Principles of presentation

6 Months Ended

Jun. 30, 2023

Principles of presentation

Principles of presentation

Note 1 – Principles of presentation

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

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and six month periods ended June 30, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023. 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, 2022 as filed with the Securities and Exchange Commission (“SEC”).

New Accounting Standards Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.  The company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard. This standard is commonly referred to as the current expected credit loss (“CECL”) methodology. As a result of adoption of Accounting Standards of Codification (“ASC”) 326, the Company recorded a net decrease to retained earnings of $119,000, net of taxes, which consisted of adjustments to the allowance for credit losses on loans as well as an adjustment to the Company’s reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its allowance for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of income.  

The Company is utilizing a third-party model to tabulate its estimate of current expected credit losses, using a weighted average remaining maturity (“WARM”) methodology. In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics by call report code. The Company’s forecast of estimated expected losses is based on a twelve-month forecast of the national rate of unemployment and external observations of historical loan losses. The Company uses the Federal Open Market Committee’s projection of unemployment for its reasonable and supportable forecasting of current expected credit losses. For the periods beyond the reasonable and supportable forecast period, projections of expected credit losses are based on a reversion to the long-run mean for the national unemployment rate. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes in lending policies and procedures including changes in underwriting standards, and collections, charge-offs, and recovery practices, changes in international, national, regional, and local conditions, changes in the nature and volume of the portfolio and terms of loans, changes in experience, depth, and ability of lending management, changes in the volume and severity of past due loans and other similar conditions, changes in the quality of the organization’s loan review system, changes in the value of underlying collateral for collateral dependent loans, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses. The Company’s CECL implementation process was overseen by the Chief Financial Officer and included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience. During 2022, the Company calculated its current expected credit losses model in parallel to its incurred loss model to further refine the

methodology and model.  In addition, the Company utilized internal personnel who were not involved in the development of the model to perform a comprehensive model validation.

The following table illustrates the impact of ASC 326 adoption:

	December 31,		January 1,		January 1,
	2022		2023		2023
	As Previously Reported		Impact of		As Reported
	(Incurred Loss)		CECL Adoption		Under CECL
Assets:
Loans
Construction and land development
Residential	$	79	$	3	$	82
Commercial		192		34		226
		271		37		308
Commercial real estate
Owner occupied		867		(475)		392
Non-owner occupied		1,289		192		1,481
Multifamily		33		7		40
Farmland		—		—		—
		2,189		(276)		1,913
Consumer real estate
Home equity lines		11		24		35
Secured by 1-4 family residential
First deed of trust		131		76		207
Second deed of trust		43		25		68
		185		125		310
Commercial and industrial loans
(except those secured by real estate)		576		1		577
Student loans		52		—		52
Consumer and other		37		(5)		32
Unallocated		60		(9)		51
Allowance for credit losses		3,370		(127)		3,243
Liabilities
Allowance for credit losses on unfunded credit exposure		—		277		277
Total Allowance for credit losses	$	3,370	$	150	$	3,520

On January 1, 2023, the Company adopted ASU 2022-02 “Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures,” which removed the recognition and measurement guidance on troubled debt restructurings (“TDRs”) and added disclosures on the financial effect and subsequent performance of certain types of modifications made to borrowers experiencing financial difficulties. Upon adoption of the standard, the Company recorded a reduction of $8,000 in the allowance for credit losses for the impact of changes in methodology used to estimate the allowance for credit losses for non-collateral dependent TDRs. There was no impact to the valuation of loans previously classified as collateral dependent TDRs. The allowance for loan and lease losses for modified loans is determined in a manner consistent with the methodology for loans under ASC 326.