UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 0-50765

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

804-897-3900

(Registrant’s telephone number, including area code)

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

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

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

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

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer  x	Smaller Reporting Company x
Emerging growth company ¨

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

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

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

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

1,453,009 shares of common stock, $4.00 par value, outstanding as of August 4, 2019

Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS

Part I – Financial Information
Item 1.  Financial Statements
Consolidated Balance Sheets June 30, 2019 (unaudited) and December 31, 2018	3
Consolidated Statements of Income For the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	4
Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	5
Consolidated Statements of Shareholders’ Equity For the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	6
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2019 and 2018 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	58
Item 4. Controls and Procedures	58
Part II – Other Information
Item 1.  Legal Proceedings	59
Item 1A. Risk Factors	59
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.  Defaults Upon Senior Securities	59
Item 4.  Mine Safety Disclosures	59
Item 5.  Other Information	59
Item 6.  Exhibits	60
Signatures	61

2

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

June 30, 2019 (Unaudited) and December 31, 2018*

(in thousands, except share and per share data)

	June 30,			December 31,
	2019			2018
Assets
Cash and due from banks	$	15,583		$	12,717
Federal funds sold		13,169			6,826
Total cash and cash equivalents		28,752			19,543
Investment securities available for sale, at fair value		43,415			44,253
Restricted stock, at cost		2,120			1,661
Loans held for sale		13,060			6,128
Loans
Outstandings		419,836			414,430
Allowance for loan losses		(3,047	)		(3,051	)
Deferred fees and costs, net		750			713
Total loans, net		417,539			412,092
Other real estate owned, net of valuation allowance		526			526
Assets held for sale		536			554
Premises and equipment, net		12,217			12,455
Bank owned life insurance		7,521			7,441
Accrued interest receivable		2,722			2,662
Other assets		8,126			7,551
	$	536,534		$	514,866
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest bearing demand	$	132,965		$	119,317
Interest bearing		313,261			319,730
Total deposits		446,226			439,047
Federal Home Loan Bank advances		31,000			21,000
Long-term debt - trust preferred securities		8,764			8,764
Subordinated debt, net		5,579			5,563
Accrued interest payable		231			221
Other liabilities		5,055			3,138
Total liabilities		496,855			477,733
Shareholders' equity
Common stock, $4 par value - 10,000,000 shares authorized;
1,444,854 shares issued and outstanding at June 30, 2019 and
1,435,283 shares issued and outstanding at December 31, 2018		5,779			5,707
Additional paid-in capital		54,246			53,212
Accumulated deficit		(20,323	)		(21,769	)
Common stock warrant		-			732
Stock in directors rabbi trust		(856	)		(883	)
Directors deferred fees obligation		856			883
Accumulated other comprehensive loss		(23	)		(749	)
Total shareholders' equity		39,679			37,133
	$	536,534		$	514,866

* Derived from audited consolidated financial statements

See accompanying notes to consolidated financial statements.

3

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Income

Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

(in thousands, except per share data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2019		2018			2019		2018
Interest income
Loans	$	5,556	$	4,873		$	10,921	$	9,361
Investment securities		271		259			564		522
Federal funds sold		44		20			95		46
Total interest income		5,871		5,152			11,580		9,929
Interest expense
Deposits		909		659			1,791		1,290
Borrowed funds		410		265			771		400
Total interest expense		1,319		924			2,562		1,690
Net interest income		4,552		4,228			9,018		8,239
Provision for loan losses		-		-			-		-
Net interest income after provision for loan losses		4,552		4,228			9,018		8,239
Noninterest income
Service charges and fees		541		482			999		939
Mortgage banking income, net		1,196		1,120			1,982		1,937
Gain on sale of investment securities		-		-			101		-
Other		211		65			384		124
Total noninterest income		1,948		1,667			3,466		3,000
Noninterest expense
Salaries and benefits		3,701		2,972			6,637		5,915
Occupancy		323		345			672		675
Equipment		210		214			436		430
Supplies		42		47			83		104
Professional and outside services		754		802			1,563		1,521
Advertising and marketing		64		67			122		147
Foreclosed assets, net		5		(5	)		7		(74	)
FDIC insurance premium		68		79			158		156
Other operating expense		516		580			1,004		1,087
Total noninterest expense		5,683		5,101			10,682		9,961
Income before income tax expense		817		794			1,802		1,278
Income tax expense		180		153			356		225
Net income		637		641			1,446		1,053
Preferred stock dividends and amortization of discount		-		-			-		(113	)
Net income available to common shareholders	$	637	$	641		$	1,446	$	940
Earnings per common share, basic	$	0.44	$	0.45		$	1.01	$	0.66
Earnings per common share, diluted	$	0.44	$	0.45		$	1.01	$	0.66

See accompanying notes to consolidated financial statements.

4

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

(in thousands)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2019		2018			2019			2018
Net income	$	637	$	641		$	1,446		$	1,053
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period		505		(189	)		1,015			(727	)
Tax effect		106		(39	)		213			(153	)
Net change in unrealized holding gains (losses) on securities available for sale, net of tax		399		(150	)		802			(574	)
Reclassification adjustment
Reclassification adjustment for gains realized in income		-		-			(101	)		-
Tax effect		-		-			(21	)		-
Reclassification for gains included in net income, net of tax		-		-			(80	)		-
Minimum pension adjustment		3		3			6			6
Tax effect		1		1			2			2
Minimum pension adjustment, net of tax		2		2			4			4
Total other comprehensive income (loss)		401		(148	)		726			(570	)
Total comprehensive income	$	1,038	$	493		$	2,172		$	483

See accompanying notes to consolidated financial statements.

5

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

(Unaudited)

(In thousands)

	Three Months Ended June 30, 2019
																	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, March 31, 2019	$	-	$	5,720	$	53,245		$	(20,960	)	$	732		$	(856	)	$	856	$	(424	)	$	38,313
Vesting of restricted stock		-		59		(59	)		-			-			-			-		-			-
Stock based compensation		-		-		328			-			-			-			-		-			328
Expiration of common stock warrant		-		-		732			-			(732	)		-			-		-			-
Net income		-		-		-			637			-			-			-		-			637
Other comprehensive income		-		-		-			-			-			-			-		401			401
Balance, June 30, 2019		-		5,779		54,246			(20,323	)		-			(856	)		856		(23	)		39,679

	Six Months Ended June 30, 2019
																	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		-		72		(72	)		-			-			-			-			-			-
Stock based compensation		-		-		374			-			-			-			-			-			374
Expiration of common stock warrant		-		-		732			-			(732	)		-			-			-			-
Net income		-		-		-			1,446			-			-			-			-			1,446
Other comprehensive income		-		-		-			-			-			-			-			726			726
Balance, June 30, 2019		-		5,779		54,246			(20,323	)		-			(856	)		856			(23	)		39,679

	Three Months Ended June 30, 2018
																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, March 31, 2018	$	-	$	5,682	$	53,084		$	(24,394	)	$	732	$	(998	)	$	998	$	(874	)	$	34,230
Vesting of restricted stock		-		1		(1	)		-			-		-			-		-			-
Stock based compensation		-		-		71			-			-		-			-		-			71
Net income		-		-		-			641			-		-			-		-			641
Other comprehensive income		-		-		-			-			-		-			-		(148	)		(148	)
Balance, June 30, 2018		-		5,683		53,154			(23,753	)		732		(998	)		998		(1,022	)		34,794

	Six Months Ended June 30, 2018
																	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, 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		-			11		(11	)		-			-		-			-			-			-
Stock based compensation		-			-		117			-			-		-			-			-			117
Net income		-			-		-			1,053			-		-			-			-			1,053
Other comprehensive loss		-			-		-			-			-		-			-			(570	)		(570	)
Balance, June 30, 2018	$	-		$	5,683	$	53,154		$	(23,753	)	$	732	$	(998	)	$	998		$	(1,022	)	$	34,794

See accompanying notes to consolidated financial statements.

