UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  __________  FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended June 30, 2007  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT  For the transition period from ______ to ______  __________  Commission file number: 0-50765  VILLAGE BANK AND TRUST FINANCIAL CORP. (Exact name of small business issuer as specified in its charter)  Virginia
        
        16-1694602(State or other jurisdiction of
        
        (I.R.S. Employerincorporation or organization)
        
        Identification No.)1231 Alverser Drive, P.O. Box 330, Midlothian, Virginia  23113(Address of principal executive offices)804-897-3900(Issuers telephone number)
   Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.  YesxNoo.  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YesoNox  State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date:  2,573,485 shares of common stock, $4.00 par value, outstanding as of July 23, 2007.    Village Bank and Trust Financial Corp. Form 10-QSB  TABLE OF CONTENTS Part I  Financial InformationItem 1.  Financial StatementsConsolidated Balance SheetsJune 30, 2007 (unaudited) and December 31, 2006
        3Consolidated Statements of IncomeFor the Three and Six Months EndedJune 30, 2007 and 2006 (unaudited)
        4Consolidated Statements of Stockholders EquityFor the Six Months EndedJune 30, 2007 and 2006 (unaudited)
        5Consolidated Statements of Cash FlowsFor the Six Months EndedJune 30, 2007 and 2006 (unaudited)
        6Notes to Condensed Consolidated Financial Statements (unaudited)
        7Item 2.  Managements Discussion and Analysis or Plan of Operation
        10Item 3.  Controls and Procedures
        26Part II  Other InformationItem 1.  Legal Proceedings
        27Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
        27Item 3.  Defaults Upon Senior Securities
        27Item 4.  Submission of Matters to a Vote of Security Holders
        27Item 5.  Other Information
        28Item 6.  Exhibits
        28Signatures
        29
   2    PART I - FINANCIAL INFORMATION  ITEM 1  FINANCIAL STATEMENTS  Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Balance SheetsJune 30, 2007 (Unaudited) and December 31, 2006June 30,
        
        December 31,2007
        
        2006(Unaudited)AssetsCash and due from banks
        
        $        4,689,789
        
        $        5,702,401Federal funds sold
        
        1,092,395
        
        11,496,102Investment securities available for sale
        
        13,107,308
        
        12,787,644Loans held for sale
        
        2,712,782
        
        3,149,178LoansOutstandings
        
        289,225,171
        
        241,389,621Allowance for loan losses
        
        (3,030,339)
        
        (2,552,607)Deferred fees
        
        (420,376)
        
        (338,596)285,774,456
        
        238,498,418Premises and equipment, net
        
        13,810,637
        
        11,676,854Accrued interest receivable
        
        2,516,264
        
        2,301,264Goodwill
        
        689,108
        
        689,108Other assets
        
        6,727,525
        
        4,916,791$    331,120,264
        
        $    291,217,760Liabilities and Stockholders' EquityLiabilitiesDepositsNoninterest bearing demand
        
        $      23,162,771
        
        $      22,381,251Interest checking
        
        10,259,145
        
        9,414,544Money market
        
        22,091,145
        
        17,941,940Savings
        
        3,292,067
        
        4,106,949Time deposits of $100,000 and over
        
        71,585,152
        
        61,883,307Other time deposits
        
        155,285,159
        
        137,581,890285,675,439
        
        253,309,881FHLB advances
        
        12,000,000
        
        4,000,000Long-term debt - trust preferred securities
        
        5,155,000
        
        5,155,000Other borrowings
        
        690,348
        
        704,265Accrued interest payable
        
        443,260
        
        429,986Other liabilities
        
        906,422
        
        1,974,513Total liabilities
        
        304,870,469
        
        265,573,645Stockholders' equityPreferred stock, $1 par value - 1,000,000 shares authorized;no shares issued and outstanding
        
        -
        
        -Common stock, $4 par value - 10,000,000 shares authorized;2,568,485 shares issued and outstanding at June 30, 2007,2,562,088 shares issued and outstanding at December 31, 2006
        
        10,273,940
        
        10,248,352Additional paid-in capital
        
        13,659,780
        
        13,588,888Accumulated other comprehensive income (loss)
        
        (205,531)
        
        (177,759)Retained earnings
        
        2,521,606
        
        1,984,634Total stockholders' equity
        
        26,249,795
        
        25,644,115$    331,120,264
        
        $    291,217,760See accompanying notes to consolidated financial statements.
   3     Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of IncomeFor the Three and Six Months Ended June 30, 2007 and 2006(Unaudited)Three Months
        
