Quarterly Report (10-q)

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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

Form 10-Q

______________________

(Mark one)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2022

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________

Virginia

001-35402

20-0500300

(State or other jurisdiction of

incorporation or organization)

(Commission file number)

(I.R.S. Employer

Identification No.)

828 Main Street, Lynchburg, VA

24504

(Address of principal executive offices)

(Zip Code)

(434) 846-2000

(Registrant’s telephone number, including area code)

Indicate by check mark 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  ☒    No  ☐

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

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

 

Large accelerated filer

 

☐

  

Accelerated filer

 

☐

Non-accelerated filer

 

☒

  

Smaller reporting company

 

☒

Emerging growth company

 

☐

  

 

______________________

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

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock, 2.14 per share par value

BOTJ

The NASDAQ Stock Market LLC

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 by Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,705,657 shares of Common Stock, par value $2.14 per share, were outstanding at August 10, 2022.
‎

Table of Contents

 

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II – OTHER INFORMATION

Item 1. Legal Proceedings 

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

Item 4. Mine Safety Disclosures

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

Table of Contents

 

PART I – FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts) (2022 unaudited)

June 30,

December 31,

Assets

2022

2021

Cash and due from banks

$                 34,249

$                 29,337

Federal funds sold

40,605

153,816

Total cash and cash equivalents

74,854

183,153

Securities held-to-maturity, at amortized cost (fair value of $3,361 in 2022 and $4,006 in 2021)

3,647

3,655

Securities available-for-sale, at fair value

201,429

161,267

Restricted stock, at cost

1,387

1,324

Loans, net of allowance for loan losses of $6,616 in 2022 and $6,915 in 2021

607,322

576,469

Loans held for sale

4,460

1,628

Premises and equipment, net

18,152

18,351

Interest receivable

2,315

2,064

Cash value - bank owned life insurance

19,010

18,785

Other real estate owned

761

761

Customer relationship intangibles, net

8,126

8,406

Goodwill

3,819

3,001

Other assets

14,295

8,770

Total assets

$               959,577

$               987,634

Liabilities and Stockholders' Equity

Deposits

Noninterest bearing demand

$               148,292

$               162,286

NOW, money market and savings

591,615

582,000

Time deposits

135,439

142,770

Total deposits

875,346

887,056

Capital notes, net

10,035

10,031

Other borrowings

10,721

10,985

Income taxes payable

133

-

Interest payable

37

46

Other liabilities

9,987

10,087

Total liabilities

$               906,259

$               918,205

Commitments and Contingencies

 

 

Stockholders' equity

Preferred stock; authorized 1,000,000 shares; none issued and outstanding

$                           -

$                           -

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 4,740,657 as of June 30, 2022 and December 31, 2021

10,145

10,145

Additional paid-in-capital

37,230

37,230

Retained earnings

27,207

23,440

Accumulated other comprehensive (loss)

(21,264)

(1,386)

Total stockholders' equity

$                 53,318

$                 69,429

Total liabilities and stockholders' equity

$               959,577

$               987,634


‎

1

See accompanying notes to these consolidated financial statements

Table of Contents

 

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

(dollar amounts in thousands, except per share amounts) (unaudited)

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,

Interest Income

2022

2021

2022

2021

Loans

$                   6,174

$                   6,624

$                 12,079

$                 13,484

Securities

US Government and agency obligations

322

219

580

410

Mortgage-backed securities

452

84

759

161

Municipals - taxable

270

193

541

336

Municipals - tax exempt

19

10

37

20

Dividends

27

29

31

35

Corporates

143

50

251

100

Interest bearing deposits

27

5

34

19

Federal Funds sold

164

20

201

34

Total interest income

7,598

7,234

14,513

14,599

Interest Expense

Deposits

NOW, money market savings

115

138

241

273

Time deposits

146

278

324

651

Finance leases

24

27

49

54

Other borrowings

108

-

222

-

Capital notes

81

81

163

163

Total interest expense

474

524

999

1,141

Net interest income

7,124

6,710

13,514

13,458

Recovery of loan losses

(300)

-

(600)

-

Net interest income after recovery of loan losses

7,424

6,710

14,114

13,458

Noninterest income

Gain on sales of loans held for sale

1,299

2,310

3,203

4,084

Service charges, fees and commissions

658

637

1,250

1,191

Wealth management fees

961

-

1,976

-

Life insurance income

112

100

225

198

Other

4

2

11

10

Total noninterest income

3,034

3,049

6,665

5,483

Noninterest expenses

Salaries and employee benefits

4,533

4,076

8,522

7,808

Occupancy

432

405

903

833

Equipment

617

631

1,223

1,257

Supplies

122

116

264

234

Professional, data processing, and other outside expense

871

1,035

1,925

1,949

Marketing

247

238

439

511

Credit expense

259

284

521

560

Other real estate expenses

6

7

12

73

FDIC insurance expense

131

123

261

288

Amortization of intangibles

140

-

280

-

Other

234

322

890

613

2

See accompanying notes to these consolidated financial statements

Table of Contents

 

Total noninterest expenses

7,592

7,237

15,240

14,126

Income before income taxes

2,866

2,522

5,539

4,815

Income tax expense

574

508

1,108

966

Net Income

$                   2,292

$                   2,014

$                   4,431

$                   3,849

Weighted average shares outstanding - basic and diluted

4,740,657

4,748,356

4,740,657

4,757,480

Earnings per common share - basic and diluted

$                     0.48

$                     0.42

$                     0.93

$                     0.81


‎

3

See accompanying notes to these consolidated financial statements

Table of Contents

 

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(dollar amounts in thousands) (unaudited)

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

2022

2021

2022

2021

Net Income

$          2,292 

$          2,014 

$          4,431 

$          3,849 

Other comprehensive (loss) income:

Unrealized (loss) gain on securities available-for-sale

(11,671)

1,596 

(25,162)

(1,843)

Tax effect

2,450 

(335)

5,284 

387 

Other comprehensive (loss) income, net of tax

(9,221)

1,261 

(19,878)

(1,456)

Comprehensive (loss) income

$        (6,929)

$          3,275 

$      (15,447)

$          2,393 


‎

4

See accompanying notes to these consolidated financial statements

Table of Contents

 

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30,

2022

2021

Cash flows from operating activities

Net Income

$                    4,431 

$                    3,849 

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

631 

1,018 

Stock based compensation expense

-

53 

Net amortization and accretion of premiums and discounts on securities

237 

562 

Amortization of debt issuance costs

4 

2 

(Gain) on sales of loans held for sale

(3,203)

(4,084)

Proceeds from sales of loans held for sale

123,182 

165,380 

Origination of loans held for sale

(122,811)

(160,447)

Recovery of loan losses

(600)

-

Loss on sale of other real estate owned

-

66 

Amortization of intangibles

280 

-

Bank owned life insurance income

(225)

(198)

(Increase) decrease in interest receivable

(251)

245 

(Increase) decrease in other assets

(649)

292 

Decrease in income taxes receivable

77 

-

Increase in income taxes payable

133 

-

(Decrease) in interest payable

(9)

(29)

(Decrease) increase in other liabilities

(100)

1,326 

Net cash provided by operating activities

$                    1,127 

$                    8,035 

Cash flows from investing activities

Purchases of securities available-for-sale

$                 (71,580)

$                 (47,894)

Proceeds from maturities, calls and paydowns of securities available-for-sale

6,027 

4,718 

Purchases of bank owned life insurance

-

(2,000)

(Purchase) sale of Federal Home Loan Bank stock

(63)

227 

Proceeds from sale of other real estate owned

-

344 

Origination of loans, net of principal collected

(30,563)

6,696 

Purchases of premises and equipment

(432)

(956)

Net cash (used in) investing activities

$                 (96,611)

$                 (38,865)

Cash flows from financing activities

Net (decrease) increase in deposits

$                 (11,710)

$                  54,475 

Principal payments on finance lease obligations

(177)

(208)

Principal payments on other borrowings

(264)

-

Repurchase of common stock

-

(427)

Dividends paid to common stockholders

(664)

(607)

Net cash (used in) provided by financing activities

$                 (12,815)

$                  53,233 

(Decrease) increase in cash and cash equivalents

(108,299)

22,403 

Cash and cash equivalents at beginning of period

$                183,153 

$                100,886 

Cash and cash equivalents at end of period

$                  74,854 

$                123,289 

Supplemental schedule of noncash investing and financing activities

Noncash transactions

Transfer of loans to other real estate owned

$                            - 

$                         66 

Fair value adjustment for securities available-for-sale

(25,162)

(1,843)

Supplemental disclosures of cash flow information

Cash transactions

Cash paid for interest

$                    1,008 

$                    1,170 

Cash paid for income taxes

900 

1,450 

5

See accompanying notes to these consolidated financial statements

Table of Contents

 

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Six Months Ended June 30, 2022 and 2021

(dollars in thousands, except per share amounts) (unaudited)

Accumulated

Additional

Other

Shares

Common

Paid-in

Retained

Comprehensive

Outstanding

Stock

Capital

Earnings

Income (Loss)

Total

Balance at December 31, 2020

4,339,436

$      9,286

$     30,989

$     24,665

$              1,792

$       66,732

Net Income

-

-

-

1,835

-

1,835

Dividends paid on common stock ($0.07 per share)

-

-

-

(304)

-

(304)

Repurchase of common stock

(14,600)

(31)

(181)

-

-

(212)

Other comprehensive (loss)

-

-

-

-

(2,717)

(2,717)

Balance at March 31, 2021

4,324,836

$      9,255

$     30,808

$     26,196

$                (925)

$       65,334

Net Income

-

-

-

2,014

-

2,014

Dividends paid on common stock ($0.07 per share)

-

-

-

(303)

-

(303)

Repurchase of common stock

(14,300)

(31)

(184)

-

-

(215)

10% Stock dividend

431,024

923

6,620

(7,543)

-

-

Other comprehensive income

-

-

-

-

1,261

1,261

Balance at June 30, 2021

4,741,560

$    10,147

$     37,244

$     20,364

$                 336

$       68,091

Balance at December 31, 2021

4,740,657

$    10,145

$     37,230

$     23,440

$             (1,386)

$       69,429

Net Income

-

-

-

2,139

-

2,139

Dividends paid on common stock ($0.07 per share)

-

-

-

(332)

-

(332)

Other comprehensive (loss)

-

-

-

-

(10,657)

(10,657)

Balance at March 31, 2022

4,740,657

$    10,145

$     37,230

$     25,247

$           (12,043)

$       60,579

Net Income

-

-

-

2,292

-

2,292

Dividends paid on common stock ($0.07 per share)

-

-

-

(332)

-

(332)

Other comprehensive (loss)

-

-

-

-

(9,221)

(9,221)

Balance at June 30, 2022

4,740,657

$    10,145

$     37,230

$     27,207

$           (21,264)

$       53,318

6

See accompanying notes to these consolidated financial statements

Table of Contents

 

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information is contained in Financial’s Annual Report on Form 10-K for the year ended December 31, 2021. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2021 included in Financial’s Annual Report on Form 10-K. Results for the three and six month periods ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Certain immaterial reclassifications have been made to prior period balances to conform to the current period presentation.