6

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2019 and 2018

(Unaudited)

(in thousands)

	2019			2018
Cash Flows from Operating Activities
Net income	$	1,446		$	1,053
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		523			368
Amortization of debt issuance costs		16			9
Deferred income taxes		356			225
Gain on sale of investment securities		(101	)		-
Gain on sales of loans held for sale		(2,405	)		(2,451	)
Gain on sale of other real estate owned		-			(83	)
Stock compensation expense		374			117
Proceeds from sale of mortgage loans		78,167			79,036
Origination of mortgage loans for sale		(82,694	)		(77,644	)
Amortization of premiums and accretion of discounts on securities, net		81			57
Increase in bank owned life insurance		(80	)		(82	)
Net change in:
Interest receivable		(60	)		156
Other assets		(1,101	)		375
Interest payable		10			56
Other liabilities		1,917			(328	)
Net cash (used in) provided by operating activities		(3,551	)		864
Cash Flows from Investing Activities
Purchases of available for sale securities		(7,088	)		-
Proceeds from the sale of available for sale securities		6,491			-
Proceeds from maturities, calls and paydowns of available for sale securities		2,369			1,791
Net increase in loans		(5,447	)		(34,759	)
Proceeds from sale of other real estate owned		-			1,139
Purchases of premises and equipment, net		(285	)		(158	)
Purchase of restricted stock		(459	)		-
Net cash used in investing activities		(4,419	)		(31,987	)
Cash Flows from Financing Activities
Redeemption of preferred stock		-			(5,027	)
Payment of preferred dividends		-			(113	)
Net increase in deposits		7,179			21,359
Net increase in Federal Home Loan Bank advances		10,000			8,200
Net increase (decrease) in other borrowings		-			(917	)
Issuance of subordinated debt, net		-			5,539
Net cash provided by financing activities		17,179			29,041
Net increase (decrease) in cash and cash equivalents		9,209			(2,082	)
Cash and cash equivalents, beginning of period		19,543			17,810
Cash and cash equivalents, end of period	$	28,752		$	15,728
Supplemental Disclosure of Cash Flow Information
Cash payments for interest	$	2,552		$	1,634
Supplemental Schedule of Non Cash Activities
Unrealized gains (losses) on securities avalable for sale	$	914		$	(726	)
Right of use assets obtained in exchage for new operating lease liabilities	$	1,405		$	-

See accompanying notes to consolidated financial statements.

7

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

Note 1 - Principles of presentation

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

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the six month period ended June 30, 2019 is not necessarily indicative of the results to be expected for the full year ending December 31, 2019. 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 as filed with the Securities and Exchange Commission (“SEC”).

On January 1, 2019, the Company adopted Accounting Standards Update (“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.

Note 2 - Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of operations 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 and the estimate of the fair value of assets held for sale.

8

Note 3 - Earnings per common share

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Numerator
Net income - basic and diluted	$	637	$	641	$	1,446	$	1,053
Preferred stock dividend		-		-		-		(113	)
Net income available to common shareholders	$	637	$	641	$	1,446	$	940
Denominator
Weighted average shares outstanding - basic		1,439		1,435		1,437		1,433
Dilutive effect of common stock options		-		-		-		-
Weighted average shares outstanding - diluted		1,439		1,435		1,437		1,433
Earnings per share - basic	$	0.44	$	0.45	$	1.01	$	0.66
Earnings per share - diluted	$	0.44	$	0.45	$	1.01	$	0.66

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.

As a result of the Company’s largest shareholder’s ownership exceeding 50% during the second quarter of 2019 all non-vested restricted stock awards and units vested during the period.

The vesting of 6,510 of the unvested restricted units included in Note 11 “Stock incentive plan” were dependent upon meeting certain performance criteria. As of June 30, 2018, it was indeterminable whether these unvested restricted units would vest and as such those shares were excluded from common shares issued and outstanding at such date and were not included in the computation of earnings per share for such period.

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 536 and 571 shares were not included in computing diluted earnings per share for the three and six months ended June 30, 2019 and stock options for 1,633 and 1,699 shares were not included in computing diluted earnings per share for the three and six months ended June 30, 2018, respectively, because their effects were anti-dilutive. Additionally, the impact of warrants to acquire shares of the Company’s common stock in connection with the Company’s participation in the Troubled Asset Relief Program were not included for the three and six months ended June 30, 2018, as the warrants were anti-dilutive. The warrants expired on May 1, 2019 and as such were not included in the three and six months ended June 30, 2019.

9

Note 4 – Investment securities available for sale

The amortized cost and fair value of investment securities available for sale as of June 30, 2019 and December 31, 2018 are as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
June 30, 2019
U.S. Government agencies	$	15,174	$	44	$	(50	)	$	15,168
Mortgage-backed securities		23,626		76		(19	)		23,683
Subordinated debt		4,582		51		(69	)		4,564
	$	43,382	$	171	$	(138	)	$	43,415
December 31, 2018
U.S. Government agencies	$	14,120	$	-	$	(269	)	$	13,851
Mortgage-backed securities		26,924		102		(576	)		26,450
Subordinated debt		4,089		11		(148	)		3,952
	$	45,133	$	113	$	(993	)	$	44,253

At June 30, 2019 and December 31, 2018, the Company had investment securities with a fair value of approximately $8,130,000 and $8,004,000, respectively, pledged to secure borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”).

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

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2019		2018		2019		2018
Gross realized gains	$	-	$	-	$	101	$	-
Gross realized losses		-		-		-		-
	$	-	$	-	$	101	$	-

The Company sold approximately $6.5 million of investment securities available for sale at a gross gain of $101,000 during the six months ended June 30, 2019.

10

Investment securities available for sale that have an unrealized loss position at June 30, 2019 and December 31, 2018 are detailed below (in thousands):

	Securities in a loss					Securities in a loss
	position for less than					position for more than
	12 Months					12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2019
US Government Agencies	$	-	$	-		$	11,677	$	(50	)	$	11,677	$	(50	)
Mortgage-backed securities		2,523		(8	)		8,946		(11	)		11,469		(19	)
Subordinated debt		1,192		(62	)		510		(7	)		1,702		(69	)
	$	3,715	$	(70	)	$	21,133	$	(68	)	$	24,848	$	(138	)
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	)

As of June 30, 2019, there were $21.1 million, or 16 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 $68,000 and consisted of US Government agencies, mortgage-backed securities, and subordinated debt.

All of the unrealized losses are attributable to increases in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the 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 June 30, 2019.

The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2019, by contractual maturity, are as follows (in thousands):

	Amortized
	Cost		Fair Value
One to five years	$	12,931	$	12,909
Five to ten years		6,390		6,365
More than ten years		24,061		24,141
Total	$	43,382	$	43,415

11

Note 5 – Loans and allowance for loan losses

Loans classified by type as of June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):

	June 30, 2019						December 31, 2018
	Amount			%			Amount			%
Construction and land development
Residential	$	5,176			1.23	%	$	7,704			1.86	%
Commercial		27,953			6.66	%		33,904			8.18	%
		33,129			7.89	%		41,608			10.04	%
Commercial real estate
Owner occupied		95,227			22.68	%		98,153			23.68	%
Non-owner occupied		105,099			25.03	%		95,034			22.93	%
Multifamily		13,291			3.17	%		13,597			3.28	%
Farmland		172			0.04	%		185			0.04	%
		213,789			50.92	%		206,969			49.93	%
Consumer real estate
Home equity lines		20,000			4.76	%		20,675			4.99	%
Secured by 1-4 family residential,
First deed of trust		59,608			14.20	%		57,410			13.85	%
Second deed of trust		10,513			2.50	%		9,556			2.31	%
		90,121			21.46	%		87,641			21.15	%
Commercial and industrial loans
(except those secured by real estate)		44,450			10.59	%		36,639			8.84	%
Guaranteed student loans		36,126			8.61	%		39,315			9.49	%
Consumer and other		2,221			0.53	%		2,258			0.55	%
Total loans		419,836			100.0	%		414,430			100.0	%
Deferred fees and costs, net		750						713
Less: allowance for loan losses		(3,047	)					(3,051	)
	$	417,539					$	412,092

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 $46,736,000 and $38,751,000 as of June 30, 2019 and December 31, 2018, 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.

12

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

	June 30,		December 31,
	2019		2018
Construction and land development
Commercial	$	-	$	39
		-		39
Commercial real estate
Non-owner occupied		507		515
		507		515
Consumer real estate
Home equity lines		420		125
Secured by 1-4 family residential,
First deed of trust		571		1,163
Second deed of trust		64		154
		1,055		1,442
Commercial and industrial loans
(except those secured by real estate)		173		255
Consumer and other		11		8
Total loans	$	1,746	$	2,259

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

· Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;

· Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close attention;

· Risk rated 6 loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; and

· Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

13

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

	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1-4		5		6		7		Loans
June 30, 2019
Construction and land development
Residential	$	5,176	$	-	$	-	$	-	$	5,176
Commercial		27,640		-		313		-		27,953
		32,816		-		313		-		33,129
Commercial real estate
Owner occupied		89,695		3,271		2,261				95,227
Non-owner occupied		104,358		234		507		-		105,099
Multifamily		13,137		154		-		-		13,291
Farmland		75		97		-		-		172
		207,265		3,756		2,768		-		213,789
Consumer real estate
Home equity lines		18,830		730		440		-		20,000
Secured by 1-4 family residential
First deed of trust		56,733		2,148		727		-		59,608
Second deed of trust		8,719		1,590		204		-		10,513
		84,282		4,468		1,371		-		90,121
Commercial and industrial loans
(except those secured by real estate)		40,018		3,029		1,403		-		44,450
Guaranteed student loans		36,126		-		-		-		36,126
Consumer and other		2,202		7		12		-		2,221
Total loans	$	402,709	$	11,260	$	5,867	$	-	$	419,836
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

