second deed of trust		57		3		54		9,717		870		8,847		76		-		76		11,348		904		10,444
		692		22		670		88,300		4,148		84,152		273		9		264		89,290		3,409		85,881
Commercial and industrial loans (except those secured by real estate)		352		-		352		40,241		512		39,729
Commercial and industrial loans
(except those secured by real estate)														409		48		361		45,838		341		45,497
Student loans		121		-		121		37,396		-		37,396		104		-		104		32,251		-		32,251
Consumer and other		151		8		143		1,986		8		1,978		183		-		183		3,001		-		3,001

	$	3,027	$	55	$	2,972	$	417,810	$	11,939	$	405,871	$	3,444	$	70	$	3,374	$	435,234	$	10,163	$	425,071

Year Ended December 31, 2018
Year Ended December 31, 2019
Construction and land development
Residential	$	42	$	-	$	42	$	7,704	$	747	$	6,957	$	48	$	-	$	48	$	7,887	$	-	$	7,887
Commercial		220		8		212		33,904		466		33,438		137		-		137		24,063		337		23,726
		262		8		254		41,608		1,213		40,395		185		-		185		31,950		337		31,613
Commercial real estate
Owner occupied		673		25		648		98,153		5,162		92,991		671		15		656		98,353		3,503		94,850
Non-owner occupied		673		-		673		95,034		2,588		92,446		831		-		831		116,508		2,304		114,204
Multifamily		87		-		87		13,597		-		13,597		85		-		85		13,332		-		13,332
Farmland		2		-		2		185		-		185		2		-		2		156		-		156
		1,435		25		1,410		206,969		7,750		199,219		1,589		15		1,574		228,349		5,807		222,542
Consumer real estate																								��
Home equity lines		244		-		244		20,675		684		19,991		271		-		271		21,509		300		21,209
Secured by 1-4 family residential
First deed of trust		385		20		365		57,410		3,257		54,153		343		9		334		55,856		1,830		54,026
Second deed of trust		51		4		47		9,556		882		8,674		64		-		64		10,411		752		9,659
		680		24		656		87,641		4,823		82,818		678		9		669		87,776		2,882		84,894
Commercial and industrial loans (except those secured by real estate)		308		8		300		36,639		536		36,103
Commercial and industrial loans
(except those secured by real estate)														572		135		437		45,074		346		44,728
Student loans		121		-		121		39,315		-		39,315		108		-		108		33,525		-		33,525
Consumer and other		245		9		236		2,258		9		2,249		54		-		54		2,621		-		2,621

	$	3,051	$	74	$	2,977	$	414,430	$	14,331	$	400,099	$	3,186	$	159	$	3,027	$	429,295	$	9,372	$	419,923

	March 31, 2019			March 31, 2020
Lease liabilities	$	1,312		$	928
Right-of-use assets	$	1,308		$	915
Weighted average remaining lease term		5.04 years			4.04 years
Weighted average discount rate		2.98	%		2.98	%

	For the Three Months Ended		For the Three Months Ended
	March 31, 2019		March 31, 2020
Lease cost
Operating lease cost	$	107	$	107
Total lease cost	$	107	$	107

	As of		As of
	March 31, 2019		March 31, 2020
Lease payments due
Nine months ending December 31, 2019	$	312
Twelve months ending December 31, 2020		416
Nine months ending December 31, 2020				310
Twelve months ending December 31, 2021		278		277
Twelve months ending December 31, 2022		120		120
Twelve months ending December 31, 2023		44		44
Twelve months ending December 31, 2024		48		48
Thereafter		203		203
Total undiscounted cash flows	$	1,421	$	1,002
Discount		109		74
Lease liabilities	$	1,312	$	928

				Weighted-
				Average		Aggregate
				Grant-Date		Intrinsic
	Shares			Fair-Value		Value

December 31, 2018		23,556		$	32.46	$	767,926
Granted		-			-		-
Vested		(3,147	)		20.19		(102,592	)
Forfeited		(2,763	)		22.35		(90,074	)

March 31, 2019		17,646		$	31.18	$	575,260

	Shares		Weighted-Average Grant-Date Fair-Value		Aggregate Intrinsic Value
December 31, 2019		12,310	$	33.83	$	311,197
Granted		750		42.99		18,960
Vested		-		-		-
Forefited		-		-		-
Other		-		-		-

March 31, 2020		13,060	$	34.36	$	330,157

	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.