        Six MonthsEnded June 30,
        
        Ended June 30,2007
        
        2006
        
        2007
        
        2006Interest incomeLoans
        
        $          5,934,721
        
        $          4,266,706
        
        $        11,251,802
        
        $          8,007,243Investment securities
        
        203,944
        
        40,341
        
        407,540
        
        75,872Federal funds sold
        
        63,577
        
        88,774
        
        187,381
        
        255,081Total interest income
        
        6,202,242
        
        4,395,821
        
        11,846,723
        
        8,338,196Interest expenseDeposits
        
        3,102,019
        
        1,743,766
        
        5,889,911
        
        3,334,283Borrowed funds
        
        149,872
        
        135,389
        
        279,935
        
        265,723Total interest expense
        
        3,251,891
        
        1,879,155
        
        6,169,846
        
        3,600,006Net interest income
        
        2,950,351
        
        2,516,666
        
        5,676,877
        
        4,738,190Provision for loan losses
        
        359,937
        
        145,761
        
        568,279
        
        363,161Net interest income after provisionfor loan losses
        
        2,590,414
        
        2,370,905
        
        5,108,598
        
        4,375,029Noninterest incomeService charges and fees
        
        187,578
        
        139,369
        
        356,639
        
        262,619Gain on sale of loans
        
        388,767
        
        424,565
        
        772,556
        
        758,176Other
        
        108,412
        
        71,109
        
        220,470
        
        191,800Total noninterest income
        
        684,757
        
        635,043
        
        1,349,665
        
        1,212,595Noninterest expenseSalaries and benefits
        
        1,717,284
        
        1,440,562
        
        3,282,767
        
        2,672,486Occupancy
        
        216,425
        
        154,959
        
        414,832
        
        314,628Equipment
        
        162,860
        
        118,178
        
        320,288
        
        218,172Supplies
        
        85,360
        
        81,244
        
        160,595
        
        152,811Professional and outside services
        
        357,920
        
        280,663
        
        631,133
        
        515,668Advertising and marketing
        
        87,082
        
        117,896
        
        166,909
        
        181,463Other operating expense
        
        379,116
        
        295,196
        
        668,146
        
        586,958Total noninterest expense
        
        3,006,047
        
        2,488,698
        
        5,644,670
        
        4,642,186Income before income taxes
        
        269,124
        
        517,250
        
        813,593
        
        945,438Provision for income taxes
        
        91,501
        
        175,865
        
        276,621
        
        321,450Net income
        
        $             177,623
        
        $             341,385
        
        $             536,972
        
        $             623,988Earnings per share, basic
        
        $                   0.07
        
        $                   0.16
        
        $                   0.21
        
        $                   0.31Earnings per share, diluted
        
        $                   0.07
        
        $                   0.16
        
        $                   0.20
        
        $                   0.30See accompanying notes to consolidated financial statements.
    4     Village Bank and Trust Financial Corp.Consolidated Statements of Stockholders' EquitySix Months Ended June 30, 2007 and 2006AccumulatedCommon Stock
        
        Additional
        
        
        
        OtherNumber of
        
        
        
        Paid-in
        
        Retained
        
        ComprehensiveShares
        
        Amount
        
        Capital
        
        Earnings
        
        Income (loss)
        
        TotalBalance, December 31, 2006
        
        2,562,088
        
        $ 10,248,352
        
        $ 13,588,888
        
        $1,984,634
        
        $    (177,759)
        
        $ 25,644,115Issuance of common stock
        
        6,397
        
        25,588
        
        40,446
        
        -
        
        -
        
        66,034Stock based compensation
        
        
        
        
        
        30,446
        
        
        
        
        
        30,446Net income
        
        -
        
        -
        
        -
        
        536,972
        
        -
        
        536,972Change in unrealized gain(loss) on securitiesavailable for sale
        
        -
        
        -
        
        -
        
        -
        
        (27,772)
        
        (27,772)Total comprehensiveincome (loss)
        
        -
        
        -
        
        -
        
        -
        
        -
        
        509,200Balance, June 30, 2007
        
        2,568,485
        
        $ 10,273,940
        
        $ 13,659,780
        
        $2,521,606
        
        $    (205,531)
        
        $ 26,249,795Balance, December 31, 2005
        
        1,854,618
        
        $   7,418,472
        
        $   9,191,567
        
        $   585,416
        
        $      (43,562)
        
        $ 17,151,893Issuance of common stock
        
        707,470
        
        2,829,880
        
        4,374,314
        
        -
        
        -
        
        7,204,194Net income
        
        -
        
        -
        
        -
        
        623,988
        
        -
        
        623,988Change in unrealized gain(loss) on securitiesavailable for sale
        
        -
        
        -
        
        -
        
        -
        
        (30,298)
        
        (30,298)Total comprehensiveincome (loss)
        
        -
        
        -
        
        -
        
        -
        
        -
        
        593,690Balance, June 30, 2006
        
        2,562,088
        
        $ 10,248,352
        
        $ 13,565,881
        
        $1,209,404
        
        $      (73,860)
        
        $ 24,949,777See accompanying notes to consolidated financial statements.
   5     Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of Cash FlowsFor the Six Months Ended June 30, 2007 and 2006(Unaudited)2007
        
        2006Cash Flows from Operating ActivitiesNet income
        
        $           536,972
        
        $           623,988Adjustments to reconcile net income to netcash provided by (used in) operating activities:Depreciation and amortization
        
        346,775
        
        200,509Provision for loan losses
        
        568,279
        
        363,161Gain on loans sold
        
        (772,556)
        
        (758,176)Stock compensation expense
        
        30,446Loss on securities
        
        -
        
        -Proceeds from sale of mortgage loans
        
        34,885,872
        
        32,444,802Origination of mortgage loans for sale
        
        (33,676,920)
        
        (31,782,094)Amortization of premiums and accretion ofdiscounts on securities, net
        
        (50,991)
        
        (20,494)Increase in interest receivable
        
        (215,000)
        
        (713,268)Increase in other assets
        
        (1,789,591)
        
        (1,640,781)Increase in interest payable
        
        13,274
        
        75,989Increase (decrease)  in other liabilities
        
        (1,068,091)
        
        (228,539)Net cash used in operating activities
        
        (1,191,531)
        
        (1,434,903)Cash Flows from Investing ActivitiesPurchases of available for sale securities
        
        (11,943,954)
        
        (9,183,855)Maturities and calls of available for sale securities
        
        11,626,366
        
        1,244,249Net increase in loans
        
        (47,844,317)
        
        (31,525,619)Purchases of premises and equipment
        
        (2,480,558)
        
        (369,789)Net cash used in investing activities
        
        (50,642,463)
        
        (39,835,014)Cash Flows from Financing ActivitiesIssuance of common stock
        
        66,034
        
        7,204,194Net increase in deposits
        
        32,365,558
        
        14,824,594Federal Home Loan Bank borrowings
        
        8,000,000
        
        -Net increase (decrease) in other borrowings
        
        (13,917)
        
        625,760Net cash provided by financing activities
        
        40,417,675
        
        22,654,548Net decrease in cash and cash equivalents
        
        (11,416,319)
        