The Company’s primary market area consists of the area commonly referred to as Region 2000 which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Recently, the Company has expanded into Charlottesville, Roanoke, Blacksburg, Harrisonburg, Lexington, and Rustburg.

Financial’s critical accounting policies include the evaluation of the allowance for loan losses which is based on management’s estimate of an amount that is adequate to absorb probable losses inherent in the loan portfolio of Bank of the James (the “Bank”), Financial’s wholly-owned subsidiary. The allowance for loan losses is established through a provision for loan losses based on available information including the composition of the loan portfolio, historical loan losses, specific impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Bank’s allowance for loan losses could result in material changes in Financial’s financial condition and results of operations. The Bank’s policy with respect to the methodology for determining the allowance for loan losses involves a high degree of complexity and requires management to make subjective judgments that often require assumptions or estimates about uncertain matters. This critical policy and its assumptions are periodically reviewed with the Board of Directors.

Goodwill is subject to at least an annual assessment for impairment. Additionally, acquired intangible assets (such as customer relationship intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The cost of customer relationships, based on independent valuation, are being amortized over their estimated lives of fifteen years.

The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. The Company will review the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists.

Financial also considers valuation of other real estate owned (OREO) a critical accounting policy. OREO consists of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at fair value less estimated costs to sell at the date of acquisition. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged against expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale. Operating costs after acquisition are expensed.


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7

Table of Contents

 

Note 2 – Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 3 – Earnings Per Common Share (EPS)

The following is a summary of the earnings per share calculation for the three and six months ended June 30, 2022 and 2021.

Three Months Ended

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Net income

$      2,292,000

$      2,014,000

$      4,431,000

$      3,849,000

Weighted average number of shares

4,740,657

4,748,356

4,740,657

4,757,480

Restricted stock units/stock options affect of incremental shares

-

-

-

-

Weighted average diluted shares

4,740,657

4,748,356

4,740,657

4,757,480

Basic and Diluted EPS (weighted avg shares)

$               0.48

$               0.42

$               0.93

$               0.81

In 2022 and 2021, all restricted stock units (RSUs) were excluded from calculating diluted earnings per share as the Company elected to settle units vesting in 2022 and 2021 wholly in cash. There are currently no outstanding RSUs as of June 30, 2022. There were no potentially dilutive shares outstanding in 2022 and 2021. Consequently, the weighted average shares and weighted average diluted shares were identical. Weighted average and per share amounts for all periods have been adjusted to reflect a 10% stock dividend declared on May 18, 2021.

 

Note 4 – Stock Based Compensation

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards.

At the annual meeting of shareholders held on May 15, 2018, the shareholders approved the Bank of the James Financial Group, Inc. 2018 Equity Incentive Plan (the “2018 Incentive Plan”). The 2018 Incentive Plan permits the issuance of up to 250,000 shares of common stock for awards to key employees of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock awards and performance units.

On January 2, 2019, the Company granted its first block of equity compensation under the 2018 Incentive Plan consisting of 24,500 restricted stock units. The recipients of restricted stock units do not receive shares of the Company’s stock immediately, but instead may receive shares, cash in lieu of shares, or a combination thereof upon satisfying the requisite service period specified by the terms and conditions of the grant. Additionally, the recipients of restricted stock units do not enjoy the rights of holder of the Company’s common stock until the units have vested and as such, they do not have voting rights or rights to nonforfeitable dividends. The related compensation expense is based on the fair value of the Company’s stock. The RSUs granted in 2019 vested over 3 years in thirds. The first one-third vested on January 2, 2020, the second one-third vested on January 2, 2021 and the final one-third vested January 2, 2022. The value of all of the vested portions of the grant were settled with cash payments and no shares were issued.


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8

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Note 4 – Stock Based Compensation (continued)

The total expense recognized for the three and six months ended June 30, 2021 in connection with the restricted stock unit awards was approximately $27,000 and $53,000, respectively. As of January 2, 2022 there was no additional unrecognized expense related to the 24,500 restricted stock units granted on January 2, 2019. There were no forfeitures during the six-month period ending June 30, 2021 or June 30, 2022.

At June 30, 2022, there is no further unrecognized stock-based compensation expense related to the restricted stock units granted on January 2, 2019 as all units have vested and have been settled.

Note 5 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market and in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Fair Value on a Recurring Basis

Securities Available-for-Sale

Fair values of securities available-for sale are based on quoted prices available in an active market. If quoted prices are available, these securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.

Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.

The below tables summarize the Company’s financial assets that were measured at fair value on a recurring basis during the period.


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9

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Note 5 – Fair Value Measurements (continued)

Derivatives Assets/Liabilities – Interest Rate Lock Commitments (IRLCs) and Forward Sales Commitments

The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 3.

Beginning with the first quarter of 2022, the Company elected to begin using fair value accounting for its forward sales commitments related to IRLCs. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment. All the Company’s forward sale commitments are classified Level 3.

Carrying Value at June 30, 2022 (in thousands)

Quoted Prices

Significant

Significant

in Active

Other

Unobservable

Balance as of

Markets for

Observable

Inputs

June 30,

Identical Assets

Inputs

(Level 3)

Description

2022

(Level 1)

(Level 2)

US Treasuries

$

4,763

$

—

$

4,763

$

—

US agency obligations

64,402

—

64,402

—

Mortgage-backed securities

74,987

—

74,987

—

Municipals

41,013

—

41,013

—

Corporates

16,264

—

16,264

—

Total available-for-sale securities

$

201,429

$

—

$

201,429

$

—

IRLCs - asset

118

—

—

118

Forward sales commitments - asset

59

—

—

59

Total assets at fair value

$

201,606

$

—

$

201,429

$

177

Carrying Value at December 31, 2021 (in thousands)

Quoted Prices

Significant

Significant

in Active

Other

Unobservable

Balance as of

Markets for

Observable

Inputs

December 31,

Identical Assets

Inputs

(Level 3)

Description

2021

(Level 1)

(Level 2)

US Treasuries

$

2,002

$

—

$

2,002

$

—

US agency obligations

58,470

—

58,470

—

Mortgage-backed securities

37,438

—

37,438

—

Municipals

50,204

—

50,204

—

Corporates

13,153

—

13,153

—

Total available-for-sale securities

$

161,267

$

—

$

161,267

$

—

IRLCs – asset

144

—

—

144

Total assets at fair value

$

161,411

$

—

$

161,267

$

144

The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:


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10

Table of Contents

 

Note 5 – Fair Value Measurements (continued)

Quantitative information about Level 3 Fair Value Measurements for June 30, 2022

(dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average) (1)

Assets

IRLCs – asset

$

118

Market approach

Range of pull through rate

70% - 100% (85%)

Forward Sales Commitments – asset

59

Market approach

Range of pull through rate

70% - 100% (85%)

(1)    Weighted based on the relative value of the instruments

Quantitative information about Level 3 Fair Value Measurements for December 31, 2021

(dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average) (1)

Assets

IRLCs - asset

$

144

Market approach

Range of pull through rate

70% - 100% (85%)

(1)    Weighted based on the relative value of the instruments

Fair Value on a Non-recurring Basis

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the 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 outside of the Bank using observable market data (Level 2). However, in situations where the collateral is a house or building in the process of construction, the appraisal is more than 12 months old, management has determined the fair value of the collateral is further impaired below the appraised value, or the appraisal is not based solely on market comparables adjusted for observable inputs, the value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts 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.

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). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended June 30, 2022. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale on the Consolidated Statements of Income.

Other real estate owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820.

Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO property is


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11

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Note 5 – Fair Value Measurements (continued)

determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2).

Any fair value adjustments are recorded in the period incurred and expensed against current earnings. However, in situations where the collateral is a house or building in the process of construction, the appraisal is more than 12 months old, management has determined the fair value of the collateral is further impaired below the appraised value, or the appraisal is not based solely on market comparables adjusted for observable inputs, the value is considered Level 3.

The following table summarizes the Company’s impaired loans and OREO measured at fair value on a nonrecurring basis during the period (in thousands):

Carrying Value at June 30, 2022

Description

Balance as of June 30, 2022

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Impaired loans*

$

1,371

$

—

$

—

$

1,371

Other real estate owned

761

—

—

761

* Includes loans charged down to the net realizable value of the collateral.

Carrying Value at December 31, 2021

Description

Balance as of December 31, 2021

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Impaired loans*

$

1,802

$

—

$

—

$

1,802

Other real estate owned

761

—

—

761

* Includes loans charged down to the net realizable value of the collateral.

The following table sets forth information regarding the quantitative inputs used to value assets classified as Level 3:

Quantitative information about Level 3 Fair Value Measurements for June 30, 2022

(dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average) (1)

Assets

Impaired loans

$

1,371

Discounted appraised value

Selling cost

0% - 10% (8%)

Discount for lack of marketability and age of appraisal

0% - 20% (6%)

OREO

761

Discounted appraised value

Selling cost

10%

Discount for lack of marketability and age of appraisal

0% - 25% (15%)

(1)Weighted based on the relative value of the instruments.