14

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

													Recorded
					Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
June 30, 2019
Construction and land development
Residential	$	-	$	-	$	-	$	-	$	5,176	$	5,176	$	-
Commercial		-		-		-		-		27,953		27,953		-
		-		-		-		-		33,129		33,129		-
Commercial real estate
Owner occupied		561		-		-		561		94,666		95,227		-
Non-owner occupied		234		-		-		234		104,865		105,099		-
Multifamily		-		-		-		-		13,291		13,291		-
Farmland		-		-		-		-		172		172		-
		795		-		-		795		212,994		213,789		-
Consumer real estate
Home equity lines		187		-		-		187		19,813		20,000		-
Secured by 1-4 family residential
First deed of trust		516		-		-		516		59,092		59,608		-
Second deed of trust		23		-		-		23		10,490		10,513		-
		726		-		-		726		89,395		90,121		-
Commercial and industrial loans
(except those secured by real estate)		94		-		-		94		44,356		44,450		-
Guaranteed student loans		1,930		642		4,259		6,831		29,295		36,126		4,259
Consumer and other		7		-		-		7		2,214		2,221		-
Total loans	$	3,552	$	642	$	4,259	$	8,453	$	411,383	$	419,836	$	4,259

													Recorded
					Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
December 31, 2018
Construction and land development
Residential	$	-	$	-	$	-	$	-	$	7,704	$	7,704	$	-
Commercial		118		-		-		118		33,786		33,904		-
		118		-		-		118		41,490		41,608		-
Commercial real estate
Owner occupied		-		-		-		-		98,153		98,153		-
Non-owner occupied		-		-		-		-		95,034		95,034		-
Multifamily		-		-		-		-		13,597		13,597		-
Farmland		-		-		-		-		185		185		-
		-		-		-		-		206,969		206,969		-
Consumer real estate
Home equity lines		-		315		-		315		20,360		20,675		-
Secured by 1-4 family residential
First deed of trust		171		7		-		178		57,232		57,410		-
Second deed of trust		162		-		-		162		9,394		9,556		-
		333		322		-		655		86,986		87,641		-
Commercial and industrial loans
(except those secured by real estate)		312		433		-		745		35,894		36,639		-
Guaranteed student loans		1,946		971		5,573		8,490		30,825		39,315		5,573
Consumer and other		9		1		-		10		2,248		2,258		-
Total loans	$	2,718	$	1,727	$	5,573	$	10,018	$	404,412	$	414,430	$	5,573

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.

15

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.

16

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

	June 30, 2019						December 31, 2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Construction and land development
Residential	$	-	$	-	$	-	$	747	$	747	$	-
Commercial		313		411		-		360		458		-
		313		411		-		1,107		1,205		-
Commercial real estate
Owner occupied		3,074		3,074		-		3,703		3,703		-
Non-owner occupied		2,536		2,536		-		2,588		2,588		-
		5,610		5,610		-		6,291		6,291		-
Consumer real estate
Home equity lines		420		420		-		684		684		-
Secured by 1-4 family residential
First deed of trust		2,213		2,235		-		3,057		3,057		-
Second deed of trust		613		821		-		721		929		-
		3,246		3,476		-		4,462		4,670		-
Commercial and industrial loans
(except those secured by real estate)		1,285		1,763		-		528		875		-
Consumer and other		-		-		-		-		-		-
		10,454		11,260		-		12,388		13,041		-
With an allowance recorded
Construction and land development
Commercial		-		-		-		106		106		8
		-		-		-		106		106		8
Commercial real estate
Owner occupied		1,437		1,437		21		1,459		1,459		25
		1,437		1,437		21		1,459		1,459		25
Consumer real estate
Home equity lines		-		-		-		-		-		-
Secured by 1-4 family residential
First deed of trust		196		196		18		200		200		20
Second deed of trust		158		158		2		161		161		4
		354		354		20		361		361		24
Commercial and industrial loans
(except those secured by real estate)		-		-		-		8		8		8
Consumer and other		7		7		7		9		9		9
		1,798		1,798		48		1,943		1,943		74
Total
Construction and land development
Residential		-		-		-		747		747		-
Commercial		313		411		-		466		564		8
		313		411		-		1,213		1,311		8
Commercial real estate
Owner occupied		4,511		4,511		21		5,162		5,162		25
Non-owner occupied		2,536		2,536		-		2,588		2,588		-
		7,047		7,047		21		7,750		7,750		25
Consumer real estate
Home equity lines		420		420		-		684		684		-
Secured by 1-4 family residential,
First deed of trust		2,409		2,431		18		3,257		3,257		20
Second deed of trust		771		979		2		882		1,090		4
		3,600		3,830		20		4,823		5,031		24
Commercial and industrial loans
(except those secured by real estate)		1,285		1,763		-		536		883		8
Consumer and other		7		7		7		9		9		9
	$	12,252	$	13,058	$	48	$	14,331	$	14,984	$	74

17

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):

	For the Three Months				For the Six Months
	Ended June 30, 2019				Ended June 30, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Construction and land development
Residential	$	162	$	-	$	267	$	-
Commercial		335		-		349		-
		497		-		616		-
Commercial real estate
Owner occupied		2,825		12		3,277		46
Non-owner occupied		2,551		39		2,574		62
		5,376		51		5,851		108
Consumer real estate
Home equity lines		272		10		479		10
Secured by 1-4 family residential
First deed of trust		2,586		3		2,853		45
Second deed of trust		662		10		694		23
		3,520		23		4,026		78
Commercial and industrial loans
(except those secured by real estate)		899		7		688		15
Consumer and other		-		1		-		1
		10,292		82		11,181		202
With an allowance recorded
Construction and land development
Commercial		-		-		26		-
Commercial real estate
Owner occupied		1,444		15		1,453		30
		1,444		15		1,453		30
Consumer real estate
Home equity line		-		-		-		-
Secured by 1-4 family residential
First deed of trust		197		3		198		6
Second deed of trust		159		2		160		4
		356		5		358		10
Commercial and industrial loans
(except those secured by real estate)		-		-		77		-
Consumer and other		8		-		12		-
		1,808		20		1,926		40
Total
Construction and land development
Residential		162		-		267		-
Commercial		335		-		375		-
		497		-		642		-
Commercial real estate
Owner occupied		4,269		27		4,730		76
Non-owner occupied		2,551		39		2,574		62
		6,820		66		7,304		138
Consumer real estate
Home equity lines		272		10		479		10
Secured by 1-4 family residential,
First deed of trust		2,783		6		3,051		51
Second deed of trust		821		12		854		27
		3,876		28		4,384		88
Commercial and industrial loans
(except those secured by real estate)		899		7		765		15
Consumer and other		8		1		12		1
	$	12,100	$	102	$	13,107	$	242

18

	For the Three Months				For the Six Months
	Ended June 30, 2018				Ended June 30, 2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Construction and land development
Commercial	$	657	$	7	$	478	$	13
		657		7		478		13
Commercial real estate
Owner occupied		1,903		40		3,753		80
Non-owner occupied		3,220		205		2,401		231
		5,123		245		6,154		311
Consumer real estate
Home equity lines		353		-		475		-
Secured by 1-4 family residential
First deed of trust		1,345		15		3,431		46
Second deed of trust		1,893		12		604		23
		3,591		27		4,510		69
Commercial and industrial loans
(except those secured by real estate)		220		12		455		20
Consumer and other		2		1		2		1
		9,593		292		11,599		414
With an allowance recorded
Construction and land development
Commercial		-		-		116		-
Commercial real estate
Owner occupied		735		11		1,591		22
		735		11		1,591		22
Consumer real estate
Home equity line		741		-		101		-
Secured by 1-4 family residential
First deed of trust		224		8		660		15
Second deed of trust		149		4		125		4
		1,114		12		886		19
Commercial and industrial loans
(except those secured by real estate)		283		-		665		-
Consumer and other		462		-		10		-
		2,594		23		3,268		41
Total
Construction and land development
Commercial		657		7		594		13
		657		7		594		13
Commercial real estate
Owner occupied		2,638		51		5,344		102
Non-owner occupied		3,220		205		2,401		231
		5,858		256		7,745		333
Consumer real estate
Home equity lines		1,094		-		576		-
Secured by 1-4 family residential,
First deed of trust		1,569		23		4,091		61
Second deed of trust		2,042		16		729		27
		4,705		39		5,396		88
Commercial and industrial loans
(except those secured by real estate)		503		12		1,120		20
Consumer and other		464		1		12		1
	$	12,187	$	315	$	14,867	$	455

19

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).