        (18,615,369)Cash and cash equivalents, beginning of period
        
        17,198,503
        
        25,828,554Cash and cash equivalents, end of period
        
        $        5,782,184
        
        $        7,213,185See accompanying notes to consolidated financial statements.
   6    Notes to Condensed Consolidated Financial Statements (Unaudited)  Note 1 - Principles of presentation  Village Bank and Trust Financial Corp. (the Company) is the holding company of Village Bank (the Bank).  The consolidated financial statements include the accounts of the Company, the Bank and the Banks three wholly-owned subsidiaries, Village Bank Mortgage Corporation, Village Insurance Agency, Inc., and Village Financial Services 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, 2007 is not necessarily indicative of the results to be expected for the full year ending December 31, 2007.  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-KSB for the year ended December 31, 2006 as filed with the Securities and Exchange Commission.  Note 2 - Use of estimates  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of income for the period.  Actual results could differ significantly from those estimates.  Note 3 - Earnings per common share  Basic earnings per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period.  For the three month periods ended June 30, 2007 and 2006, the weighted-average number of common shares totaled 2,565,692 and 2,071,159, respectively.  For the six month periods ended June 30, 2007 and 2006, the weighted-average number of common shares totaled 2,563,900 and 1,971,239, respectively.  Diluted earnings per share reflects the potential dilution of securities that could share in the net income of the Company.  Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings per share for the periods presented.  For the three month periods ended June 30, 2007 and 2006, the weighted-average number of common shares on a fully diluted basis totaled 2,713,512 and 2,163,716, respectively.  For the six month
periods ended June 30, 2007 and 2006, the weighted-average number of common shares on a fully diluted basis totaled 2,701,743 and 2,066,713, respectively.  There were no options to acquire common stock that were anti-dilutive for the three and six month periods ended June 30, 2007 and 2006.   7    Note 4  Stock warrant and incentive plans  On March 21, 2000, the Company approved the Organizational Investors Warrant Plan which made available 140,000 warrants for grant to the Companys initial (organizational) investors for certain risks associated with the establishment of the Bank.  The warrants have an exercise price of $10 per share (which approximated the fair value per share of common stock at issuance date) and expire in April 2008.  At June 30, 2007, 140,000 warrants had been issued and none had been exercised.  Also on March 21, 2000, the Company established the Incentive Plan, a stock incentive plan, which authorizes the issuance of up to 455,000 shares of common stock (increased from 255,000 shares by amendment to the Incentive Plan approved by the Companys shareholders at its 2006 annual meeting on May 23, 2006) to assist the Company in recruiting and retaining key personnel.  Prior to January 1, 2006, the Company applied Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB 25), in accounting for stock based compensation granted to employees and directors pursuant to the stock incentive plan.  Under APB 25, compensation expense was determined based upon the fair value of the awards at the grant date consistent with the method under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), and the impact of this expense on net income and earnings per share was disclosed in the notes to financial statements.  Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment, issued in December 2004, a revision of SFAS 123, and superseding APB 25, and its related implementation guidance.  SFAS 123 (Revised 2004)
requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service in exchange for the award rather than disclosed in the financial statements.  The aggregate intrinsic value of the options outstanding was $1,003,000 and $737,000 at December 31, 2006 and 2005, respectively, and $1,815,000 and $713,000 at June 30, 2007 and 2006, respectively.  The following table summarizes stock options outstanding under the stock incentive plan at the indicated dates:  Six Months Ended June 30,2007
        
        2006Weighted
        
        
        
        
        
        WeightedAverage
        
        
        
        
        
        AverageExercise
        
        Fair Value
        
        
        
        Exercise
        
        Fair ValueOptions
        
        Price
        
        Per Share
        
        Options
        
        Price
        
        Per ShareOptions outstanding at beginning of period
        
        251,910
        
        $    10.22
        
        $      4.67
        
        241,660
        
        $      9.80
        
        $      4.47Granted
        
        -
        
        -
        
        -
        
        16,500
        
        12.50
        
        7.35Forfeited
        
        -
        
        -
        
        -
        
        (250)
        
        11.77
        
        5.29Exercised
        
        (500)
        
        11.77
        
        5.29
        
        (6,000)
        
        8.20
        
        3.93Options outstanding at end of period
        
        251,410
        
        $    10.22
        
        $      4.67
        
        251,910
        
        $    10.02
        
        $      4.67Options exercisable at end of period
        
        234,910
        
        
        
        
        
        235,410
   8    During the first quarter of 2007, we granted to certain officers 5,725 restricted shares of common stock and 5,725 performance shares of common stock with a weighted average fair market value of $15.95 at the date of grant.  During the second quarter an additional 175 restricted shares of common stock and 175 performance shares of common stock were granted with a weighted average fair market value of $16.75 at the date of grant.  These restricted stock awards have three-year graded vesting, and the performance shares cliff vest at the end of the three years.  The number of performance shares that ultimately vest is dependent upon achieving specific performance targets.  Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances.  The total number of shares underlying non-vested restricted stock and performance share awards
was 11,200 at June 30, 2007.  Stock-based compensation expense was $30,446 for the six months ended June 30, 2007.  Unamortized stock-based compensation as of June 30, 2007 was $73,100 for stock options and $178,900 for restricted stock and performance shares.  Note 5  Trust preferred securities  During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable securities.  On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting.  The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at June 30, 2007 was 7.50%. The securities may be redeemed at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035.  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.  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.  9    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  Forward-Looking Statements  Certain information contained in this discussion may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements are generally identified by phrases such as we expect, we believe or words of similar import.  Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:  
        interest rate fluctuations;
 
        risk inherent in making loans such as repayment risks and fluctuating collateral values;
 
        economic conditions in the Richmond metropolitan area;
 
        the ability to continue to attract low cost core deposits to fund asset growth;
 
        changes in general economic and business conditions;
 
        changes in laws and regulations applicable to us;
 
        competition within and from outside the banking industry;
 
        the ability to successfully manage the Companys growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;
 
        maintaining capital levels adequate to support the Companys growth;
 
        reliance on the Companys management team, including its ability to attract and retain key personnel;
 
        new products and services in the banking industry;
 