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12

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Note 5 – Fair Value Measurements (continued)

Quantitative information about Level 3 Fair Value Measurements for December 31, 2021

(dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average) (1)

Assets

Impaired loans

$

1,802

Discounted appraised value

Selling cost

0% - 10% (8%)

Discount for lack of marketability and age of appraisal

0% - 20% (6%)

OREO

761

Discounted appraised value

Selling cost

10%

Discount for lack of marketability and age of appraisal

0% - 27% (26%)

(1)Weighted based on the relative value of the instruments.

Financial Instruments

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. The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following tables whether or not recognized on the Consolidated Balance Sheets at fair value.


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13

Table of Contents

 

Note 5 – Fair Value Measurements (continued)

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments and their placement in the fair value hierarchy at June 30, 2022 and December 31, 2021 was as follows (in thousands):

Fair Value Measurements at June 30, 2022 using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

Assets

Amounts

(Level 1)

(Level 2)

(Level 3)

Balance

Cash and due from banks

$

34,249

$

34,249

$

—

$

—

$

34,249

Fed funds sold

40,605

40,605

—

—

40,605

Securities

Available-for-sale

201,429

—

201,429

—

201,429

Held-to-maturity

3,647

—

3,361

—

3,361

Restricted stock

1,387

1,387

—

1,387

Loans, net (1)

607,322

—

-

582,406

582,406

Loans held for sale

4,460

—

4,460

—

4,460

Interest receivable

2,315

—

2,315

—

2,315

BOLI

19,010

—

19,010

—

19,010

Derivatives – IRLCs

118

—

—

118

118

Derivatives – Forward sales commitments

59

—

—

59

59

Liabilities

Deposits

$

875,346

$

—

$

875,744

$

—

$

875,744

Capital notes

10,035

—

—

9,869

9,869

Other borrowings

10,721

—

10,743

10,743

Interest payable

37

—

37

—

37

Fair Value Measurements at December 31, 2021 using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

Assets

Amounts

(Level 1)

(Level 2)

(Level 3)

Balance

Cash and due from banks

$

29,337

$

29,337

$

—

$

—

$

29,337

Fed funds sold

153,816

153,816

—

—

153,816

Securities

Available-for-sale

161,267

—

161,267

—

161,267

Held-to-maturity

3,655

—

4,006

—

4,006

Restricted stock

1,324

—

1,324

—

1,324

Loans, net (1)

576,469

—

—

565,543

565,543

Loans held for sale

1,628

—

1,628

—

1,628

Interest receivable

2,064

—

2,064

—

2,064

BOLI

18,785

—

18,785

—

18,785

Derivatives

144

—

—

144

144

Liabilities

Deposits

$

887,056

$

—

$

887,955

$

—

$

887,955

Capital notes

10,031

—

—

10,712

10,712

Other borrowings

10,985

—

—

11,467

11,467

Interest payable

46

—

46

—

46

(1) Carrying amount is net of unearned income and the Allowance.

14

Table of Contents

 

   

Note 6 – Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of June 30, 2022 and December 31, 2021 (amounts in thousands):

June 30, 2022

Amortized

Gross Unrealized

Costs

Gains

(Losses)

Fair Value

Held-to-Maturity

US agency obligations

$

3,647

$

-

$

(286)

$

3,361

Available-for-Sale

US Treasuries

4,876

-

(113)

4,763

US agency obligations

71,777

46

(7,421)

64,402

Mortgage-backed securities

83,909

2

(8,924)

74,987

Municipals

50,738

1

(9,726)

41,013

Corporates

17,045

-

(781)

16,264

$

228,345

$

49

$

(26,965)

$

201,429

December 31, 2021

Amortized

Gross Unrealized

Costs

Gains

(Losses)

Fair Value

Held-to-Maturity

US agency obligations

$

3,655

$

351

$

—

$

4,006

Available-for-Sale

US Treasuries

2,000

2

—

2,002

US agency obligations

59,144

575

(1,249)

58,470

Mortgage-backed securities

38,017

75

(654)

37,438

Municipals

50,806

368

(970)

50,204

Corporates

13,053

169

(69)

13,153

$

163,020

$

1,189

$

(2,942)

$

161,267


‎

15

Table of Contents

 

Note 6 – Securities (continued)

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2022 and December 31, 2021 (amounts in thousands):

Less than 12 months

More than 12 months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

June 30, 2022

Value

Losses

Value

Losses

Value

Losses

Description of securities

Held-to-maturity

US agency obligations

$

3,647

$

286

$

—

$

—

$

3,647

$

286

Available-for-sale

US Treasuries

4,763

113

—

—

4,763

113

US agency obligations

37,991

3,234

25,203

4,187

63,194

7,421

Mortgage-backed securities

59,940

6,177

14,868

2,747

74,808

8,924

Municipals

25,665

5,912

14,126

3,814

39,791

9,726

Corporates

8,264

781

—

—

8,264

781

Total

$

140,270

$

16,503

$

54,197

$

10,748

$

194,467

$

27,251

Less than 12 months

More than 12 months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

December 31, 2021

Value

Losses

Value

Losses

Value

Losses

Description of securities

Held-to-maturity

US agency obligations

$

—

$

—

$

—

$

—

$

—

$

—

Available-for-sale

US Treasuries

—

—

—

—

—

—

US agency obligations

21,893

379

15,233

870

37,126

1,249

Mortgage-backed securities

28,019

402

6,382

252

34,401

654

Municipals

28,028

635

7,952

335

35,980

970

Corporates

1,931

69

—

—

1,931

69

Total

$

79,871

$

1,485

$

29,567

$

1,457

$

109,438

$

2,942

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent of Financial, if any, to sell the security; (4) whether Financial more likely than not will be required to sell the security before recovering its cost; and (5) whether Financial does not expect to recover the security’s entire amortized cost basis (even if Financial does not intend to sell the security).

At June 30, 2022 the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of June 30, 2022, the Bank owned 117 securities in an unrealized loss position that were being evaluated for other than temporary impairment. Of the securities, 46 were S&P rated AAA, 63 were rated AA, six were rated A, one was rated BBB, and one was non-rated. As of June 30, 2022, 51 of these securities were municipal issues, 56 were backed by the US government, and 10 were issues of publicly traded domestic corporations.

Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to change in interest rates and other market conditions, no declines currently are deemed to be other-than-temporary.

There were no sales of available-for-sale securities during the three and six months ended June 30, 2022 and 2021.


‎

16

Table of Contents

 

Note 6 – Securities (continued)

The amortized costs and fair values of securities at June 30, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2022

Amortized

Costs

Fair Value

Available-for-sale:

Due in one year or less

$              3,025

$              3,004

Due after one year through five years

41,307

38,878

Due after five years through ten years

74,058

66,696

Due after ten years

109,955

92,851

Total securities Available-for-sale

$          228,345

$          201,429

Amortized

Costs

Fair Value

Held-to-maturity:

Due in one year or less

$                      -

$                      -

Due after one year through five years

-

-

Due after five years through ten years

2,426

2,271

Due after ten years

1,221

1,090

Total securities Held-to-maturity

$              3,647

$              3,361

Note 7 – Business Segments

The Company has three reportable business segments: (i) a traditional full-service community banking segment, (ii) a mortgage loan origination business, and (iii) a registered investment advisory business (sometimes referred to as the wealth management business). The community banking business segment includes Bank of the James which provides loans, deposits, investments and insurance to retail and commercial customers throughout Region 2000 and other areas within Central Virginia. The mortgage segment provides a variety of mortgage loan products principally within Region 2000. Mortgage loans are originated and sold in the secondary market through purchase commitments from investors with servicing released. Because of the pre-arranged purchase commitments, there is minimal risk to the Company. The investment advisory business offers investment advisory services through Financial’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc.

All of the Company’s reportable segments are service based. The mortgage business is a gain on sale business and the investment advisory business is fee for service based, while the Bank’s primary source of revenue is net interest income. The Bank also provides a referral network for the mortgage origination business and the investment advisory business. The mortgage business may also be in a position to refer its customers to the Bank for banking services when appropriate.

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2022 and 2021 was as follows (dollars in thousands):


‎

17

Table of Contents

 

Note 7 – Business Segments (continued)

Business Segments

Investment

Community

Advisory

Banking

Mortgage

Services

Total

For the three months ended June 30, 2022

Net interest income

$        7,124

$            -

$              -

$        7,124

Recovery of loan losses

(300)

-

-

(300)

Net interest income after recovery of loan losses

7,424

-

-

7,424

Noninterest income

774

1,299

961

3,034

Noninterest expenses

5,874

1,159

559

7,592

Income before income taxes

2,324

140

402

2,866

Income tax expense

459

30

85

574

Net income

$        1,865

$        110

$         317

$        2,292

Total assets

$    941,294

$     5,141

$    13,142

$    959,577

For the three months ended June 30, 2021

Net interest income

$        6,710

$            -

$              -

$        6,710

Provision for loan losses

-

-

-

-

Net interest income after provision for loan losses

6,710

-

-

6,710

Noninterest income

739

2,310

-

3,049

Noninterest expenses

5,705

1,532

-

7,237

Income before income taxes

1,744

778

-

2,522

Income tax expense

345

163

-

508

Net income

$        1,399

$        615

$              -

$        2,014

Total assets

$    901,350

$     7,014

$              -

$    908,364

Investment

Community

Advisory

Banking

Mortgage

Services

Total

Six months ended June 30, 2022

Net interest income

$      13,514

$            -

$              -

$      13,514

Recovery of loan losses

(600)

-

-

(600)

Net interest income after recovery of loan losses

14,114

-

-

14,114

Noninterest income

1,486

3,203

1,976

6,665

Noninterest expenses

11,501

2,609

1,130

15,240

Income before income taxes

4,099

594

846

5,539

Income tax expense

805

125

178

1,108

Net income

$        3,294

$        469

$         668

$        4,431

Total assets

$    941,294

$     5,141

$    13,142

$    959,577

Six months ended June 30, 2021

Net interest income

$      13,458

$            -

$              -

$      13,458

Provision for loan losses

-

-

-

-

Net interest income after provision for loan losses

13,458

-

-

13,458

Noninterest income

1,399

4,084

-

5,483

Noninterest expenses

11,209

2,917

-

14,126

Income before income taxes

3,648

1,167

-

4,815

Income tax expense

721

245

-

966

Net income

$        2,927

$        922

$              -

$        3,849

Total assets

$    901,350

$     7,014

$              -

$    908,364

18

Table of Contents

 

Note 8 – Loans, allowance for loan losses and OREO

Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio into classes, based on the associated risks. The classifications set forth below do not correspond directly to the classifications set forth in the call report (Form FFIEC 041). Management has determined that the classifications set forth below are more appropriate for use in identifying and managing risk in the loan portfolio.