							Specific
							Valuation
	Total		Performing		Nonaccrual		Allowance
June 30, 2019
Commercial real estate
Owner occupied	$	3,982	$	3,982	$	-	$	21
Non-owner occupied		2,536		2,029		507		-
		6,518		6,011		507		21
Consumer real estate
Secured by 1-4 family residential
First deeds of trust		2,214		1,726		488		18
Second deeds of trust		771		707		64		2
		2,985		2,433		552		20
Commercial and industrial loans
(except those secured by real estate)		303		270		33		-
	$	9,806	$	8,714	$	1,092	$	41
Number of loans		42		34		8		6

20

							Specific
							Valuation
	Total		Performing		Nonaccrual		Allowance
December 31, 2018
Construction and land development
Commercial	$	-	$	-	$	-	$	-
		-		-		-		-
Commercial real estate
Owner occupied		4,064		4,064		-		25
Non-owner occupied		2,072		2,072		-		-
		6,136		6,136		-		25
Consumer real estate
Secured by 1-4 family residential
First deeds of trust		2,284		1,525		759		20
Second deeds of trust		794		729		65		4
		3,078		2,254		824		24
Commercial and industrial loans
(except those secured by real estate)		317		282		35		-
	$	9,531	$	8,672	$	859	$	49
Number of loans		42		33		9		6

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

	Three Months Ended						Three Months Ended
	June 30, 2019						June 30, 2018
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Loans		Balance		Balance		Loans		Balance		Balance
Secured by 1-4 family residential
First deed of trust		-	$	-	$	-		1	$	73	$	73
		-	$	-	$	-		1	$	73	$	73

	Six Months Ended						Six Months Ended
	June 30, 2019						June 30, 2018
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Loans		Balance		Balance		Loans		Balance		Balance
Commercial real estate
Non-owner occupied		1	$	507	$	507		-	$	-	$	-
Secured by 1-4 family residential
First deed of trust		-		-				1		73		73
		1	$	507	$	507		1	$	73	$	73

There were no defaults on TDRs that were modified as TDRs during the prior twelve month period.

21

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

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance
Three Months Ended June 30, 2019
Construction and land development
Residential	$	46	$	(21	)	$	-		$	6	$	31
Commercial		173		(15	)		-			1		159
		219		(36	)		-			7		190
Commercial real estate
Owner occupied		710		(51	)		-			-		659
Non-owner occupied		692		55			-			-		747
Multifamily		88		(3	)		-			-		85
Farmland		2		-			-			-		2
		1,492		1			-			-		1,493
Consumer real estate
Home equity lines		240		(13	)		-			6		233
Secured by 1-4 family residential
First deed of trust		395		(31	)		-			3		367
Second deed of trust		57		(3	)		-			6		60
		692		(47	)		-			15		660
Commercial and industrial loans
(except those secured by real estate)		352		11			-			22		385
Student loans		121		8			(20	)		-		109
Consumer and other		30		8			(5	)		1		34
Unallocated		121		55			-			-		176
	$	3,027	$	-		$	(25	)	$	45	$	3,047

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance
Three Months Ended June 30, 2018
Construction and land development
Residential	$	26	$	9		$	-		$	1	$	36
Commercial		189		5			-			2		196
		215		14			-			3		232
Commercial real estate
Owner occupied		662		57			-			-		719
Non-owner occupied		537		30			-			-		567
Multifamily		60		12			-			-		72
Farmland		2		-			-			-		2
		1,261		99			-			-		1,360
Consumer real estate
Home equity lines		277		(41	)		-			1		237
Secured by 1-4 family residential
First deed of trust		527		(59	)		(7	)		15		476
Second deed of trust		54		(25	)		-			27		56
		858		(125	)		(7	)		43		769
Commercial and industrial loans
(except those secured by real estate)		604		(54	)		(314	)		168		404
Student loans		107		12			(28	)		-		91
Consumer and other		27		3			-			-		30
Unallocated		271		51			-			-		322
	$	3,343	$	-		$	(349	)	$	214	$	3,208

22

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance
Six Months Ended June 30, 2019
Construction and land development
Residential	$	42	$	(18	)	$	-		$	7	$	31
Commercial		220		(63	)		-			2		159
		262		(81	)		-			9		190
Commercial real estate
Owner occupied		673		(14	)		-			-		659
Non-owner occupied		673		74			-			-		747
Multifamily		87		(2	)		-			-		85
Farmland		2		-			-			-		2
		1,435		58			-			-		1,493
Consumer real estate
Home equity lines		244		(23	)		-			12		233
Secured by 1-4 family residential
First deed of trust		385		(23	)		-			5		367
Second deed of trust		51		(1	)		-			10		60
		680		(47	)		-			27		660
Commercial and industrial loans
(except those secured by real estate)		308		59			(15	)		33		385
Student loans		121		41			(53	)		-		109
Consumer and other		34		5			(7	)		2		34
Unallocated		211		(35	)		-			-		176
	$	3,051	$	-		$	(75	)	$	71	$	3,047

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance
Six Months Ended June 30, 2018
Construction and land development
Residential	$	32	$	3		$	-		$	1	$	36
Commercial		165		28			-			3		196
		197		31			-			4		232
Commercial real estate
Owner occupied		624		95			-			-		719
Non-owner occupied		500		(151	)		-			218		567
Multifamily		60		12			-			-		72
Farmland		3		(1	)		-			-		2
		1,187		(45	)		-			218		1,360
Consumer real estate
Home equity lines		268		(32	)		-			1		237
Secured by 1-4 family residential
First deed of trust		502		(2	)		(41	)		17		476
Second deed of trust		47		22			(45	)		32		56
		817		(12	)		(86	)		50		769
Commercial and industrial loans
(except those secured by real estate)		556		(10	)		(314	)		172		404
Student loans		108		43			(60	)		-		91
Consumer and other		27		18			(21	)		6		30
Unallocated		347		(25	)		-			-		322
	$	3,239	$	-		$	(481	)	$	450	$	3,208

23

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance
Year Ended December 31, 2018
Construction and land development
Residential	$	32	$	9		$	-		$	1	$	42
Commercial		165		49			-			6		220
		197		58			-			7		262
Commercial real estate
Owner occupied		624		49			-			-		673
Non-owner occupied		500		(45	)		-			218		673
Multifamily		60		27			-			-		87
Farmland		3		(1	)		-			-		2
		1,187		30			-			218		1,435
Consumer real estate
Home equity lines		268		39			(64	)		1		244
Secured by 1-4 family residential
First deed of trust		502		(97	)		(41	)		21		385
Second deed of trust		47		6			(45	)		43		51
		817		(52	)		(150	)		65		680
Commercial and industrial loans
(except those secured by real estate)		556		(50	)		(375	)		177		308
Student loans		108		118			(105	)		-		121
Consumer and other		27		32			(34	)		9		34
Unallocated		347		(136	)		-			-		211
	$	3,239	$	-		$	(664	)	$	476	$	3,051

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 $176,000, $211,000, and $322,000 at June 30, 2019, December 31, 2018, and June 30, 2018, respectively.

24

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

	Recorded Investment in Loans
	Allowance								Loans
	Ending						Ending
	Balance		Individually		Collectively		Balance		Individually		Collectively
As of June 30, 2019
Construction and land development
Residential	$	31	$	-	$	31	$	5,176	$	-	$	5,176
Commercial		159		-		159		27,953		313		27,640
		190		-		190		33,129		313		32,816
Commercial real estate
Owner occupied		659		21		638		95,227		4,511		90,716
Non-owner occupied		747		-		747		105,099		2,536		102,563
Multifamily		85		-		85		13,291		-		13,291
Farmland		2		-		2		172		-		172
		1,493		21		1,472		213,789		7,047		206,742
Consumer real estate
Home equity lines		233		-		233		20,000		420		19,580
Secured by 1-4 family residential
First deed of trust		367		18		349		59,608		2,409		57,199
Second deed of trust		60		2		58		10,513		771		9,742
		660		20		640		90,121		3,600		86,521
Commercial and industrial loans
(except those secured by real estate)		385		-		385		44,450		1,285		43,165
Student loans		109		-		109		36,126		-		36,126
Consumer and other		210		7		203		2,221		7		2,214
	$	3,047	$	48	$	2,999	$	419,836	$	12,252	$	407,584
Year Ended December 31, 2018
Construction and land development
Residential	$	42	$	-	$	42	$	7,704	$	747	$	6,957
Commercial		220		8		212		33,904		466		33,438
		262		8		254		41,608		1,213		40,395
Commercial real estate
Owner occupied		673		25		648		98,153		5,162		92,991
Non-owner occupied		673		-		673		95,034		2,588		92,446
Multifamily		87		-		87		13,597		-		13,597
Farmland		2		-		2		185		-		185
		1,435		25		1,410		206,969		7,750		199,219
Consumer real estate
Home equity lines		244		-		244		20,675		684		19,991
Secured by 1-4 family residential
First deed of trust		385		20		365		57,410		3,257		54,153
Second deed of trust		51		4		47		9,556		882		8,674
		680		24		656		87,641		4,823		82,818
Commercial and industrial loans
(except those secured by real estate)		308		8		300		36,639		536		36,103
Student loans		121		-		121		39,315		-		39,315
Consumer and other		245		9		236		2,258		9		2,249
	$	3,051	$	74	$	2,977	$	414,430	$	14,331	$	400,099