        problems with our technology, and
 
        changing trends in customer profiles and behavior.
  Although we believe that our expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.  General  The Company was organized under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiary, the Bank.  The Bank is engaged in commercial and retail banking.  We opened to the public on December 13, 1999.  We place special emphasis on serving the financial needs of individuals, small and medium sized businesses, entrepreneurs, and professional concerns.  The Bank has three subsidiaries: Village Bank Mortgage Company, Village Insurance Agency, Inc., and Village Financial Services Corporation.  Through our combined companies, we offer a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, and commercial, real estate and consumer loans.  We are a community-oriented and locally owned and managed financial institution focusing on providing a high level of responsive and personalized services to our customers, delivered in the context of a strong direct relationship with the customer.  We conduct our operations from our main office/corporate headquarters location and nine branch offices.  10     Net interest income is our primary source of earnings and represents the difference between interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities.  The level of net interest income is affected primarily by variations in the volume and mix of those assets and liabilities, as well as changes in interest rates when compared to previous periods of operation.  In addition, revenues are generated from fees charged on deposit accounts and gains from sale of mortgage loans to third-party investors.  Our total assets increased to $331,120,000 at June 30, 2007 from $291,218,000 at December 31, 2006, an increase of $39,902,000, or 13.7%.  The increase in assets resulted primarily from increases in net loans of $47,276,000.  The net increase in assets was funded by increases in deposits of $32,366,000 and advances from the Federal Home Loan Bank of Atlanta of $8,000,000, and a decrease in liquid assets of $11,416,000.  The following presents managements discussion and analysis of the financial condition of the Company at June 30, 2007 and December 31, 2006, and results of operations for the Company for the three and six month periods ended June 30, 2007 and 2006.  This discussion should be read in conjunction with the Companys Annual Report on Form 10-KSB for the year ended December 31, 2006 as filed with the Securities and Exchange Commission as well as the second quarter 2007 financial statements and notes thereto appearing elsewhere in this report.  Results of operations  Net income totaled $178,000, or $0.07 per share on a fully diluted basis, in the second quarter of 2007 compared to net income of $341,000, or $0.16 per share on a fully diluted basis, in the second quarter of 2006.  For the six months ended June 30, 2007, net income totaled $537,000, or $0.20 per share on a fully diluted basis, compared to net income of $624,000, or $0.30 per share on a fully diluted basis, for the same period in 2006.This represents a decrease in net income of $163,000, or 48%, and $167,000, or 14%, for the three and six month periods, respectively.  The decline in earnings for the three and six month periods ended June 30, 2007 compared to the same periods in 2006 is a result of the growth in branches and loans of the Companys wholly-owned subsidiary, Village Bank.  The Bank also experienced several extraordinary expenses in June 2007 including a litigation settlement and the expenses associated with moving the retail operations from our headquarters to an independent location.  This growth is demonstrated in the following schedule (dollars in thousands):  11     June 30,
        
        Increase2007
        
        2006
        
        Amount
        
        PercentTotal assetsAt period end
        
        $  331,120
        
        $  238,071
        
        $    93,049
        
        39%Average for the quarter
        
        321,748
        
        227,285
        
        94,463
        
        42%Loans, net of deferred feesAt period end
        
        288,805
        
        203,799
        
        85,006
        
        42%Average for the quarter
        
        275,877
        
        197,679
        
        78,198
        
        40%DepositsAt period end
        
        285,675
        
        201,577
        
        84,098
        
        42%Average for the quarter
        
        282,437
        
        199,640
        
        82,797
        
        41%Number of offices
        
        9
        
        7
        
        2
        
        29%
   The Banks growth, which included the addition of two new branches since June 30, 2006, resulted in increases in noninterest expense of $517,000 when comparing the second quarter of 2006 to the second quarter of 2007, and $1,003,000 when
comparing the first six months of 2006 to the first six months of 2007.  For the second quarter of 2007 compared to the second quarter of 2006, the largest increases in noninterest expense occurred in salaries and benefits of $277,000, occupancy costs of $61,000, equipment costs of $45,000 and data processing costs of $18,000.  For the six months ended June 30, 2007 compared to the same period in 2006, the largest increases in noninterest expense occurred in salaries and benefits of $610,000, occupancy costs of $100,000, equipment costs of $102,000 and data processing costs of $65,000.  The 2007 periods were also negatively affected by a litigation settlement in the amount of $82,000.  Coupled with additional expenses associated with the opening and staffing of the new branches, we had unexpected strong loan growth during the first six months of 2007 of $47 million, which resulted in the highest quarterly provision for loan losses in the Banks history.  The amount of the provision for loan losses is determined by many factors, but is primarily determined by the amount of loans outstanding.  The provisions for loan losses for the three and six month periods ended June 30, 2007 amounted to $360,000 and $568,000, respectively, which was $214,000 and $205,000, respectively, higher than the provisions for the same periods in 2006.  Net interest income  Net interest income is our primary source of earnings and represents the difference between interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities.  The level of net interest income is affected primarily by variations in the volume and mix of those assets and liabilities, as well as changes in interest rates when compared to previous periods of operation.  Net interest income for the six months ended June 30, 2007 and 2006 was $5,677,000 and $4,738,000, respectively.  This increase of $939,000, or 20%, in net interest income was due to growth in loans, offset by a decline in the net interest margin.  Loans net of deferred fees increased by $85,006,000, or 42%, from $203,799,000 at June 30, 2006 to $288,805,000 at June 30, 2007.  Loans net of deferred fees averaged $262,562,000 for the first six months of 2007 as compared to $189,471,000 for the first six months of 2006, an increase of $73,091,000, or 39%.  However, our net interest margin (net interest income expressed as a percentage of  12    average earning assets) for the six months ended June 30, 2007 declined to 4.00% from 4.65% for the same period in 2006.  The declining net interest margin is a result of increasing cost of funds as rates on liabilities reprice upwards.  While we believe that our net interest margin will not decline significantly during the remainder of 2007 as interest rates have stabilized, we can provide no assurance that it will not.  Average interest-earning assets for the first six months of 2007 increased by $80,552,000, or 39%, compared to the first six months of 2006.  The increase in interest-earning assets was due primarily to the growth of our loan portfolio.  The average yield on interest-earning assets increased to 8.35% for the first six months of 2007 compared to 8.18% for the first six months of 2006.  The increase in the average yields from 2006 to 2007 was due primarily to an improvement in the yield on loans.  Our average interest-bearing liabilities increased by $75,746,000, or 41%, for the first six months of 2007 compared to the first six months of 2006.  The growth in interest-bearing liabilities was primarily due to growth in deposits.  The average cost of interest-bearing liabilities increased to 4.79% for the first six months of 2007 from 3.95% for the first six months of 2006.  The principal reason for the increase in liability costs was increasing interest rates as liabilities reprice.  The increasing interest rates were a result of increases in short term interest rates by the Federal Reserve.  See our discussion of interest rate sensitivity below for more information.  The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders' equity and related income, expense and corresponding weighted-average yields and rates.  The average balances used in these tables and other statistical data were calculated using daily average balances.  We had no tax exempt assets for the periods presented.  13     Average Balance Sheets(In thousands)Six Months Ended June 30, 2007
        