Loan Segments:

Loan Classes:

Commercial

Commercial and industrial loans

Commercial real estate

Commercial mortgages – owner occupied

Commercial mortgages – non-owner occupied

Commercial construction

Consumer

Consumer unsecured

Consumer secured

Residential

Residential mortgages

Residential consumer construction

A summary of loans, net is as follows (dollars in thousands):

As of:

June 30,

December 31,

2022

2021

Commercial

$

102,879

$

105,067

Commercial real estate

354,061

338,149

Consumer

100,165

89,102

Residential

56,833

51,066

Total loans (1)

613,938

583,384

Less allowance for loan losses

6,616

6,915

Net loans

$

607,322

$

576,469

(1)Includes net deferred costs of $1,238 and $372 as of June 30, 2022 and December 31, 2021, respectively.

The Bank’s internal risk rating system is in place to grade commercial and commercial real estate loans. Category ratings are reviewed periodically by lenders and the credit review area of the Bank based on the borrower’s individual situation. Additionally, internal and external monitoring and review of credits are conducted on an annual basis.
‎

19

Table of Contents

 

Note 8 – Loans, allowance for loan losses and OREO (continued)

Below is a summary and definition of the Bank’s risk rating categories:

RATING 1

Excellent

RATING 2

Above Average

RATING 3

Satisfactory

RATING 4

Acceptable / Low Satisfactory

RATING 5

Monitor

RATING 6

Special Mention

RATING 7

Substandard

RATING 8

Doubtful

RATING 9

Loss

We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:

“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events.

“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.


‎

20

Table of Contents

 

Note 8 – Loans, allowance for loan losses and OREO (continued)

Loans on Non-Accrual Status

(dollars in thousands)

As of

June 30, 2022

December 31, 2021

Commercial

$

60

$

25

Commercial Real Estate:

Commercial Mortgages-Owner Occupied

502

501

Commercial Mortgages-Non-Owner Occupied

129

138

Commercial Construction

—

—

Consumer

Consumer Unsecured

—

—

Consumer Secured

8

127

Residential:

Residential Mortgages

156

163

Residential Consumer Construction

—

—

Totals

$

855

$

954

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank which was acquired through purchase at foreclosure or from the borrower through a deed in lieu of foreclosure. OREO remained the same at $761 from December 31, 2021 to June 30, 2022. The following table represents the changes in OREO balance during the six months ended June 30, 2022 and year ended December 31, 2021.

OREO Changes

(dollars in thousands)

Six Months Ended Year Ended

June 30, 2022

December 31, 2021

Balance at the beginning of the year (net)

$

761

$

1,105

Transfers from loans

—

111

Capitalized costs

—

—

Valuation adjustments

—

—

Sales proceeds

—

(368)

Loss on disposition

—

(87)

Balance at the end of the period (net)

$

761

$

761

At June 30, 2022 and December 31, 2021, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held no residential real estate properties in other real estate owned as of June 30, 2022 and December 31, 2021.


‎

21

Table of Contents

 

Note 8 – Loans, allowance for loan losses and OREO (continued)

Impaired Loans

(dollars in thousands)

As of and For the Six Months Ended June 30, 2022

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

Investment (1)

Balance

Allowance

Investment

Recognized

With No Related Allowance Recorded:

Commercial

$                      - 

$                      - 

$                    - 

$               9 

$                 - 

Commercial Real Estate

Commercial Mortgages-Owner Occupied

1,210

1,417

-

1,901

32

Commercial Mortgage Non-Owner Occupied

525

525

-

314

13

Commercial Construction

-

-

-

-

-

Consumer

Consumer Unsecured

-

-

-

-

-

Consumer Secured

252

252

-

156

4

Residential

Residential Mortgages

1,362

1,440

-

1,339

27

Residential Consumer Construction

-

-

-

-

-

With an Allowance Recorded:

Commercial

$                      - 

$                      - 

$                    - 

$                - 

$                 - 

Commercial Real Estate

Commercial Mortgages-Owner Occupied

-

-

-

-

-

Commercial Mortgage Non-Owner Occupied

-

-

-

-

-

Commercial Construction

-

-

-

-

-

Consumer

Consumer Unsecured

-

-

-

-

-

Consumer Secured

-

-

-

-

-

Residential

Residential Mortgages

-

-

-

-

-

Residential Consumer Construction

-

-

-

-

-

Totals:

Commercial

$                      - 

$                      - 

$                    - 

$               9 

$                 - 

Commercial Real Estate

Commercial Mortgages-Owner Occupied

1,210

1,417

-

1,901

32

Commercial Mortgage Non-Owner Occupied

525

525

-

314

13

Commercial Construction

-

-

-

-

-

Consumer

Consumer Unsecured

-

-

-

-

-

Consumer Secured

252

252

-

156

4

Residential

Residential Mortgages

1,362

1,440

-

1,339

27

Residential Consumer Construction

-

-

-

-

-

$               3,349 

$              3,634 

$                    - 

$        3,719 

$              76 

(1)Recorded Investment is net of charge-offs and interest paid while a loan is in nonaccrual status.
‎

22

Table of Contents

 

Note 8 – Loans, allowance for loan losses and OREO (continued)

Impaired Loans

(dollars in thousands)

As of and For the Year Ended December 31, 2021

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

Investment (1)

Balance

Allowance

Investment

Recognized

With No Related Allowance Recorded:

Commercial

$                    17 

$                    67 

$                    - 

$            179 

$                5 

Commercial Real Estate

Commercial Mortgages-Owner Occupied

2,592 

2,971 

-

2,368 

154 

Commercial Mortgage Non-Owner Occupied

102 

102 

-

371 

13 

Commercial Construction

-

-

-

-

-

Consumer

Consumer Unsecured

-

-

-

-

-

Consumer Secured

59 

60 

-

201 

2 

Residential

Residential Mortgages

1,316 

1,390 

-

1,332 

47 

Residential Consumer Construction

-

-

-

-

-

With an Allowance Recorded:

Commercial

$                      - 

$                       - 

$                    - 

$                2 

$                 - 

Commercial Real Estate

Commercial Mortgages-Owner Occupied

-

-

-

-

-

Commercial Mortgage Non-Owner Occupied

-

-

-

-

-

Commercial Construction

-

-

-

-

-

Consumer

Consumer Unsecured

-

-

-

-

-

Consumer Secured

-

-

-

-

-

Residential

Residential Mortgages

-

-

-

-

-

Residential Consumer Construction

-

-

-

-

-

Totals:

Commercial

$                    17 

$                    67 

$                    - 

$            181 

$                5 

Commercial Real Estate

Commercial Mortgages-Owner Occupied

2,592 

2,971 

-

2,368 

154 

Commercial Mortgage Non-Owner Occupied

102 

102 

-

371 

13 

Commercial Construction

-

-

-

-

-

Consumer

Consumer Unsecured

-

-

-

-

-

Consumer Secured

59 

60 

-

201 

2 

Residential

Residential Mortgages

1,316 

1,390 

-

1,332 

47 

Residential Consumer Construction

-

-

-

-

-

$               4,086 

$               4,590 

$                    - 

$         4,453 

$            221 

(1)Recorded Investment is net of charge-offs and interest paid while a loan is in nonaccrual status.


‎

23

Table of Contents

 

Note 8 – Loans, allowance for loan losses and OREO (continued)

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

As of and For the Six Months Ended June 30, 2022

Commercial

Commercial

Real Estate

Consumer

Residential

Total

Allowance for Loan Losses:

Beginning Balance

$          1,471 

$                 3,637 

$            860 

$              947 

$         6,915 

Charge-Offs

-

-

(9)

-

(9)

Recoveries

87

206

12

5

310

Provision (Recovery of)

(261)

(709)

58

312

(600)

Ending Balance

1,297

3,134

921

1,264

6,616

Ending Balance: Individually evaluated for impairment

-

-

-

-

-

Ending Balance: Collectively evaluated for impairment

1,297

3,134

921

1,264

6,616

Totals:

$          1,297 

$                 3,134 

$            921 

$           1,264 

$         6,616 

Financing Receivables:

Ending Balance: Individually evaluated for impairment

-

1,735

252

1,362

3,349

Ending Balance: Collectively evaluated for impairment

102,879

352,326

99,913

55,471

610,589

Totals:

$      102,879 

$             354,061 

$     100,165 

$         56,833 

$     613,938 


‎

24

Table of Contents

 

Note 8 – Loans, allowance for loan losses and OREO (continued)

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

As of and For the Year Ended December 31, 2021

Commercial

Commercial

Real Estate

Consumer

Residential

Total

Allowance for Loan Losses:

Beginning Balance

$          2,001 

$                 3,550 

$            868 

$              737 

$         7,156 

Charge-Offs

(53)

-

(38)

-

(91)

Recoveries

112

72

29

137

350

Provision (Recovery of)

(589)

15

1

73 

(500)

Ending Balance

1,471

3,637

860

947

6,915

Ending Balance: Individually evaluated for impairment

-

-

-

-

-

Ending Balance: Collectively evaluated for impairment

1,471

3,637

860

947

6,915

Totals:

$          1,471 

$                 3,637 

$            860 

$              947 

$         6,915 

Financing Receivables:

Ending Balance: Individually evaluated for impairment

17

2,694

59

1,316

4,086

Ending Balance: Collectively evaluated for impairment

105,050

335,455

89,043

49,750

579,298

Totals:

$      105,067 

$             338,149 

$       89,102 

$         51,066 

$     583,384 


‎

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Note 8 – Loans, allowance for loan losses and OREO (continued)