25

Note 6 – Deposits

Deposits as of June 30, 2019 and December 31, 2018 were as follows (dollars in thousands):

	June 30, 2019					December 31, 2018
	Amount		%			Amount		%
Demand accounts	$	132,965		29.8	%	$	119,317		27.2	%
Interest checking accounts		49,019		11.0	%		49,188		11.2	%
Money market accounts		90,278		20.2	%		86,295		19.7	%
Savings accounts		26,379		5.9	%		28,694		6.5	%
Time deposits of $250,000 and over		25,054		5.6	%		24,160		5.5	%
Other time deposits		122,531		27.5	%		131,393		29.9	%
Total	$	446,226		100.0	%	$	439,047		100.0	%

Note 7 – Borrowings

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

As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company held $1,779,000 in FHLB stock at June 30, 2019 and $1,320,000 at December 31, 2018, 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. The Company had FHLB advances of $31,000,000 at June 30, 2019 and $21,000,000 at December 31, 2018 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. There were no borrowings against the lines at June 30, 2019 and December 31, 2018.

26

Note 8 – Leases

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

	June 30, 2019
Lease liabilities	$	1,218
Right-of-use assets	$	1,211
Weighted average remaining lease term		4.79 years
Weighted average discount rate		2.98	%

	For the Six Months Ended
	June 30, 2019
Lease cost
Operating lease cost	$	213
Total lease cost	$	213

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):

	As of
	June 30, 2019
Lease payments due
Six months ending December 31, 2019	$	208
Twelve months ending December 31, 2020		416
Twelve months ending December 31, 2021		278
Twelve months ending December 31, 2022		120
Twelve months ending December 31, 2023		44
Twelve months ending December 31, 2024		48
Thereafter		203
Total undiscounted cash flows	$	1,317
Discount		99
Lease liabilities	$	1,218

Cash paid for amounts included in the measurement of lease liabilities during the six months ended June 30, 2019 was $207,000. The Company adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Company measured lease expense in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 840. During the six months ended June 30, 2018, the Company recognized lease expense of $213,000.

Note 9 – Trust preferred securities

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at June 30, 2019 was 4.55%. The securities were redeemable at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035. No amounts have been redeemed at June 30, 2019 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.

27

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 June 30, 2019 was 3.80%. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in 2037. No amounts have been redeemed at June 30, 2019 and there are no plans to do so. The principal asset of the Trust is $3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

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

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

Note 10 – Subordinated Debt

On March 21, 2018, the Company issued $5,700,000 of fixed-to-floating rate subordinated notes due March 31, 2028 in a private placement. The Company received $5,539,000 in net proceeds after deducting issuance costs. The subordinated notes 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. The carrying value of the notes totaled $5,579,000 and $5,563,000 at June 30, 2019 and December 31, 2018, respectively.

Note 11 – Stock incentive plan

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

28

The following table summarizes options outstanding under the Company’s stock incentive plans at the indicated dates:

	Six Months Ended June 30,
	2019								2018
			Weighted								Weighted
			Average								Average
			Exercise		Fair Value		Intrinsic				Exercise		Fair Value		Intrinsic
	Options		Price		Per Share		Value		Options		Price		Per Share		Value
Options outstanding, beginning of period		734	$	25.63	$	9.76				2,245	$	24.17	$	12.88
Granted		-		-		-				-		-		-
Forfeited		-		-		-				-		-		-
Exercised		-		-		-				-		-		-
Options outstanding, end of period		734	$	25.63	$	9.76	$	-		2,245	$	24.17	$	12.88	$	-
Options exercisable, end of period		734								2,245

During the first quarter of 2018, we granted certain officers 1,590 restricted shares of common stock with a weighted average fair market value of $32.42 on the date of grant. These restricted stock awards were scheduled to vest over three years.

Prior to vesting, these shares were 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 20,197 at June 30, 2018. There were no non-vested restricted stocks awards outstanding as of June 30, 2019.

The fair value of the stock is based on the grant date of the award and the expense is recognized over the vesting period. Unamortized stock-based compensation related to non-vested share based compensation arrangements granted under the stock incentive plan as of June 30, 2018 was $268,946.

A summary of changes in the Company’s non-vested restricted stock awards for the six months ended June 30, 2019 follows:

				Weighted-
				Average		Aggregate
				Grant-Date		Intrinsic
	Shares			Fair-Value		Value
December 31, 2018		23,556		$	32.46	$	776,170
Granted		-			-		-
Vested		(18,674	)		29.91		(615,308	)
Forfeited		(8,074	)		27.84		(266,038	)
Other		3,192			33.75		105,176
June 30, 2019		-			-	$	-

During the second quarter of 2019, the Company’s largest shareholder’s ownership exceeded 50% of the Company’s outstanding common stock, which triggered change in control provisions included in the Company’s stock incentive plans. The award agreements provided for the acceleration of the vesting of restricted stock awards and units in the event of a change in control, with the restricted stock units vesting at the maximum potential value of the awards. The vesting of the restricted stock units was dependent upon the Company meeting certain performance criteria over the vesting period, and the units included in the non-vested balance as of December 31, 2018 assumed the probable outcome of performance conditions was equal to the targeted potential value of the awards. The 3,192 shares included in the above table as other represent the incremental increase in shares that vested based on the restricted stock units vesting at the maximum potential value as opposed to the targeted potential value of the award.

29

Stock-based compensation expense was approximately $374,000 and $117,000 for the six months ended June 30, 2019 and 2018, respectively.

Note 12 — Fair value

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

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

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

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

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

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

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

Impaired 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 Income.

30

Loans held for sale: Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

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: 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):

	Fair Value Measurement
	at June 30, 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	$	15,168	$	-	$	15,168	$	-
Mortgage-backed securities		23,683		-		23,683		-
Subordinated debt		4,564		-		4,064		500
Financial Assets - Non-Recurring
Impaired loans		1,750		-		-		1,750
Assets held for sale		536		-		-		536
Other real estate owned		526		-		-		526

31

	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		1,868		-		-		1,868
Assets held for sale		554		-		-		554
Other real estate owned		526		-		-		526

The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30, 2019
					Range
	Fair Value		Valuation	Unobservable	(Weighted
	Estimate		Techniques	Input	Average)
Impaired loans - real estate secured	$	1,750	Appraisal or Internal Valuation (1)	Selling costs	6%-10% (7%)
				Discount for lack of marketability and age of appraisal	6%-30% (10%)
Assets held for sale	$	536	Appraisal or Internal Valuation (1)	Selling costs	6%-10% (7%)
				Discount for lack of marketability and age of appraisal	6%-30% (15%)
Other real estate owned	$	526	Appraisal or Internal Valuation (1)	Selling costs	6%-10% (7%)

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

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	December 31, 2018
					Range
	Fair Value		Valuation	Unobservable	(Weighted
	Estimate		Techniques	Input	Average)
Impaired loans - real estate secured	$	1,868	Appraisal or Internal Valuation (1)	Selling costs	6%-10% (7%)
				Discount for lack of marketability and age of appraisal	6%-30% (10%)
Assets held for sale	$	554	Appraisal or Internal Valuation (1)	Selling costs	6%-10% (7%)
				Discount for lack of marketability and age of appraisal	6%-30% (15%)
Other real estate owned	$	526	Appraisal or Internal Valuation (1)	Selling costs	6%-10% (7%)

(1) 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 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.

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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.