        Six Months Ended June 30, 2006Interest
        
        Annualized
        
        
        
        Interest
        
        AnnualizedAverage
        
        Income/
        
        Yield
        
        Average
        
        Income/
        
        YieldBalance
        
        Expense
        
        Rate
        
        Balance
        
        Expense
        
        RateLoans net of deferred fees
        
        $  262,562
        
        $ 11,181
        
        8.59%
        
        $189,471
        
        $   7,950
        
        8.46%Investment securities
        
        14,180
        
        408
        
        5.80%
        
        3,182
        
        76
        
        4.82%Loans held for sale
        
        2,212
        
        71
        
        6.47%
        
        1,777
        
        57
        
        6.47%Federal funds and other
        
        7,182
        
        187
        
        5.25%
        
        11,154
        
        255
        
        4.61%Total interest earning assets
        
        286,136
        
        11,847
        
        8.35%
        
        205,584
        
        8,338
        
        8.18%Allowance for loan losses
        
        (2,720)
        
        
        
        
        
        (2,044)Cash and due from banks
        
        4,869
        
        
        
        
        
        2,264Premises and equipment, net
        
        12,872
        
        
        
        
        
        7,327Other assets
        
        8,433
        
        
        
        
        
        6,479Total assets
        
        $  309,590
        
        
        
        
        
        $219,610Interest bearing depositsInterest checking
        
        $    10,140
        
        $        46
        
        0.91%
        
        $    7,624
        
        $        39
        
        1.03%Money market
        
        20,665
        
        336
        
        3.28%
        
        25,789
        
        443
        
        3.46%Savings
        
        3,826
        
        22
        
        1.15%
        
        4,201
        
        24
        
        1.15%Certificates
        
        214,857
        
        5,486
        
        5.15%
        
        136,794
        
        2,828
        
        4.17%Total deposits
        
        249,488
        
        5,890
        
        4.76%
        
        174,408
        
        3,334
        
        3.85%Borrowings
        
        10,141
        
        280
        
        5.57%
        
        9,475
        
        266
        
        5.66%Total interest bearing liabilities
        
        259,629
        
        6,170
        
        4.79%
        
        183,883
        
        3,600
        
        3.95%Noninterest bearing deposits
        
        22,159
        
        
        
        
        
        15,685Other liabilities
        
        1,576
        
        
        
        
        
        1,119Total liabilities
        
        283,364
        
        
        
        
        
        200,687Equity capital
        
        26,226
        
        
        
        
        
        18,923Total liabilities and capital
        
        $  309,590
        
        
        
        
        
        $219,610Net interest income beforeprovision for loan losses
        
        
        
        $   5,677
        
        
        
        
        
        $   4,738Interest spread - average yield on interestearning assets, less average rate oninterest bearing liabilities
        
        
        
        
        
        3.56%
        
        
        
        
        
        4.23%Annualized net interest margin (netinterest income expressed aspercentage of average earning assets)
        
        
        
        
        
        4.00%
        
        
        
        
        
        4.65%
  Provision for loan losses  The provision for loan losses for the three months ended June 30, 2007 was $360,000 compared to $146,000 for the three months ended June 30, 2006.  The provision for loan losses for the six months ended June 30, 2007 was $568,000 compared to $363,000 for the six months ended June 30, 2006.  The 56% increase when comparing
 the six month periods was primarily due to the higher loan volume in 2007 compared to 2006.  Net loans increased by $47,754,000  14    during the first six months of 2007 compared to an increase of $31,420,000 during the first six months of 2006.  The amount of the loan loss provision is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.  See our discussion of the allowance for loan losses underAllowance for loan lossesandCritical accounting policiesbelow.  Noninterest income  Noninterest income increased from $635,000 for the first three months of 2006 to $685,000 for the first three months of 2007.  Noninterest income also increased from $1,213,000 for the first six months of 2006 to $1,350,000 for the first six months of 2007, a $137,000, or 11%, increase.  This increase was attributable to an increase in loan originations in the mortgage company and increased service charges and fees resulting from a larger deposit base.  Gains on loan sales increased from $758,000 for the first six months of 2006 to $773,000 for the first six months of 2007, a $14,000, or 2% increase.  Service charges and fees increased by $94,000, or 36%, from $263,000 for the first six months of 2006 to $357,000 for the first six months of 2007.  Noninterest expense  Noninterest expense for the three months ended June 30, 2007 was $3,006,000 compared to $2,489,000 for the three months ended June 30, 2006, an increase of $517,000 or 21%.  Noninterest expense for the six months ended June 30, 2007 totaled $5,645,000, an increase of $1,002,000, or 22%, from $4,642,000 for the six months ended June 30, 2006.  Salaries and benefits represented the largest increase in both periods, increasing by $277,000 or 19% from $1,440,000 for the first three months of 2006 to $1,717,000 for the first three months of 2007 and increasing by $610,000, or 23%, from $2,673,000 for the first six months of 2006 to $3,283,000 for the first six months of 2007.  This increase and other increases in noninterest expense were primarily attributable to the growth of the Company both in personnel and in new branches.  Occupancy and equipment expenses increased by $202,000, or 38%, when comparing
the six month periods.  Income taxes  The provision for income taxes of $277,000 for the six months ended June 30, 2007 is based upon the results of operations.  Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.  The Company must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income.  If any such assets are not likely to be recovered, a valuation allowance must be recognized.  We determined that a valuation allowance was not required for deferred tax assets as of June 30, 2007.  The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Companys financial statements.  Commercial banking organizations conducting business in Virginia are not subject to Virginia income taxes.  Instead, they are subject to a franchise tax based on bank capital.  The Company recorded a franchise tax expense of $105,000 and $60,000 for the six months ended June 30, 2007 and 2006, respectively.  15     Loan portfolio  The following table presents the composition of our loan portfolio (excluding mortgage loans held for sale) at the dates indicated.  Loan Portfolio, Net(In thousands)June 30, 2007
        