Credit Quality Information - by Class

June 30, 2022

Pass

Monitor

Special

Substandard

Doubtful

Totals

Mention

Commercial

$          93,336 

$        4,476 

$        4,949 

$           118 

$                - 

$        102,879 

Commercial Real Estate:

Commercial Mortgages-Owner Occupied

127,879 

2,014 

-

1,229 

-

131,122 

Commercial Mortgages-Non-Owner Occupied

197,847 

96 

1,206 

725 

-

199,874 

Commercial Construction

23,065 

-

-

-

-

23,065 

Consumer

Consumer Unsecured

3,857 

-

21 

1 

-

3,879 

Consumer Secured

95,934 

-

-

352 

-

96,286 

Residential:

Residential Mortgages

35,614 

-

-

1,479 

-

37,093 

Residential Consumer Construction

19,740 

-

-

-

-

19,740 

Totals

$        597,272 

$        6,586 

$        6,176 

$        3,904 

$                - 

$        613,938 

Credit Quality Information - by Class

December 31, 2021

Pass

Monitor

Special

Substandard

Doubtful

Totals

Mention

Commercial

$          92,789 

$        7,965 

$        4,262 

$             51 

$                - 

$        105,067 

Commercial Real Estate:

Commercial Mortgages-Owner Occupied

116,098 

5,986 

4,130 

2,620 

-

128,834 

Commercial Mortgages-Non-Owner Occupied

176,291 

2,506 

-

316 

-

179,113 

Commercial Construction

30,202 

-

-

-

-

30,202 

Consumer

Consumer Unsecured

2,581 

-

23 

1 

-

2,605 

Consumer Secured

86,265 

-

-

232 

-

86,497 

Residential:

Residential Mortgages

30,486 

-

-

1,439 

-

31,925 

Residential Consumer Construction

19,141 

-

-

-

-

19,141 

Totals

$        553,853 

$      16,457 

$        8,415 

$        4,659 

$                - 

$        583,384 


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Note 8 – Loans, allowance for loan losses and OREO (continued)

Age Analysis of Past Due Loans as of June 30, 2022

Recorded

Greater

Investment

30-59 Days

60-89 Days

than

Total Past

Total

> 90 Days &

Past Due

Past Due

90 Days

Due

Current

Loans

Accruing

Commercial

$            200 

$                 - 

$         60 

$          260 

$      102,619 

$      102,879 

$                 - 

Commercial Real Estate:

Commercial Mortgages-Owner Occupied

-

-

502 

502 

130,620 

131,122 

-

Commercial Mortgages-Non-Owner Occupied

-

-

-

-

199,874 

199,874 

-

Commercial Construction

-

-

-

-

23,065 

23,065 

-

Consumer:

Consumer Unsecured

-

-

-

-

3,879 

3,879 

-

Consumer Secured

87 

7 

-

94 

96,192 

96,286 

-

Residential:

Residential Mortgages

111 

-

96 

207 

36,886 

37,093 

-

Residential Consumer Construction

-

-

-

-

19,740 

19,740 

-

Total

$            398 

$                7 

$       658 

$       1,063 

$      612,875 

$      613,938 

$                 - 

Age Analysis of Past Due Loans as of December 31, 2021

Recorded

Greater

Investment

30-59 Days

60-89 Days

than

Total Past

Total

> 90 Days &

Past Due

Past Due

90 Days

Due

Current

Loans

Accruing

Commercial

$                - 

$               1 

$         25 

$            26 

$      105,041 

$      105,067 

$                 - 

Commercial Real Estate:

Commercial Mortgages-Owner Occupied

464 

-

501 

965 

127,869 

128,834 

-

Commercial Mortgages-Non-Owner Occupied

1,310 

-

-

1,310 

177,803 

179,113 

-

Commercial Construction

-

-

-

-

30,202 

30,202 

-

Consumer:

Consumer Unsecured

8 

1 

-

9 

2,596 

2,605 

-

Consumer Secured

111 

3 

118 

232 

86,265 

86,497 

-

Residential:

Residential Mortgages

948 

-

163 

1,111 

30,814 

31,925 

-

Residential Consumer Construction

-

-

-

-

19,141 

19,141 

-

Total

$        2,841 

$               5 

$       807 

$       3,653 

$      579,731 

$      583,384 

$                 - 


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Note 8 – Loans, allowance for loan losses and OREO (continued)

Troubled Debt Restructurings (TDR)

There was one loan modification that was classified as a TDR during the three and six months ended June 30, 2022. This loan has had its original terms modified to facilitate payment by the borrower. The loan has been classified as a TDR primarily due to the extension of the maturity date which lowered the borrower’s payment.

There were no loan modifications that would have been classified as TDRs during the three and six months ended June 30, 2021.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and six months ended June 30, 2022 and 2021.

At June 30, 2022 and December 31, 2021, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

At the outset of the COVID-19 pandemic in the spring of 2020, we developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that are insignificant. The Bank modified a total of 191 loans. As of June 30, 2022 and December 31, 2021, none of the 191 previously modified loans remain in deferment and all such previously deferred loans are current.

Note 9 – Revenue Recognition

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, treasury services income and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Treasury services income primarily represents fees charged to customers for sweep, positive pay and lockbox services. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or at the end of the month.

Investment Advisory Fees

The Company earns fees from its contracts with its investment advisory clients to manage client assets and for the provision of miscellaneous services. These fees are primarily earned over time as the Company charges its clients on a quarterly (which may not be a calendar quarter) basis in accordance with its investment advisory agreements. Fees are generally assessed based on a tiered scale of the market value of the client’s assets under management at quarter end.

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Note 9 – Revenue Recognition (continued)

Other

Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company

also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Note 10 - COVID-19 and Current Economic Conditions

On March 11, 2020, the World Health Organization announced that the COVID-19 outbreak was deemed a pandemic, and on March 13, 2020, the President declared the ongoing COVID-19 pandemic of sufficient magnitude to warrant an emergency declaration. The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and when state and local economies will return to operational norms, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. In addition, we rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the outbreak could negatively impact our employees’ and customers’ ability to engage in banking and other financial transactions. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas.

Management will continue to evaluate current economic conditions to determine the impact of the pandemic on the ability of our customers to fulfill their financial obligations to the Company, as well as the values of our financial and nonfinancial assets resulting from the market disruption. Accordingly, significant estimates used in the preparation of our financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods. As the full effects are not yet known, it is not currently possible to ascertain the overall impact of COVID-19 on the Company's business. However, as the pandemic continues to evolve into a prolonged worldwide health crisis, the pandemic could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

 

Note 11 – Capital Notes and Other Borrowings

On April 13, 2020, the Company commenced a private placement of unregistered debt securities (the “2020 Offering”). In the 2020 Offering, the Company sold and closed $10,050,000 in principal of notes (the “2020 Notes”) during the 2nd and 3rd quarters of 2020. The 2020 Offering officially ended on July 8, 2020. The 2020 Notes bear interest at the rate of 3.25% per year with interest payable quarterly in arrears. The 2020 Notes will mature on June 30, 2025 and are currently subject subject to full or partial call by the Company. The balance of the 2020 Notes on the June 30, 2022 consolidated balance sheet is presented net of unamortized issuance costs.

On September 24, 2020 the Bank used $5,000,000 of the proceeds for the payment of principal of the Company’s previously outstanding 4.00% notes that were issued in 2017. The Company intends to use the balance of the proceeds from the 2020 Offering for general corporate purposes at the discretion of Company’s management such as payment of interest on the 2020 Notes and as a contribution of additional capital to the Bank.

On December 29, 2021 Financial borrowed $11,000,000 from National Bank of Blacksburg (NBB) pursuant to a secured promissory note (the “NBB Note”). Prior to the modification discussed below, the NBB Note bore interest at the rate of 4.00%, and was being amortized over a fifteen year period with a balloon payment of approximately $9,375,000 due on December 31, 2024. The note is secured by a first priority lien on approximately 4.95% of the Bank's common stock. The balance of the NBB Note is presented on the December 31, 2021 consolidated balance sheet under “other borrowings” and is net of unamortized issuance costs. A portion of the proceeds were used to purchase 100% of the capital stock of PWW.

On June 30, 2022, NBB agreed to modify the terms of the NBB Note effective July 1, 2022. Pursuant to the modification, the balloon payment date was extended to December 31, 2026 from December 31, 2024 and the interest rate was lowered to 3.90% from 4.00%. The approximate amount of the balloon payment on December 31, 2026 will be $8,104,000.

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Note 12 – Acquisitions

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the nets assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected September 1 of each year as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

On December 31, 2021, Financial completed its acquisition of PWW, a Lynchburg, Virginia-based investment advisory firm with approximately $650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. The acquisition date fair value of consideration transferred totaled $10.5 million, which was paid in cash.

In connection with this transaction, the Company recorded $3.0 million in goodwill and $8.4 million of amortizable intangible assets, which primarily relate to the value of customer relationships. The goodwill is not deductible for tax purposes. The Company is amortizing these intangible assets over a 15-year period using the straight line method. The transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The fair values are subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other.

It was necessary to increase goodwill related to PWW during the six months ended June 30, 2022 as a result of a contractual net working capital adjustment payment to the previous owners of PWW in the amount of approximately $818,000. This net working capital adjustment payment was related to fees generated by PWW that were not collected until 2022. This adjustment to goodwill was within the one-year measurement period allowed per GAAP.

Note 13 – Recent accounting pronouncements and other authoritative guidance

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has contracted with an additional vendor in addition to its core processer and the implementation process has begun. It is anticipated that the Company will run the CECL methodology side by side with the current allowance methodology for the last 4 months of 2022 before full implementation.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses

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Note 13 – Recent accounting pronouncements and other authoritative guidance (continued)

areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified a small number of affected loans and is evaluating other benchmarks to substitute for LIBOR such as SOFR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loans.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The Company does not expect the adoption of ASU 2021-08 to have a material impact on its consolidated financial statements.