		June 30,				December 31,
		2019				2018
	Level in Fair
	Value	Carrying		Estimated		Carrying		Estimated
	Hierarchy	Value		Fair Value		Value		Fair Value
	(In thousands)
Financial assets
Cash	Level 1	$	15,583	$	15,583	$	12,717	$	12,717
Cash equivalents	Level 2		13,169		13,169		6,826		6,826
Investment securities available for sale	Level 2		42,915		42,915		43,753		43,753
Investment securities available for sale	Level 3		500		500		500		500
Federal Home Loan Bank stock	Level 2		1,779		1,779		1,320		1,320
Loans held for sale	Level 2		13,060		13,060		6,128		6,128
Loans	Level 3		418,086		415,699		412,562		409,939
Impaired loans	Level 3		1,750		1,750		1,868		1,868
Assets held for sale	Level 3		536		536		554		554
Other real estate owned	Level 3		526		526		526		526
Bank owned life insurance	Level 3		7,521		7,521		7,441		7,441
Accrued interest receivable	Level 2		2,722		2,722		2,662		2,662
Financial liabilities
Deposits	Level 2		446,226		446,649		439,047		439,125
FHLB borrowings	Level 2		31,000		31,335		21,000		21,093
Trust preferred securities	Level 2		8,764		9,702		8,764		8,852
Other borrowings	Level 2		5,579		5,579		5,563		5,563
Accrued interest payable	Level 2		231		231		221		221

Note 13 – Segment Reporting

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

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

34

The following table presents segment information as of and for the three and six months ended June 30, 2019 and 2018 (in thousands):

	Commercial		Mortgage					Consolidated
	Banking		Banking		Eliminations			Totals
Three Months Ended June 30, 2019
Revenues
Interest income	$	5,771	$	124	$	(24	)	$	5,871
Gain on sale of loans		-		1,477		-			1,477
Other revenues		796		200		(53	)		943
Total revenues		6,567		1,801		(77	)		8,291
Expenses
Interest expense		1,319		24		(24	)		1,319
Salaries and benefits		2,848		853		-			3,701
Commissions		-		472					472
Other expenses		1,757		278		(53	)		1,982
Total operating expenses		5,924		1,627		(77	)		7,474
Income before income taxes		643		174		-			817
Income tax espense		143		37		-			180
Net income	$	500	$	137	$	-		$	637
Total assets	$	537,356	$	10,911	$	(11,733	)	$	536,534

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	Commercial		Mortgage					Consolidated
	Banking		Banking		Eliminations			Totals
Three Months Ended June 30, 2018
Revenues
Interest income	$	5,079	$	73	$	-		$	5,152
Gain on sale of loans		-		1,422		-			1,422
Other revenues		588		188		(51	)		725
Total revenues		5,667		1,683		(51	)		7,299
Expenses
Interest expense		924		-		-			924
Salaries and benefits		2,140		832		-			2,972
Commissions		-		480					480
Other expenses		1,903		277		(51	)		2,129
Total operating expenses		4,967		1,589		(51	)		6,505
Income before income taxes		700		94		-			794
Income tax espense		133		20		-			153
Net income	$	567	$	74	$	-		$	641
Total assets	$	508,158	$	9,628	$	(11,434	)	$	506,352

	Commercial		Mortgage					Consolidated
	Banking		Banking		Eliminations			Totals
Six Months Ended June 30, 2019
Revenues
Interest income	$	11,417	$	187	$	(24	)	$	11,580
Gain on sale of loans		-		2,405		-			2,405
Other revenues		1,571		312		(110	)		1,773
Total revenues		12,988		2,904		(134	)		15,758
Expenses
Interest expense		2,562		24		(24	)		2,562
Salaries and benefits		5,048		1,589		-			6,637
Commissions		-		712		-			712
Other expenses		3,640		515		(110	)		4,045
Total operating expenses		11,250		2,840		(134	)		13,956
Income before income taxes		1,738		64		-			1,802
Income tax espense		343		13		-			356
Net income	$	1,395	$	51	$	-		$	1,446
Total assets	$	537,356	$	10,911	$	(11,733	)	$	536,534

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	Commercial		Mortgage						Consolidated
	Banking		Banking			Eliminations			Totals
Six Months Ended June 30, 2018
Revenues
Interest income	$	9,809	$	120		$	-		$	9,929
Gain on sale of loans		-		2,451			-			2,451
Other revenues		1,146		305			(100	)		1,351
Total revenues		10,955		2,876			(100	)		13,731
Expenses
Interest expense		1,690		-			-			1,690
Salaries and benefits		4,264		1,651			-			5,915
Commissions		-		802			-			802
Other expenses		3,601		545			(100	)		4,046
Total operating expenses		9,555		2,998			(100	)		12,453
Income before income taxes		1,400		(122	)		-			1,278
Income tax espense (benefit)		251		(26	)		-			225
Net income (loss)	$	1,149	$	(96	)	$	-		$	1,053
Total assets	$	508,158	$	9,628		$	(11,434	)	$	506,352

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Note 14 – Shareholders’ Equity and Regulatory Matters

Preferred Stock

On May 1, 2009, as part of the Capital Purchase Program established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008, the Company 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, 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 expired ten years from the issuance date. The Warrant expired during the period ended June 30, 2019.

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 subordinated note issuance to redeem the remaining 5,027 shares ($5,027,000 aggregate liquidation value) of preferred stock plus accrued dividends of $56,554.

During the second quarter of 2019, the Company received approval from state and federal regulators allowing the Bank to pay a special dividend to the Company for the purpose of servicing the trust preferred securities and subordinated debt.

Accumulated Other Comprehensive Loss

The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes of $6,000 and $199,000 as of June 30, 2019 and December 31, 2018 (in thousands):

	June 30,			December 31,
	2019			2018
Net unrealized losses on securities	$	26		$	(696	)
Net unrecognized losses on defined benefit plan		(49	)		(53	)
Total other comprehensive loss	$	(23	)	$	(749	)

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Regulatory Matters

Both the Company and the Bank are 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 June 30, 2019, 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 June 30, 2019, the Bank exceeded the minimum ratios to be classified as well capitalized.

On November 21, 2018, the federal bank regulators jointly issued a proposed rule required by the EGRRCPA that would permit 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, 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 rule is in proposed form so the content and scope of the final rule, and its impact on the Company and the Bank (if any), cannot be determined.

39

The capital amounts and ratios at June 30, 2019 and December 31, 2018 for the Bank are presented in the table below (dollars in thousands):

						For Capital
	Actual					Adequacy Purposes					To be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2019
Total capital (to risk- weighted assets) Village Bank	$	51,555		12.44	%	$	33,163		8.00	%	$	41,454		10.00	%
Tier 1 capital (to risk- weighted assets) Village Bank		48,508		11.70	%		24,872		6.00	%		33,163		8.00	%
Leverage ratio (Tier 1 capital to average assets) Village Bank		48,508		9.36	%		20,737		4.00	%		25,921		5.00	%
Common equity tier 1 (to risk- weighted assets) Village Bank		48,508		11.70	%		18,654		4.50	%		26,945		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	%

40

Note 15 – Commitments and contingencies

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

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

At June 30, 2019 and December 31, 2018, the Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands):

	June 30,		December 31,
	2019		2018
Undisbursed credit lines	$	70,050	$	66,057
Commitments to extend or originate credit		28,893		12,738
Standby letters of credit		3,901		3,999
Total commitments to extend credit	$	102,844	$	82,794

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.

41

Note 16 – Recent accounting pronouncements

In June 2016, the FASB issued 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 in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Based on FASB’s July 17, 2019 meeting, an exposure draft is expected that, once finalized, could change implementation dates for many companies. 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 the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are 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. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

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.

42

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;

· changing trends in customer profiles and behavior; and

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

43

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.

Results of operations

The following presents management’s discussion and analysis of the financial condition of the Company at June 30, 2019 and December 31, 2018 and the results of operations for the Company for the three and six months ended June 30, 2019 and 2018. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

Summary

For the three months ended June 30, 2019, the Company had net income and net income available to common shareholders of $637,000, or $0.44 per fully diluted share, compared to net income of $641,000 or $0.45 per fully diluted share, for the same period in 2018. For the six months ended June 30, 2019, the Company had net income of $1,446,000 or $1.01 per fully diluted share compared to net income of $1,053,000 and net income available to common shareholders of $940,000 or $0.66 per fully diluted share for the same period in 2018.

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.

44

	For the Three Months Ended June 30,
	2019			2018			Change
	(dollars in thousands)
Average interest-earning assets	$	483,163		$	451,057		$	32,106
Interest income	$	5,871		$	5,152		$	719
Yield on interest-earning assets		4.87	%		4.58	%		0.29	%
Average interest-bearing liabilities	$	356,396		$	341,022		$	15,374
Interest expense	$	1,319		$	924		$	395
Cost of interest-bearing liabilities		1.48	%		1.09	%		0.39	%
Net interest income	$	4,552		$	4,228		$	324
Net interest margin		3.78	%		3.76	%		0.02	%

The increase in net interest income of $324,000 in the second quarter of 2019 was a result of positive movements in interest income. Interest income increased by $719,000 with interest income on loans held for investment increasing by $632,000 and interest income on investment securities increasing by $12,000.

The increase in interest income on loans held for investment was attributable to an increase in average loans outstanding of $27,289,000 and an increase in the yield of 28 basis points. Interest expense increased by $395,000 because of an increase in average interest bearing liabilities of $15,374,000 and an increase in the cost of interest bearing liabilities of 39 basis points.