	Fair Value Measurement
	at March 31, 2019 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	15,260	$	1,545	$	13,715	$	-
Mortgage-backed securities		22,080		2,587		19,493		-
Subordinated debt	��	4,495		-		3,995		500

Financial Assets - Non-Recurring
Impaired loans		1,759		-		-		1,759
Assets held for sale		537		-		-		537
Other real estate owned		526		-		-		526

	Fair Value Measurement
	at March 31, 2020 Using
	Carrying		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	12,857	$	-	$	12,857	$	-
Mortgage-backed securities		18,620		-		18,620		-
Subordinated debt		7,604		500		7,104		-
Loans held for sale		17,219		-		17,219		-
IRLC		728		-		728		-

Financial Liabilities - Recurring
Forward sales commitment		1,188		-		1,188		-

Financial Assets - Non-Recurring
Impaired loans		1,590		-		-		1,590
Assets held for sale		514		-		-		514
Other real estate owned		526		-		-		526

	Fair Value Measurement
	at December 31, 2019 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	14,845	$	-	$	14,845	$	-
Mortgage-backed securities		25,302		-		25,302		-
Subordinated debt		6,790		-		6,540		250

Financial Assets - Non-Recurring
Impaired loans		1,468		-		-		1,468
Assets held for sale		514		-		-		514
Other real estate owned		526		-		-		526

	Fair Value Measurement
	at December 31, 2018 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	13,851	$	-	$	13,851	$	-
Mortgage-backed securities		26,450		-		26,450		-
Subordinated debt		3,952		-		3,452		500

Financial Assets - Non-Recurring
Impaired loans		1,869		-		-		1,869
Assets held for sale		554		-		-		554
Other real estate owned		526		-		-		526

	Commercial		Mortgage						Consolidated		Commercial		Mortgage					Consolidated
	Banking		Banking			Eliminations			Totals		Banking		Banking		Eliminations			Totals
Three Months Ended March 31, 2019
Three Months Ended March 31, 2020

Revenues
Interest income	$	5,646	$	63		$	-		$	5,709	$	5,590	$	109	$	(15	)	$	5,684
Gain on sale of loans		-		928			-			928		-		1,624		-			1,624
Other revenues		774		112			(57	)		829		733		197		(57	)		873
Total revenues		6,420		1,103			(57	)		7,466		6,323		1,930		(72	)		8,181

Expenses
Provision for loan losses												400		-		-			400
Interest expense		1,243		-			-			1,243		1,257		15		(15	)		1,257
Salaries and benefits		2,200		736			-			2,936		2,208		814		-			3,022
Commissions		-		239			-			239		-		437		-			437
Other expenses		1,882		238			(57	)		2,063		1,709		276		(57	)		1,928
Total operating expenses		5,325		1,213			(57	)		6,481		5,574		1,542		(72	)		7,044

Income before income taxes	$	1,095	$	(110	)	$	-		$	985		749		388		-			1,137
Income tax expense												158		81		-			239
Net income											$	591	$	307	$	-		$	898

Total assets	$	525,782	$	9,892		$	(13,400	)	$	522,274	$	570,751	$	12,433	$	(12,979	)	$	570,205

						For Capital
	Actual					Adequacy Purposes					To be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio

March 31, 2019
Total capital (to risk-weighted assets) Village Bank	$	51,152		12.63	%	$	32,413		8.00	%	$	40,516		10.00	%

Tier 1 capital (to risk-weighted assets) Village Bank		48,125		11.88	%		24,310		6.00	%		32,413		8.00	%

Leverage ratio (Tier 1 capital to average assets) Village Bank		48,125		9.46	%		20,352		4.00	%		25,440		5.00	%

Common equity tier 1 (to risk-weighted assets) Village Bank		48,125		11.88	%		18,232		4.50	%		26,335		6.50	%

December 31, 2018
Total capital (to risk-weighted assets) Village Bank	$	49,926		12.46	%	$	32,051		8.00	%	$	40,064		10.00	%

Tier 1 capital (to risk-weighted assets) Village Bank		46,875		11.70	%		24,038		6.00	%		32,051		8.00	%

Leverage ratio (Tier 1 capital to average assets) Village Bank		46,875		9.15	%		20,502		4.00	%		25,628		5.00	%

Common equity tier 1 (to risk-weighted assets) Village Bank		46,875		11.70	%		18,029		4.50	%		26,042		6.50	%

											For the Year Ended
	Three Months Ended March 31,										December 31,
	2019					2018					2018
	Provision			Loans		Provision			Loans		Provision			Loans
	(Recovery)			Outstanding		(Recovery)			Outstanding		(Recovery)			Outstanding

Construction and land development	$	(45	)	$	36,383	$	17		$	33,284	$	58		$	41,608
Commercial real estate		57			213,504		(144	)		176,901		30			206,969
Consumer real estate		-			88,300		113			90,358		(52	)		87,641
Commercial and industrial		48			40,241		44			41,315		(50	)		36,639
Guaranteed student loans		33			37,396		31			43,896		118			39,315
Consumer		(3	)		1,986		15			1,973		32			2,258
Unallocated		(90	)		-		(76	)		-		(136	)		-

	$	-		$	417,810	$	-		$	387,727	$	-		$	414,430