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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute “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, and the Private Securities Litigation Reform Act of 1995. Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, including any statements regarding descriptions of management's plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Financial and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Financial’s control, include, but are not necessarily limited to the following:

the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets;

operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Financial specifically;

government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations), including changes to address the impact of COVID-19;

economic, market, political and competitive forces affecting Financial’s banking and other businesses;

competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act;

changes in interest rates, monetary policy and general economic conditions, which may impact Financial’s net interest income;

changes in the value of real estate securing loans made by the Bank;

diversion of management time on pandemic-related issues;

adoption of new accounting standards or changes in existing standards;

changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic;

compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Financial may pursue or implement;

a potential resurgence of economic and political tensions with China, the ongoing war between Russia and Ukraine and potential expansion of combatants, and the sanctions imposed on Russia by numerous countries and private companies, all of which may have a destabilizing effect on financial markets and economic activity; and

the risk that Financial's analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Financial specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the most recently filed Form 10-K.

IMPACT OF COVID-19

Effects on Market Areas

The COVID-19 pandemic and certain provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and other recent legislative and regulatory relief efforts have had and are expected to continue to have a material impact on the Company's operations, as further discussed below.


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Policy and Regulatory Developments

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the Paycheck Protection Program, or PPP Program, which was subsequently increased by $320 billion on April 24, 2020. Under the PPP program, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP program. Effective August 8, 2020, banks ceased taking applications under the PPP program. In addition, the CARES Act provided financial institutions the option to temporarily suspend certain requirements under GAAP related to loan modifications and classification as troubled debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19.

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs, and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. In addition, upon expiration of the initial loan modification period, the Bank, pursuant to the “Joint Statement on Additional Loan Accommodations Related to COVID-19” published August 3, 2020, is encouraged to continue to work with effected borrowers on additional loan modifications. Since the beginning of the pandemic in the spring of 2020, the Bank has modified a total of 191 loans. The principal balances of these loans on March 31, 2022 (adjusted for payoffs) totaled approximately $76 million. As of June 30, 2022, none of the 191 previously modified loans remain in deferment and all such previously deferred loans are current.

On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) into law to provide continued assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic. Section 311 of the Economic Aid Act added a new temporary provision that authorizes the SBA to guarantee Paycheck Protection Program Second Draw Loans (the “PPP Second Draw Program”), under generally the same terms and conditions available under the PPP Under section 311, SBA was authorized to guarantee loans under the PPP Second Draw Program through May 31, 2021 (“Second Draw PPP Loans”) to borrowers that previously received an initial PPP loan and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan. In addition, the Economic Aid Act permitted individuals and business that did not receive an initial PPP loan to apply under the PPP Program.

In accordance with the relief provisions of the CARES Act and the March 22, 2020 (revised April 2020) Joint Interagency Regulatory Guidance, the above modifications were not considered to be troubled debt restructurings and were excluded from TDR classification. The TDR relief provisions provided for by the CARES Act were extended in December 2020 by the Consolidated Appropriations Act through the earlier of January 1, 2022 or 60 days after the national COVID-19 emergency terminates.

Effects on Our Business

The COVID-19 pandemic and the specific developments referred to above have had an impact on our business. Initially, we anticipated that the COVID-19 pandemic could have a negative impact on our financial condition, capital levels and results of operations could be significantly adversely affected. Mitigation efforts, as described in further detail below, helped offset the effects of the pandemic.

COVID-19 Crisis Management

As an essential service provider, Bank of the James has continued to provide uninterrupted service to its clients throughout the COVID-19 crisis. On March 2, 2020 the Company’s Management Committee initiated plans in response to the emerging risk related to the pandemic.

From the beginning, our management of the crisis has focused on protecting the health and well-being of our employees and clients while continuing to provide our clients with full access to banking services. As the operational risk related to the COVID-19 crisis evolved, the Company took proactive measures to manage operational risk, including the following:

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The Company has implemented its Business Continuity Plan.

All branches remain open, with routine banking services offered through online banking, drive-thru, ATMs, and full lobby access.

Implemented a number of actions to support a healthy workforce, including:

-Flexible work practices such as work-from-home options, working in shifts and placing greater distances between employees;

-Limitation of business travel and in-person meetings; and

-Use of online meeting platforms, including successfully conducting the 2020, 2021, and 2022 Annual Meetings of Shareholders in a virtual format.

We anticipate that the Company will continue to maintain these policies as long as necessary.

GENERAL

Critical Accounting Policies

Bank of the James Financial Group, Inc.’s (“Financial”) financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss ratios as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Financial’s critical accounting policies include the evaluation of the allowance for loan losses which is based on management’s estimate of an amount that is adequate to absorb probable losses inherent in the loan portfolio of the Bank. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses, specific impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Bank’s allowance for loan losses could result in material changes in Financial’s financial condition and results of operations.

The allowance is based on two basic principles of accounting: (i) ASC 450 “Contingencies”, which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) ASC 310 “Receivables”, which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Guidelines for determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102 – “Selected Loan Loss Allowance Methodology and Documentation Issues” and the Federal Financial Institutions Examination Council’s interagency guidance, “Interagency Policy Statement on the Allowance for Loan and Lease Losses” (the “FFIEC Policy Statement”).

The Bank’s policy with respect to the methodology for determining the allowance for loan losses involves a higher degree of complexity and requires management to make subjective judgments that often require assumptions or estimates about uncertain matters. This critical policy and its assumptions are periodically reviewed with the Board of Directors.

See “Management Discussion and Analysis Results of Operations – Allowance and Provision for Loan Losses” below for further discussion of the allowance for loan losses.

Financial also considers valuation of other real estate owned (OREO) a critical accounting policy. OREO consists of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at fair value less estimated costs to sell at the date of foreclosure. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged against expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale. Operating costs after acquisition are expensed.

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the nets assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events

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and circumstances exists that indicate that a goodwill impairment test should be performed. The initial goodwill impairment test will occur in 2022 as goodwill was the result of a transaction on December 31, 2021. The Company has selected September 1 of each year as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our consolidated balance sheet.

Overview

Financial is a bank holding company headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to as the “Bank”). We conduct four other business activities: mortgage banking through the Bank’s Mortgage Division (which we refer to as “Mortgage”), investment services through the Bank’s Investment division (which we refer to as “Investment Division”), insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance business”), and as of December 31, 2021, investment advisory services through the Company's wholly-owned subsidiary, Pettyjohn, Wood & White, Inc., which we refer to as “PWW.”

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state-chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns. Historically, our primary market area has been the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Recently the Bank has begun to expand to other areas in Virginia, specifically Roanoke, Charlottesville, Harrisonburg, Blacksburg, Lexington and Rustburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market areas.

We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that had approximately $650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. PWW generates revenue primarily through investment advisory fees.

The Bank’s principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.bank.

Our operating results depend primarily upon the Bank’s net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for loan losses, as well as the level of its noninterest income, including gains on sales of loans held for sale and service charges, and investment advisory fees, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.

The Bank intends to enhance its profitability by increasing its market share in our service areas, providing additional services to its customers, and controlling costs.

The Bank services its banking customers through the following locations in Virginia:

Full-Service Branches

The main office located at 828 Main Street in Lynchburg (the “Main Street Office”),

A branch located at 5204 Fort Avenue in Lynchburg (the “Fort Avenue Branch”),

A branch located at 4698 South Amherst Highway in Amherst County (the “Madison Heights Branch”),

A branch located at 17000 Forest Road in Forest (the “Forest Branch”),

A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the “Boonsboro Branch”),

A branch located at 164 South Main Street, Amherst, Virginia (the “Amherst Branch”),

A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford, Virginia, located off of Independence Boulevard (the “Bedford Branch”),

A branch located at 1110 Main Street, Altavista, Virginia (the “Altavista Branch”),

A branch located at 1391 South High Street, Harrisonburg, VA (the “Harrisonburg Branch”),

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A branch located at 1745 Confederate Blvd, Appomattox, VA (the “Appomattox Branch”),

A branch located at 225 Merchant Walk Avenue, Charlottesville, VA (the “5th Street Station Branch”),

A branch located at 3562 Electric Road, Roanoke, VA (the “Roanoke Branch”),

A branch located at 45 South Main St., Lexington, VA (the “Lexington Branch”),

A branch located at 550 Water St., Charlottesville, VA (the “Water Street Branch”),

A branch located at 2101 Electric Rd, Roanoke, VA (the “Oak Grove Branch”), and

A branch located at 13 Village Highway, Rustburg, VA (the “Rustburg Branch”).

Limited Service Branches

Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia, and

Westminster-Canterbury facilities located at 250 Pantops Mountain Road, Charlottesville, Virginia.

Loan Production Offices

Residential mortgage loan production office located at the Forest Branch,

Residential mortgage loan production office located at 570 West Main St., Wytheville, Virginia

Residential mortgage loan production office located at 2001 South Main Street, Blacksburg, Virginia, and

Commercial, consumer and residential mortgage loan production office located at the Water Street Branch.

The Investment division and the Insurance business operate primarily out of offices located at the Main Street Office. PWW operates our investment advisory business primarily from its offices at 1925 Atherholt Road in Lynchburg.

The Bank continuously evaluates areas located within our service areas to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.

Subject to regulatory approval, the Bank may open additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the following discussion provides a general overview of the additional branch locations that the Bank currently is considering, including the following properties that we own and are holding for expansion:

Real property located in the Timberlake Road area of Campbell County (Lynchburg), Virginia. The Timberlake property is not suitable for its intended use as a branch bank. Management anticipates that it will be necessary to raze the current structures and replace it with appropriate new construction. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit and construct a branch at this location could be between $900,000 and $1,500,000.

Real property located at 4105 Boonsboro Road, Lynchburg, Virginia. This property is a former bank branch and with minor cosmetic improvements is suitable as is to be used as a bank branch. The Bank does not anticipate utilizing this location as a bank branch prior to the fourth quarter of 2022.