	For the Six Months Ended June 30,
	2019			2018			Change
	(dollars in thousands)
Average interest-earning assets	$	477,885		$	442,924		$	34,961
Interest income	$	11,580		$	9,929		$	1,651
Yield on interest-earning assets		4.89	%		4.52	%		0.37	%
Average interest-bearing liabilities	$	355,388		$	335,039		$	20,349
Interest expense	$	2,562		$	1,690		$	872
Cost of interest-bearing liabilities		1.45	%		1.02	%		0.43	%
Net interest income	$	9,018		$	8,239		$	779
Net interest margin		3.81	%		3.75	%		0.06	%

The increase in net interest income of $779,000 for the six months ended June 30, 2019 was a result of positive movements in interest income. Interest income increased $1,651,000 with interest income on loans held for investment increasing by $1,493,000 and interest income on investments increasing by $42,000. The increase in interest income on loans held for investment was attributable to an increase in average loans outstanding of $33,806,000 and an increase in the yield of 33 basis points. The increase in interest income on securities was due to an increase in the yield of 43 basis points despite a decrease in average investment securities of $4,588,000. Interest expense increased by $872,000 as a result of an increase in average interest bearing liabilities of $20,349,000 and an increase in the cost of interest bearing liabilities of 43 basis points.

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

45

Average Balance Sheets, Income and Expense, Yields and Rates

	Three Months Ended June 30, 2019								Three Months Ended June 30, 2018
				Interest		Annualized						Interest		Annualized
	Average			Income/		Yield			Average			Income/		Yield
	Balance			Expense		Rate			Balance			Expense		Rate
Loans net of deferred fees	$	420,346		$	5,432		5.18	%	$	393,057		$	4,800		4.90	%
Loans held for sale		11,576			124		4.30	%		6,056			73		4.83	%
Investment securities		43,499			271		2.50	%		47,777			259		2.17	%
Federal funds and other		7,742			44		2.28	%		4,167			20		1.93	%
Total interest earning assets		483,163			5,871		4.87	%		451,057			5,152		4.58	%
Allowance for loan losses and deferred fees		(3,052	)							(3,425	)
Cash and due from banks		8,456								10,623
Premises and equipment, net		13,570								12,873
Other assets		19,955								20,660
Total assets	$	522,092							$	491,788
Interest bearing deposits
Interest checking	$	48,606		$	21		0.17	%	$	48,767		$	22		0.18	%
Money market		90,058			154		0.69	%		81,736			86		0.42	%
Savings		23,474			10		0.17	%		24,545			11		0.18	%
Certificates		151,152			724		1.92	%		154,553			540		1.40	%
Total		313,290			909		1.16	%		309,601			659		0.85	%
Borrowings		43,106			410		3.82	%		31,421			265		3.38	%
Total interest bearing liabilities		356,396			1,319		1.48	%		341,022			924		1.09	%
Noninterest bearing deposits		121,901								113,340
Other liabilities		4,584								2,848
Total liabilities		482,881								457,210
Equity capital		39,211								34,578
Total liabilities and capital	$	522,092							$	491,788
Net interest income before provision for loan losses				$	4,552							$	4,228
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities							3.39	%							3.49	%
Annualized net interest margin (net interest income expressed as percentage of average earning assets)							3.78	%							3.76	%

46

Average Balance Sheets, Income and Expense, Yields and Rates

	Six Months Ended June 30, 2019								Six Months Ended June 30, 2018
				Interest		Annualized						Interest		Annualized
	Average			Income/		Yield			Average			Income/		Yield
	Balance			Expense		Rate			Balance			Expense		Rate
Loans net of deferred fees	$	417,949		$	10,734		5.18	%	$	384,143		$	9,241		4.85	%
Loans held for sale		8,458			187		4.46	%		5,160			120		4.69	%
Investment securities		43,824			564		2.60	%		48,412			522		2.17	%
Federal funds and other		7,654			95		2.50	%		5,209			46		1.78	%
Total interest earning assets		477,885			11,580		4.89	%		442,924			9,929		4.52	%
Allowance for loan losses and deferred fees		(3,050	)							(3,320	)
Cash and due from banks		8,698								10,718
Premises and equipment, net		13,679								12,929
Other assets		20,017								20,912
Total assets	$	517,229							$	484,163
Interest bearing deposits
Interest checking	$	48,072		$	41		0.17	%	$	48,096		$	43		0.18	%
Money market		89,559			292		0.66	%		82,612			169		0.41	%
Savings		23,822			20		0.17	%		24,124			21		0.18	%
Certificates		154,407			1,438		1.88	%		153,567			1,057		1.39	%
Total		315,860			1,791		1.14	%		308,399			1,290		0.84	%
Borrowings		39,528			771		3.93	%		26,640			400		3.03	%
Total interest bearing liabilities		355,388			2,562		1.45	%		335,039			1,690		1.02	%
Noninterest bearing deposits		118,714								109,231
Other liabilities		4,643								2,933
Total liabilities		478,745								447,203
Equity capital		38,484								36,960
Total liabilities and capital	$	517,229							$	484,163
Net interest income before provision for loan losses				$	9,018							$	8,239
Interest spread - average yield on interest  earning assets, less average rate on interest bearing liabilities							3.44	%							3.50	%
Annualized net interest margin (net  interest income expressed as percentage of average earning assets)							3.81	%							3.75	%

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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, 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 did not record a provision for loan losses for the three and six months ended June 30, 2019 and 2018 because of minimal net charge-offs, no significant changes in qualitative factors, and stable asset quality.

For more financial data and other information about the Allowance for loan losses refer to section, “Balance Sheet Analysis “ under 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 61% and 67% for the three month periods ended June 30, 2019 and 2018, respectively, and 57% and 65% for the six month periods ended June 30, 2019 and 2018, respectively.

	For the Three Months Ended
	June 30,				Change
	2019		2018		$		%
	(dollars in thousands)
Service charges and fees	$	541	$	482	$	59		12.2	%
Mortgage banking income, net		1,196		1,120		76		6.8	%
Other		211		65		146		224.6	%
Total noninterest income	$	1,948	$	1,667	$	281		16.9	%

· The increase in other income is because the Company executed a sale of a Small Business Administration loan guaranteed strip producing a gain on sale of $136,000.

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	For the Six Months Ended
	June 30,				Change
	2019		2018		$		%
	(dollars in thousands)
Service charges and fees	$	999	$	939	$	60		6.4	%
Mortgage banking income, net		1,982		1,937		45		2.3	%
Gain on sale of investment securities		101		-		101		100.0	%
Other		384		124		260		209.7	%
Total noninterest income	$	3,466	$	3,000	$	466		15.5	%

· The Company sold approximately $6.5 million in securities resulting in a gain of $101,000 during the six months ended June 30, 2019.

· The increase in other income is because the Company executed sales of Small Business Administration loan guaranteed strips producing a cumulative gain on sale of $228,000.

Noninterest expense

	For the Three Months Ended
	June 30,					Change
	2019		2018			$			%
	(dollars in thousands)
Salaries and benefits	$	3,701	$	2,972		$	729			24.5	%
Occupancy		323		345			(22	)		(6.4	)%
Equipment		210		214			(4	)		(1.9	)%
Supplies		42		47			(5	)		(10.6	)%
Professional and outside services		754		802			(48	)		(6.0	)%
Advertising and marketing		64		67			(3	)		(4.5	)%
Foreclosed assets, net		5		(5	)		10			(200.0	)%
FDIC insurance premium		68		79			(11	)		(13.9	)%
Other operating expense		516		580			(64	)		(11.0	)%
Total noninterest income	$	5,683	$	5,101		$	582			11.4	%

· The increase in salaries and benefits is a result of the recognition of $814,000 of additional compensation expense as a result of the triggering of change in control provisions included in the Company’s supplemental executive retirement plan and stock incentive plans, during the three months ended June 30, 2019 as discussed in Note 11 “Stock incentive plan” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

49

	For the Six Months Ended
	June 30,					Change
	2019		2018			$			%
	(dollars in thousands)
Salaries and benefits	$	6,637	$	5,915		$	722			12.2	%
Occupancy		672		675			(3	)		(0.4	)%
Equipment		436		430			6			1.4	%
Supplies		83		104			(21	)		(20.2	)%
Professional and outside services		1,563		1,521			42			2.8	%
Advertising and marketing		122		147			(25	)		(17.0	)%
Foreclosed assets, net		7		(74	)		81			(109.5	)%
FDIC insurance premium		158		156			2			1.3	%
Other operating expense		1,004		1,087			(83	)		(7.6	)%
Total noninterest income	$	10,682	$	9,961		$	721			7.2	%

· The increase in salaries and benefits is a result of the recognition of $814,000 of additional compensation expense as a result of the triggering of change in control provisions included in the Company’s supplemental executive retirement plan and stock incentive plans, during the six months ended June 30, 2019 as discussed in Note 11 “Stock incentive plan” in the “Notes to Consolidated Financial Statements” contained in Item 1 of this Form 10-Q.