        December 31, 2006Amount
        
        %
        
        Amount
        
        %Commercial
        
        $    23,076
        
        8.0%
        
        $    17,889
        
        7.4%Real estate - residential
        
        41,380
        
        14.3%
        
        36,408
        
        15.1%Real estate - commercial
        
        121,262
        
        41.9%
        
        100,039
        
        41.4%Real estate - construction
        
        96,357
        
        33.3%
        
        80,324
        
        33.3%Consumer
        
        7,150
        
        2.5%
        
        6,730
        
        2.8%Total loans
        
        289,225
        
        100.0%
        
        241,390
        
        100.0%Less:  unearned income, net
        
        (420)
        
        
        
        (339)Less:  Allowance for loan losses
        
        (3,030)
        
        
        
        (2,553)Total loans, net
        
        $  285,775
        
        
        
        $  238,498
   Allowance for loan losses  The allowance for loan losses at June 30, 2007 was $3,030,000, compared to $2,553,000 at December 31, 2006.  The ratio of the allowance for loan losses to gross portfolio loans (net of unearned income and excluding mortgage loans held for sale) at June 30, 2007 and December 31, 2006 was 1.05% and 1.06%, respectively.  The amount of the loan loss provision is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.  See our discussion of the allowance for loan losses underCritical accounting policiesbelow.  16    The following table presents an analysis of the changes in the allowance for loan losses for the periods indicated.  Analysis of Allowance for Loan Losses(In thousands)Six Months EndedJune 30,2007
        
        2006Beginning balance
        
        $    2,553
        
        $    1,931Provision for loan losses
        
        568
        
        363Charge-offs - comercial
        
        (91)
        
        (105)Recoveries
        
        -
        
        -Ending balance
        
        $    3,030
        
        $    2,189Loans outstanding at end of period (1)
        
        $288,805
        
        $203,799Ratio of allowance for loan losses asa percent of loans outstanding atend of period
        
        1.05%
        
        1.07%Average loans outstanding for the period (1)
        
        $262,562
        
        $189,471Ratio of net charge-offs to average loansoutstanding for the period
        
        0.03%
        
        0.06%(1)  Loans are net of unearned income.
    17    Investment portfolio  At June 30, 2007 and December 31, 2006, all of our securities were classified as available-for-sale.  The following table presents the composition of our investment portfolio at the dates indicated.   Investment Securities Available-for-Sale( in thousands)Unrealized
        
        EstimatedPar
        
        Amortized
        
        Gain
        
        Fair
        
        AverageValue
        
        Cost
        
        (Loss)
        
        Value
        
        YieldJune 30, 2007US Government AgenciesWithin one year
        
        $    1,000
        
        $      987
        
        $         (2)
        
        $      985
        
        5.08%One to five years
        
        360
        
        360
        
        (8)
        
        352
        
        4.65%More than five years
        
        11,789
        
        11,789
        
        (75)
        
        11,714
        
        5.83%Total
        
        13,149
        
        13,136
        
        (85)
        
        13,051
        
        5.74%Mortgage-backed securitiesMore than five years
        
        55
        
        55
        
        1
        
        56
        
        3.63%Other investmentsMore than five years
        
        -
        
        -
        
        -
        
        -Total investment securities
        
        $  13,204
        
        $  13,191
        
        $       (84)
        
        $  13,107
        
        5.73%December 31, 2006US Government AgenciesWithin one year
        
        $      605
        
        $      597
        
        $           -
        
        $      597
        
        5.22%One to five years
        
        360
        
        360
        
        (9)
        
        351
        
        4.65%More than five years
        
        11,789
        
        11,789
        
        (27)
        
        11,762
        
        5.83%Total
        
        12,754
        
        12,746
        
        (36)
        
        12,710
        
        5.77%Mortgage-backed securitiesMore than five years
        
        77
        
        77
        
        -
        
        77
        
        3.57%Other investmentsMore than five years
        
        -
        
        -
        
        -
        
        -Total investment securities
        
        $  12,831
        
        $  12,823
        
        $       (36)
        
        $  12,787
        
        5.75%
   18    Goodwill  Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is evaluated at least annually for impairment by comparing its fair value with its recorded amount and is written down when appropriate.  Projected net operating cash flows are compared to the carrying amount of the goodwill recorded and, if the estimated net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value.  Goodwill of $689,000 at June 30, 2007 was related to the Banks acquisition of Village Bank Mortgage in 2003.  There was no impairment of goodwill at June 30, 2007.  Deposits  Total deposits increased by $32,366,000, or 13%, during the first six months of 2007 as compared to an increase of $14,825,000, or 8%, during the first six months of 2006.  The increase in deposits in 2007 resulted primarily from an increase in certificates of deposit of $27,405,000.  The increase in certificates of deposit was due primarily to efforts to increase liquidity to fund the large increase in loans discussed previously.  The mix of our deposits continues to be weighted toward time deposits, which represent 79% of our total deposits at each of June 30, 2007 and December 31, 2006.  As our branch network increases and becomes more convenient to a larger segment of our targeted customer base, we believe that a move to a higher percentage of our deposits in checking accounts will occur. Additionally, we are emphasizing checking account deposit growth at our existing branches by providing incentives to branch personnel for reaching new checking account growth goals.  The average cost of interest-bearing deposits for the six months ended June 30, 2007 and 2006 was 4.76% and 3.85%, respectively.  This increase in our average cost of interest-bearing deposits has mirrored the overall increase in interest rates resulting from the actions by the Federal Reserve to increase short-term interest rates during 2005 and 2006.  We expect our cost of deposits to stabilize now that the Federal Reserve has stopped increasing short-term interest rates.  The variety of deposit accounts that we offer has allowed us to be competitive in obtaining funds and has allowed us to respond with flexibility to, although not to eliminate, the threat of disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment vehicles such as government and corporate securities).  Our ability to attract and retain deposits, and our cost of funds, has been, and is expected to continue to be, significantly affected by money market conditions.  Borrowings  We use borrowings to supplement deposits when they are available at a lower overall cost to us or they can be invested at a positive rate of return.  As a member of the Federal Home Loan Bank of Atlanta (FHLB), the Bank is required to own capital stock in the FHLB and is authorized to apply for borrowings from the FHLB.  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.  Borrowings from the FHLB were $12,000,000 and $4,000,000 at June 30, 2007 and December 31, 2006, respectively.  The  19    FHLB advances are secured by the pledge of first mortgage loans and the pledge of our FHLB stock.  Capital resources  Stockholders equity at June 30, 2007 was $26,250,000, compared to $25,644,000 at December 31, 2006.  The $606,000 increase in equity during the first six months of 2007 was primarily due to net income of $537,000.  Stockholders equity at June 30, 2006 was $24,950,000 compared to $17,152,000 at December 31, 2005.  The $7,798,000 increase in equity during the first six months of 2006 was due to proceeds from the issuance of common stock in stock options and warrants exercises of $7,204,000 and net income of $624,000.  During the first quarter of 2005, the Company issued $5.2 million in 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.  20    The following table presents the composition of regulatory capital and the capital ratios at the dates indicated.  Analysis of Capital(In thousands)June 30,
        