Real property located at 1925 Atherholt Road, Lynchburg, Virginia. On December 31, 2021, the Bank purchased real property located at 1925 Atherholt Road, Lynchburg, Virginia. The building currently serves as the offices for Financial's wholly-owned subsidiary, PWW. PWW is currently leasing the space from the Bank on a month-to-month basis. While the Bank currently does not have a timeline for a branch at this location, the space is attractive for a branch due to its close proximity to Centra's Lynchburg General Hospital. The investment needed to upfit the property will be minimal.

Although the Bank cannot predict with certainty the financial impact of each new branch, management generally anticipates that each new branch will become profitable within 12 to 18 months of operation.

Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.

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OFF-BALANCE SHEET ARRANGEMENTS

The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept and/or use these commitments.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:

June 30, 2022

(in thousands)

Commitments to extend credit

$

191,935

Letters of Credit

4,263

Total

$

196,138

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. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.

The Bank has rate lock commitments to originate mortgage loans through its Mortgage Division. The Bank has entered into corresponding commitments with third party investors to sell each of these loans that close. No other obligation exists. As a result of these contractual relationships with these investors, the Bank is not exposed to losses nor will it ultimately realize gains related to its rate lock commitments due to changes in interest rates.

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of June 30, 2022 and December 31, 2021 and the results of operations of Financial for the three and six month periods ended June 30, 2022 and 2021. This discussion should be read in conjunction with the financial statements included elsewhere herein.

All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Financial Condition Summary

June 30, 2022 as Compared to December 31, 2021

Total assets were $959,577,000 on June 30, 2022 compared with $987,634,000 at December 31, 2021, a decrease of 2.84%. The decrease in total assets was primarily due to a decrease in cash and cash equivalents. This decrease in cash and cash equivalents was due primarily to i) a decrease in deposits; ii) the use of cash to fund loan growth; and iii) the use of cash to purchase securities available-for-sale to take advantage of the increase in interest rates. The resulting increase in securities available-for-sale was offset by an increase in the unrealized loss (mark to market) on the securities available-for-sale.

Total deposits decreased from $887,056,000 as of December 31, 2021 to $875,346,000 on June 30, 2022, a decrease of 1.32%. The decrease resulted in large part from decreases in the following deposit categories: noninterest-bearing demand deposits and time deposits.

Total loans, excluding loans held for sale, increased to $613,938,000 on June 30, 2022 from $583,384,000 on December 31, 2021, resulting from an increase in commercial real estate loans (owner occupied and non-owner occupied and excluding construction loans). Growth was partially offset by the continued payoff of PPP loans, the payoff of two substandard loans, and normal

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amortization. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $607,322,000 on June 30, 2022 from $576,469,000 on December 31, 2021, an increase of 5.35%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):

June 30, 2022

December 31, 2021

Amount

Percentage (%)

Amount

Percentage (%)

Commercial

$

102,879

16.76

$

105,067

18.01

Commercial Real Estate

354,061

57.66

338,149

57.97

Consumer

100,165

16.32

89,102

15.27

Residential

56,833

9.26

51,066

8.75

Total loans

$

613,938

100.00

$

583,384

100.00

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and OREO decreased to $1,616,000 on June 30, 2022 from $1,715,000 on December 31, 2021. OREO remained constant at $761,000 on both June 30, 2022 and December 31, 2021. Non-performing loans decreased slightly from $954,000 at December 31, 2021 to $855,000 at June 30, 2022.

As discussed in more detail below under “Results of Operations—Allowance and Provision for Loan Losses,” management has provided for the anticipated losses on these loans in the allowance for loan losses. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for loan losses charged against earnings.

As a result of the COVID-19 pandemic, we anticipate that our commercial, commercial real estate, residential and consumer borrowers may encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings. Any potential financial impacts are unknown at this time.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2021, the Bank was carrying two OREO properties on its books at a value of $761,000. During the six months ended June 30, 2022, the Bank neither acquired or disposed of any OREO property. The OREO properties are available for sale and are being actively marketed.

The Bank had loans in the amount of $432,000 at June 30, 2022 classified as performing TDRs as compared to $372,000 at December 31, 2021. None of these TDRs were included in non-accrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year.

At the beginning of the COVID-19 pandemic, we developed relief programs to assist borrowers in financial need. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that were insignificant. The Bank modified a total of 191 loans. The principal balances of these loans on June 30, 2022 (adjusted for payoffs) totaled approximately $76 million. As of June 30, 2022 and December 31, 2021, none of the 191 previously modified loans remain in deferment and all such previously deferred loans are current.

Cash and cash equivalents decreased to $74,854,000 on June 30, 2022 from $183,153,000 on December 31, 2021. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease was due primarily to i) a decrease in deposits; ii) the use of cash to fund loan growth; and iii) the use of cash to purchase securities available-for-sale to take advantage of the increase in interest rates. In addition, cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

Securities held-to-maturity were essentially flat, decreasing slightly to $3,647,000 on June 30, 2022 from $3,655,000 on December 31, 2021. This decrease is a result of normal amortization of premiums within the held-to-maturity portfolio.

Securities available-for-sale, which are carried on the balance sheet at fair market value, increased to $201,429,000 on June 30, 2022, from $161,267,000 on December 31, 2021. During the six months ended June 30, 2022, the Bank purchased $71,580,000 in available-for-sale securities, which was responsible for the increase in securities available-for sale. During the six months ended June 30, 2022 the Bank did not sell any securities available-for-sale and received $6,027,000 in proceeds from calls, maturities, and

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paydowns of securities available-for-sale, which partially offset the increase. The increase was offset in part by an increase in the unrealized loss on securities available for sale of approximately $25,162,000.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $489,000 at June 30, 2022 and $426,000 at December 31, 2021, an increase of $63,000. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Liquidity and Capital

At June 30, 2022, Financial, on a consolidated basis, had liquid assets of $276,283,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $35,596,000 (representing current market value) of the available-for-sale securities are pledged as collateral with $30,165,000 pledged as security for public deposits, and $5,431,000 pledged as security on a line of credit the Bank may draw on from time to time to meet liquidity needs. This line of credit currently has a zero balance. Management believes that liquid assets were adequate at June 30, 2022. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, if additional liquidity is needed, the Bank has the ability to purchase federal funds on the open market, borrow from the FHLBA using loans or investments within the Bank’s portfolio as collateral, and to borrow from the Federal Reserve Bank’s discount window.

The COVID-19 pandemic could have a material negative impact on Financial’s short-term or long-term liquidity. For example, if customers unexpectedly draw down on existing lines of credit, our liquidity could be impacted. While we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic, management is closely monitoring our sources and uses of funds in order to meet our cash flow requirements while maximizing profits. Based in part on recent loan activity including loans made pursuant to the PPP as discussed below under “Allowance and Provision for Loan Losses,” the Bank is monitoring liquidity to ensure it is able to fund future loans and withdrawals related to the use of PPP funds.

At June 30, 2022, the Bank had a leverage ratio of approximately 8.28%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 11.08% and a total risk-based capital ratio of approximately 11.96%. As of June 30, 2022 and December 31, 2021, the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of June 30, 2022 and December 31, 2021:


‎

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Bank Level Only Capital Ratios

Analysis of Capital for Bank of the James (Bank only)

(dollars in thousands)

June 30,

December 31,

Analysis of Capital

2022

2021

Tier 1 capital

Common Stock

$             3,742

$            3,742

Surplus

22,325

22,325

Retained earnings

57,052

52,821

Total Tier 1 capital

$           83,119

$          78,888

Common Equity Tier 1 Capital (CET1)

$           83,119

$          78,888

Tier 2 capital

Allowance for loan losses

$             6,616

$            6,915

Total Tier 2 capital:

$             6,616

$            6,915

Total risk-based capital

$           89,735

$          85,803

Risk weighted assets

$         749,994

$        693,400

Average total assets

$      1,003,598

$        959,794

Actual

Regulatory Benchmarks

For Capital

For Well

June 30,

December 31,

Adequacy

Capitalized

2022

2021

Purposes (1)

Purposes

Capital Ratios:

Tier 1 capital to average total assets

8.28%

8.22%

4.000%

5.000%

Common Equity Tier 1 capital

11.08%

11.38%

7.000%

6.500%

Tier 1 risk-based capital ratio

11.08%

11.38%

8.500%

8.000%

Total risk-based capital ratio

11.96%

12.37%

10.500%

10.000%

(1)Includes the capital conservation buffer of 2.50% for all ratios, excluding the Tier 1 capital to average total assets ratio.

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis at June 30, 2022 would be slightly lower than those of the Bank because a portion of proceeds from the sale of notes previously issued by the holding company were contributed to the Bank as equity.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule was fully implemented on January 1, 2019 and implemented a capital conservation buffer of 2.5%. As a result, the Bank is required to have a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% (inclusive of the capital conservation buffer) and a Tier 1 risk-based capital ratio of 8.5% (inclusive of the capital conservation buffer). Failure to maintain the capital conservation buffer will limit the ability of the Bank and Financial to pay dividends, repurchase shares or pay discretionary bonuses. The rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

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In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

While the CBLR framework is currently available for banks to use in their June 30, 2022 Call Report, the Bank has elected not to opt into the CBLR framework at this time.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

Earnings Summary

Financial had net income including all operating segments of $2,292,000 and $4,431,000 for the three and six months ended June 30, 2022, compared to $2,014,000 and $3,849,000 for the comparable periods in 2021. Basic and diluted earnings per common share for the three and six months ended June 30, 2022 were $0.48 and $0.93, compared to basic and diluted earnings per share of $0.42 and $0.81 for the three and six months ended June 30, 2021.

The increase in net income for the three months ended June 30, 2022, as compared to the prior year period was due primarily to i) a recovery of $300,000 from the allowance for loan losses during the quarter as compared to no recovery in the same period in 2021; and ii) an increase in net interest income in the quarter of $414,000.

The increase in net income for the six months ended June 30, 2022, as compared to the prior year period was due primarily to i) a recovery of $600,000 from the allowance for loan losses during the first six months as compared to no recovery in the same period in 2021; and ii) an increase in noninterest income of for the six months ended June 30, 2022 of $1,182,000, which was primarily due to an increase in wealth management fees from the services provided by PWW. Because the acquisition of PWW closed on December 31, 2021, PWW did not contribute any noninterest income in the first six months of 2021.