· The change in expense related to foreclosed real estate was due to the recognition of a gain on sale of $83,000 during the six months ended June 30, 2018. There were no sales of other real estate owned during the six months ended June 30, 2019.

Income taxes

The Company’s effective tax rate, income tax as a percent of pre-tax income, may vary significantly from the statutory rate due to permanent difference and available tax credits. Income tax expense for the three and six months ended June 30, 2019 was $180,000 and $356,000, respectively, resulting in an effective tax rate of 22.0% and 19.8%, respectively, compared to $153,000 and $225,000, or 19.3% and 17.6%, for the same periods in 2018. The higher effective tax rate in the three and six months ended June 30, 2019 is primarily because of an increase in pre-tax income during those periods.

50

Balance Sheet Analysis

Investment securities

At June 30, 2019 and December 31, 2018, 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 80% 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% of the loan portfolio consists of rehabilitated student loans purchased by the Bank in 2017, 2016, 2015 and 2014 (see discussion following). The Company’s commercial and industrial loan portfolio represents approximately 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.

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Loans classified by type as of June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):

	June 30, 2019						December 31, 2018
	Amount			%			Amount			%
Construction and land development
Residential	$	5,176			1.23	%	$	7,704			1.86	%
Commercial		27,953			6.66	%		33,904			8.18	%
		33,129			7.89	%		41,608			10.04	%
Commercial real estate
Owner occupied		95,227			22.68	%		98,153			23.68	%
Non-owner occupied		105,099			25.03	%		95,034			22.93	%
Multifamily		13,291			3.17	%		13,597			3.28	%
Farmland		172			0.04	%		185			0.04	%
		213,789			50.92	%		206,969			49.93	%
Consumer real estate
Home equity lines		20,000			4.76	%		20,675			4.99	%
Secured by 1-4 family residential,
First deed of trust		59,608			14.20	%		57,410			13.85	%
Second deed of trust		10,513			2.50	%		9,556			2.31	%
		90,121			21.46	%		87,641			21.15	%
Commercial and industrial loans
(except those secured by real estate)		44,450			10.59	%		36,639			8.84	%
Guaranteed student loans		36,126			8.61	%		39,315			9.49	%
Consumer and other		2,221			0.53	%		2,258			0.55	%
Total loans		419,836			100.0	%		414,430			100.0	%
Deferred fees and costs, net		750						713
Less: allowance for loan losses		(3,047	)					(3,051	)
	$	417,539					$	412,092

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.

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Asset quality

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

	June 30,			December 31,			June 30,
	2019			2018			2018
Nonaccrual loans	$	1,746		$	2,259		$	1,927
Foreclosed properties		526			526			732
Total nonperforming assets	$	2,272		$	2,785		$	2,659
Restructured loans (not included in nonaccrual loans above)	$	8,714		$	8,672		$	9,796
Loans past due 90 days and still accruing (1)	$	4,259		$	5,573		$	6,577
Nonperforming assets to loans (2)		0.54	%		0.67	%		0.66	%
Nonperforming assets to total assets		0.42	%		0.54	%		0.53	%
Allowance for loan losses to nonaccrual loans		174.50	%		135.04	%		166.40	%

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

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

The following table presents an analysis of the changes in nonperforming assets for the six months ended June 30, 2019 (in thousands):

	Nonaccrual			Foreclosed
	Loans			Properties		Total
Balance December 31, 2018	$	2,259		$	526	$	2,785
Additions		306			-		306
Loans placed back on accrual		(618	)		-		(618	)
Transfers to OREO		-			-		-
Repayments		(139	)		-		(139	)
Charge-offs		(62	)		-		(62	)
Sales		-			-		-
		-			-		-
Balance June 30, 2019	$	1,746		$	526	$	2,272

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.

53

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 $1,746,000 at June 30, 2019 that were considered impaired, one loan totaling $7,000 had specific allowances for loan losses totaling $7,000. This compares to $2,259,000 in nonaccrual loans at December 31, 2018 of which three loans totaling $17,000 had specific allowances for loan losses of $17,000.

Cumulative interest income that would have been recorded had nonaccrual loans been performing would have been approximately $120,000 and $185,000 for the six months ended June 30, 2019 and 2018, respectively.

Deposits

Deposits as of June 30, 2019 and December 31, 2018 were as follows (dollars in thousands):

	June 30, 2019					December 31, 2018
	Amount		%			Amount		%
Demand accounts		132,965		29.8	%	$	119,317		27.2	%
Interest checking accounts		49,019		11.0	%		49,188		11.2	%
Money market accounts		90,278		20.2	%		86,295		19.7	%
Savings accounts		26,379		5.9	%		28,694		6.5	%
Time deposits of $250,000 and over		25,054		5.6	%		24,160		5.5	%
Other time deposits		122,531		27.5	%		131,393		29.9	%
Total	$	446,226		100.0	%	$	439,047		100.0	%

Total deposits increased by $7,179,000, or 1.6%, from $439,047,000 at December 31, 2018 to $446,226,000 at June 30, 2019, as compared to an increase of $21,359,000, or 5.2%, during the first six months of 2018. Checking and savings accounts increased by $11,164,000, money market accounts increased by $3,983,000 and time deposits decreased by $7,968,000 during the first six months of 2019. The cost of our interest-bearing deposits increased to 1.14% for the first six months of 2019 compared to 0.84% for the first six months of 2018.

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

54

Borrowings

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

Capital resources

Shareholders’ equity at June 30, 2019 was $39,679,000 compared to $37,133,000 at December 31, 2018. The $2.5 million increase in shareholders’ equity during the six months ended June 30, 2019 is primarily due to net income of $1,446,000.

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

	June 30,			December 31,
	2019			2018
Tier 1 capital
Total bank equity capital	$	50,191		$	48,272
Net unrealized (gain) loss on available-for-sale securities		(26	)		696
Defined benefit postretirement plan		49			53
Dissallowed deferred tax asset		(1,706	)		(2,146	)
Total Tier 1 capital		48,508			46,875
Tier 2 capital
Allowance for loan losses		3,047			3,051
Total Tier 2 capital		3,047			3,051
Total risk-based capital		51,555			49,926
Risk-weighted assets	$	414,540		$	400,639
Average assets	$	518,425		$	512,558
Capital ratios
Leverage ratio (Tier 1 capital to average assets)		9.36	%		9.15	%
Common equity tier 1 capital ratio (CET 1)		11.70	%		11.70	%
Tier 1 capital to risk-weighted assets		11.70	%		11.70	%
Total capital to risk-weighted assets		12.44	%		12.46	%
Equity to total assets		9.40	%		9.42	%

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.

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Liquidity

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

At June 30, 2019, our liquid assets, consisting of cash, cash equivalents and investment securities available for sale totaled $72,167,000, or 13.5% 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 $8,130,000 of these securities are 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 June 30, 2019 and December 31, 2018.

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 June 30, 2019 was $11.1 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 June 30, 2019, we had commitments to originate $102,844,000 of loans. Fixed commitments to incur capital expenditures were less than $100,000 at June 30, 2019. Certificates of deposit scheduled to mature in the 12-month period ending June 30, 2020 totaled $74,845,000. 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.

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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.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4 – CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2019. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019 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.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

As disclosed in the Company’s Form 8-K filed with the Securities and Exchange Commission (“SEC”) on June 25, 2019, Kenneth R. Lehman, the largest shareholder of the Company, filed a Form 4 with the SEC reporting the purchase of an aggregate of 1,785 shares of common stock of the Company in three transactions. As a result of these transactions, Mr. Lehman’s ownership increased to approximately 50.01%, of the Company’s outstanding common stock as of the date of the Form 4 filing, which represented a change in control of the Company as outlined in the Company’s employment and benefit agreements. The Company recognized $814,000 in additional compensation expense as a result of the triggering of the change in control provision. There have been no other material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 29, 2019.

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.

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ITEM 6 – EXHIBITS

31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101	The following materials from the Village Bank and Trust Financial Corp. Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

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SIGNATURES

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

		VILLAGE BANK AND TRUST FINANCIAL CORP.
Date:	August 9, 2019	By:	/s/ William G. Foster, Jr.
		William G. Foster, Jr.
		President and Chief Executive Officer
Date:	August 9, 2019	By:	/s/ Donald M. Kaloski, Jr.
		Donald M. Kaloski, Jr.
		Executive Vice President and Chief Financial Officer

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