        December 31,2007
        
        2006Tier 1 capitalCommon stock
        
        $       10,274
        
        $       10,248Additional paid-in capital
        
        13,660
        
        13,589Retained earnings
        
        2,522
        
        1,985Net unrealized losses on securities
        
        206
        
        178Qualifying trust preferred securities
        
        5,000
        
        5,000Total equity
        
        31,662
        
        31,000Less: goodwill
        
        (689)
        
        (689)Total Tier 1 capital
        
        30,973
        
        30,311Tier 2 capitalAllowance for loan losses
        
        3,030
        
        2,553Total Tier 2 capital
        
        3,030
        
        2,553Total risk-based capital
        
        34,003
        
        32,864Risk-weighted assets
        
        $     326,464
        
        $     275,323Capital ratiosTier 1 capital to risk-weighted assets
        
        9.5%
        
        11.0%Total capital to risk-weighted assets
        
        10.4%
        
        11.9%Leverage ratio (Tier 1 capital toaverage assets)
        
        10.0%
        
        10.6%Equity to total assets
        
        7.9%
        
        8.8%
   Liquidity  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, 2007, cash, cash equivalents and investment securities available for sale totaled $18,889,000, or 6% of total assets, which we believe is adequate to meet short-term liquidity needs.  At June 30, 2007, we had commitments to originate $104,189,000 of loans.  Fixed commitments to incur capital expenditures were $12,000,000 at June 30, 2007 and relate to the construction of a new headquarters building in Chesterfield County.  Time deposits scheduled to mature in the 12-month period ending June 30, 2008 totaled $131,566,000 at June 30, 2007. Based on past experience, we believe that a significant portion of such deposits will remain with us. We further believe that loan repayments and other sources of funds such as deposit growth will be
adequate to meet our foreseeable short- and long-term liquidity needs.  21     Interest rate sensitivity  An important element of asset/liability management is the monitoring of our sensitivity to interest rate movements.  In order to measure the effects of interest rates on our net interest income, management takes into consideration the expected cash flows from the securities and loan portfolios and the expected magnitude of the repricing of specific asset and liability categories.  We evaluate interest sensitivity risk and then formulate guidelines to manage this risk based on managements outlook regarding the economy, forecasted interest rate movements and other business factors.  Our goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.  Contractual principal repayments of loans do not necessarily reflect the actual term of our loan portfolio.  The average lives of mortgage loans are substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which gives us the right to declare a loan immediately due and payable in the event, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid.  In addition, certain borrowers increase their equity in the security property by making payments in excess of those required under the terms of the mortgage.  The sale of fixed rate loans is intended to protect us from precipitous changes in the general level of interest rates. The valuation of adjustable rate mortgage loans is not as directly dependent on the level of interest rates as is the value of fixed rate loans.  As with other investments, we regularly monitor the appropriateness of the level of adjustable rate mortgage loans in our portfolio and may decide from time to time to sell such loans and reinvest the proceeds in other adjustable rate investments.  The data in the following table reflects repricing or expected maturities of various assets and liabilities at June 30, 2007.  The gap analysis represents the difference between interest-sensitive assets and liabilities in a specific time interval.  Interest sensitivity gap analysis presents a position that existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.  22     Interest Rate Sensitivity GAP AnalysisJune 30, 2007(In thousands)Within 3
        
        3 to 6
        
        6 to 12
        
        13 to 36
        
        More thanMonths
        
        Months
        
        Months
        
        Months
        
        36 Months
        
        TotalInterest Rate Sensitive AssetsLoans (1)Fixed rate
        
        $  2,403
        
        $   1,655
        
        $   7,826
        
        $   9,013
        
        $  52,084
        
        $ 72,981Variable rate
        
        156,580
        
        4,899
        
        6,844
        
        12,835
        
        35,086
        
        216,244Investment securities
        
        -
        
        985
        
        -
        
        -
        
        12,122
        
        13,107Loans held for sale
        
        2,713
        
        -
        
        -
        
        -
        
        -
        
        2,713Federal funds sold
        
        1,092
        
        -
        
        -
        
        -
        
        -
        
        1,092Total rate sensitive assets
        
        162,788
        
        7,539
        
        14,670
        
        21,848
        
        99,292
        
        306,137Cumulative rate sensitive assets
        
        162,788
        
        170,327
        
        184,997
        
        206,845
        
        306,137Interest Rate Sensitive LiabilitiesInterest checking (2)
        
        -
        
        -
        
        -
        
        10,259
        
        -
        
        10,259Money market accounts
        
        22,091
        
        -
        
        -
        
        -
        
        -
        
        22,091Savings (2)
        
        -
        
        -
        
        -
        
        3,292
        
        -
        
        3,292Certificates of deposit
        
        47,601
        
        34,461
        
        49,504
        
        75,933
        
        19,371
        
        226,870FHLB advances
        
        -
        
        -
        
        2,000
        
        10,000
        
        -
        
        12,000Trust Preferred Securities
        
        -
        
        -
        
        -
        
        -
        
        5,155
        
        5,155Other borrowings
        
        690
        
        -
        
        -
        
        -
        
        -
        
        690Total rate sensitive liabilities
        
        70,382
        
        34,461
        
        51,504
        
        99,484
        
        24,526
        
        280,357Cumulative rate sensitive liabilities
        
        70,382
        
        104,843
        
        156,347
        
        255,831
        
        280,357Rate sensitivity gap for period
        
        $92,406
        
        $(26,922)
        
        $(36,834)
        
        $(77,636)
        
        $  74,766
        
        $ 25,780Cumulative rate sensitivity gap
        
        $92,406
        
        $  65,484
        
        $  28,650
        
        $(48,986)
        
        $  25,780Ratio of cumulative gap to total assets
        
        27.9%
        
        19.8%
        
        8.7%
        
        (14.8)%
        
        7.8%Ratio of cumulative rate sensitiveassets to cumulative rate sensitiveliabilities
        
        231.3%
        
        162.5%
        
        118.3%
        
        80.9%
        
        109.2%Ratio of cumulative gap to cumulativerate sensitive assets
        
        56.8%
        
        38.4%
        
        15.5%
        
        (23.7)%
        
        8.4%(1) Includes nonaccrual loans of approximately $3,414,000, which are spread throughout the categories.(2) Management believes that interest checking and savings accounts are generally not sensitive to changes in interestrates and therefore has placed such deposits in the "13 to 36 months" category.
   At June 30, 2007, our assets that reprice within one year exceeded liabilities that reprice within one year by $28,650,000 and therefore we were in an asset positive position.  An asset positive position, or positive gap, can adversely affect earnings in periods of falling interest rates, but can improve earnings in periods of rising interest rates.  This positive position is due primarily to our adjustable rate loan portfolio.  23    Critical accounting policies  The financial condition and results of operations presented in the financial statements, accompanying notes to the financial statements and management's discussion and analysis are, to a large degree, dependent upon our accounting policies.  The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.  Presented below is a discussion of those accounting policies that management believes are the most important accounting policies to the portrayal and understanding of our financial condition and results of operations.  These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain.  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.  See also Note 1 of theNotes to Consolidated Financial Statementsfiled with the Companys Annual Report on Form 10-KSB for the year ended December 31, 2006.  We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio.  We maintain policies and procedures that address the systems of controls over the following areas of maintenance of the allowance:  the systematic methodology used to determine the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.  We evaluate various loans individually for impairment as required by Statement of Financial Accounting Standards (SFAS) 114,Accounting by Creditors for Impairment of a Loan, and SFAS 118,Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.  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.  If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS 5,Accounting for Contingencies, with a group of loans that have similar characteristics.  For loans without individual measures of impairment, we make estimates of losses for groups of loans as required by SFAS 5.  Loans are grouped by similar characteristics, including the type of loan, the assigned loan classification and the general collateral type.  A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan.  The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans and leases, including:  borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.  The amounts of estimated impairment for individually evaluated loans and groups of loans are added together for a total estimate of loan losses.  This estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made.  If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated  24    to determine whether the allowance falls outside a range of estimates.  If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses.  We recognize the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high.  If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the financial statements.  Impact of inflation and changing prices and seasonality  The financial statements in this document have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without consideration of changes in the relative purchasing power of money over time due to inflation.  Unlike industrial companies, most of the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates have a more significant impact on a financial institutions performance than the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation.  25    ITEM 3  CONTROLS AND PROCEDURES  Based upon an evaluation as of June 30, 2007 under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Companys disclosure controls and procedures, they have concluded that our disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended, are effective in ensuring that all material information required to be disclosed in reports that it files or submits under such Act are made known to them in a timely fashion.  Our management is also responsible for establishing and maintaining adequate internal control over financial reporting.  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.   26    PART II  OTHER INFORMATION  ITEM 1  LEGAL PROCEEDINGS  Not applicable.
   ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  Not applicable.
   ITEM 3  DEFAULTS UPON SENIOR SECURITIES  Not applicable.
   ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  The Company held its 2007 Annual Meeting of Shareholders on Tuesday, May 22, 2007 at 6:00 p.m. at the Salisbury Country Club, 13620 Salisbury Road, Midlothian, Virginia.  There were 2,033,116 shares represented in person or by proxy, which represented 79.2% of the outstanding shares.  There was a quorum for all purposes.  The shareholders were asked to vote on the election of three directors of the Company for a term of three years each and to ratify the appointment of the independent registered public accounting firm for the Company for 2007.  The votes cast for or withheld for the election of directors were as follows:  Name
        For
        WithheldClass C Directors:Craig D. Bell
        1,902,977
        130,139George R. Whittemore
        1,975,666
        57,450Thomas W. Winfree
        1,821,808
        211,308
  The votes cast for, against or abstain to ratify the appointment of BDO Seidman, LLP as the independent registered public accounting firm for the Company for 2007 were as follows:  For
        Against
        Abstain1,877,566
        1,200
        152,300
  There were no broker non-votes in connection with the ratification of the appointment of BDO Seidman, LLP.  27     ITEM 5  OTHER INFORMATION  Not applicable.
   ITEM 6  EXHIBITS  31.1
        Certification of Chief Executive Officer
  31.2
        Certification of Chief Financial Officer
  32.1
        Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
   28    SIGNATURES  In accordance with the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.  VILLAGE BANK AND TRUST FINANCIAL CORP. (Registrant)   Date:August 13, 2007
        By:/s/ Thomas W. Winfree
 Thomas W. Winfree President and Chief Executive Officer  Date:August 13, 2007
        By:/s/ C. Harril Whitehurst, Jr.
 C. Harril Whitehurst, Jr. Senior Vice President and Chief Financial Officer   29    Exhibit Index  Exhibit Number
        Document
  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