These operating results represent an annualized return on average stockholders’ equity of 12.68% and 12.48% for the three and six months ended June 30, 2022, compared with 12.23% and 11.86% for the three and six months ended June 30, 2021. This increase for the three and six months ended June 30, 2022 was due to an increase in our net income and a decrease in stockholders’ equity as a result of a decrease in the value of the available-for-sale securities resulting from an application of the mark-to-market accounting rules. The Company had an annualized return on average assets of 0.89% for both the three and six months ended June 30, 2022 compared with 0.88% and 0.86% for the same periods in 2021. The increase for the three and six months ended June 30, 2022 largely resulted from an increase in the Bank’s net income and was partially offset by an increase in average assets.

See “Noninterest Income” below for mortgage business and wealth management segment discussions.

Interest Income, Interest Expense, and Net Interest Income

For the three months ended June 30, 2022, interest income increased to $7,598,000 from $7,234,000 for the same period in 2021, due primarily to an increase in interest earning assets, which was offset in part by a decrease in yields on total earning assets. In the comparable period of 2021, the yield on loans were elevated due to the accretion of PPP fees as PPP loans were forgiven. The average rate received on loans was 4.12% for the three months ended June 30, 2022 as compared to 4.33% for the same period in 2021. The rate on total average earning assets decreased for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily because a decrease in the rates previously discussed.

For the six months ended June 30, 2022, interest income decreased slightly to $14,513,000 from $14,599,000 for the same period in 2021, due primarily to a decrease in yields on total interest earning assets, which was partially offset by an increase in total earning assets. In the comparable period of 2021, the yield on loans were elevated due to the accretion of PPP fees as PPP loans were forgiven. The average rate received on loans was 4.08% for the six months ended June 30, 2022 as compared to 4.42% for the same period in 2021. The rate on total average earning assets decreased for the six months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily because a decrease in the rates previously discussed.

Interest expense decreased to $474,000 and $999,000 for the three and six months ended June 30, 2022 from $524,000 and $1,141,000 for the same periods in 2021, decrease of 9.54% and 12.45%. The decrease for the three and six month periods resulted primarily from a decrease in interest rates paid on deposits. The Bank’s average rate paid on interest bearing deposits was 0.14% and 0.16% during the three and six months ended June 30, 2022 as compared to 0.25% and 0.29% for the same periods in 2021.

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The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and six months ended June 30, 2022 of $7,124,000 and $13,514,000 as compared to $6,710,000 and $13,458,000 for the same periods in 2021. The net interest margin was 2.99% and 2.92% for the three and six months ended June 30, 2022 as compared to 3.15% and 3.25% for the same periods in 2021. The decreases was primarily attributable to the decrease in loan fees related to the PPP program in 2022 as compared to 2021. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact net interest margin. The FOMC has taken actions that are likely to positively impact our net interest margin in the near term. Other financial impacts could occur, though such potential impacts are unknown at this time.

Financial’s net interest margin analysis and average balance sheets are shown in Schedule I below.

Noninterest Income

Noninterest income is comprised primarily of fees and charges on transactional deposit accounts, gains on sales of mortgage loans held for sale, commissions on sales of investments, fees generated from treasury management services, fees generated from our investment advisory business, and bank-owned life insurance income.

Noninterest income decreased to $3,034,000 for the three months ended June 30, 2022 from $3,049,000 for the same period in 2021. This decrease was primarily related to a decrease in gains on sales of loans held for sale of $1,011,000 from $2,310,000 during the quarter ended June 30, 2021 to $1,299,000 for the same period in 2022. The decrease was partially offset by fees generated from PWW’s investment advisory business. Fee income from PWW was $961,000 in for the period ended June 30, 2022 as compared to $0 for the same period in 2021.

Noninterest income increased to $6,665,000 for the six months ended June 30, 2022 from $5,483,000 for the same period in 2021. This increase was primarily related to fees generated from PWW’s investment advisory business and was partially offset by the decrease in gains on sale of loans held for sale. Fee income from PWW was $1,976,000 in for the period ended June 30, 2022 as compared to $0 for the same period in 2021.

The Bank, through its Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the markets we serve. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage division are presold to major national mortgage banking or financial institutions. The Mortgage division assumes, except in limited circumstances such as first payment default, no credit or interest rate risk on these mortgages.

Purchase mortgage originations totaled $50,235,000 and $87,404,000 or 81.93% and 71.17%, respectively, of the total mortgage loans originated in the three and six months ended June 30, 2022 as compared to $54,116,000 and $84,954,000 or 64.44% and 52.94% of the total mortgage loans originated in the same periods in 2021. Because of a rising mortgage interest rate environment, management anticipates that in the short term purchase mortgage originations will continue to represent a majority of mortgage originations. However, management also believes that a continued increase in long term market interest rates could limit refinancing activity.

Although mortgage rates increased dramatically in the first six months of 2022, rates remain attractive when compared to rates over the last 20 years. Because of uncertainty surrounding current and near-term economic conditions arising from the COVID-19 pandemic, supply chain issues, inflation, and geopolitical concerns, management cannot predict future mortgage rates. Nevertheless, management expects that the Mortgage division’s reputation in Region 2000, steady residential real estate inventory and the recent hiring of additional mortgage loan originators in Roanoke, Harrisonburg, Charlottesville, Blacksburg, and most recently, Wytheville, will result in strong mortgage originations through the remainder of 2022. Management also believes that the rising interest rates could put revenue from the mortgage segment under pressure.

Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by two dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s impact on noninterest income will remain immaterial in 2022.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three employees that are licensed to sell insurance products through Insurance. Insurance generates minimal revenue

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and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2022.

Financial provides investment advisory services through PWW. In the three and six months ended June 30, 2022, PWW generated non interest revenue (fee income) of $961,000 and $1,976,000 as compared to $0 for the same periods in 2021.

Noninterest Expense

Noninterest expense for the three and six months ended June 30, 2022 increased to $7,592,000 and $15,240,000 from $7,237,000 and $14,126,000 for the same periods in 2021, increases of 4.91% and 7.89%, respectively. These increases resulted from increases in personnel expenses from variable compensation along with the added personnel expense of PWW employees, occupancy expense, and supply expense. The increases were offset in part by a decrease in equipment expense, marketing expense, and credit expense. FDIC insurance expense increased in the quarter ended June 30, 2022, but decreased for the six months ended June 30, 2022. Total personnel expense was $4,533,000 and $8,522,000 for the three and six month periods ended June 30, 2022 as compared to $4,076,000 and $7,808,000 for the same periods in 2021.

Allowance and Provision for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged-off, net of recoveries, reduce the allowance. The provision for the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon two components – specific impairment and general reserves. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due as well as all TDRs, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the loan loss calculation, the Bank had a recovery of $300,000 and $600,000 from the allowance for loan losses in the three and six month periods ended June 30, 2022. This compares to a provision of $0 for each of the comparable periods in 2021.

At June 30, 2022, the allowance for loan losses was 1.08% of total loans outstanding, versus 1.19% and 1.20% of total loans outstanding at December 31, 2021 and June 30, 2021, respectively. The decrease in the allowance for loan losses was largely driven by decreased qualitative factor adjustments related to the ongoing COVID-19 pandemic, primarily in relation to the economy and because all loans previously in deferral due to COVID-19 conditions have returned to normal status. The specific reserve was $0 at December 31, 2021 and June 30, 2022. PPP loans are guaranteed in full by the U.S. Small Business Administration, and therefore, are excluded from the Company’s allowance for loan losses calculation. As shown in the table below, the total balance in the allowance decreased, from $6,915,000 as of December 31, 2021 to $6,616,000 on June 30, 2022. The decrease was due in part to the $600,000 recovery discussed above and was offset by recoveries exceeding charge-offs during the first six months of 2022. The effects of the pandemic may require the Company to fund increases in the allowance for loan losses in future periods.

Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for loan losses and constitute a realized loss. Charged-off loans were $1,000 and $9,000 for the three and six months ended June 30, 2022 as compared to $0 and $64,000 for the comparable periods in 2021. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three and six months ended June 30, 2022, the Bank had recoveries of charged-off loans of $47,000 and $310,000 as compared with $106,000 and $120,000 for the comparable periods in 2021.

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. As set forth in the tables below, the Bank’s allowance arising from the specific impairment evaluation as of June 30, 2022 was unchanged as compared to December 31, 2021.


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The following tables summarize the allowance activity for the periods indicated:

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

As of and For the Six Months Ended June 30, 2022

Commercial

Commercial

Real Estate

Consumer

Residential

Total

Allowance for Loan Losses:

Beginning Balance

$          1,471 

$                 3,637 

$            860 

$              947 

$         6,915 

Charge-Offs

-

-

(9)

-

(9)

Recoveries

87

206

12

5

310

Provision (Recovery of)

(261)

(709)

58

312

(600)

Ending Balance

1,297

3,134

921

1,264

6,616

Ending Balance: Individually evaluated for impairment

-

-

-

-

-

Ending Balance: Collectively evaluated for impairment

1,297

3,134

921

1,264

6,616

Totals:

$          1,297 

$                 3,134 

$            921 

$           1,264 

$         6,616 

Financing Receivables:

Ending Balance: Individually evaluated for impairment

-

1,735

252

1,362

3,349

Ending Balance: Collectively evaluated for impairment

102,879

352,326

99,913

55,471

610,589

Totals:

$      102,879 

$             354,061 

$     100,165 

$         56,833 

$     613,938 


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Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

As of and For the Year Ended December 31, 2021

Commercial

Commercial

Real Estate

Consumer

Residential

Total

Allowance for Loan Losses:

Beginning Balance

$          2,001 

$                 3,550 

$            868 

$              737 

$         7,156 

Charge-Offs

(53)

-

(38)

-

(91)

Recoveries

112

72

29

137

350

Provision (Recovery of)

(589)

15

1

73 

(500)

Ending Balance

1,471

3,637

860

947

6,915

Ending Balance: Individually evaluated for impairment

-

-

-

-

-

Ending Balance: Collectively evaluated for impairment

1,471

3,637

860

947

6,915

Totals:

$          1,471 

$                 3,637 

$            860 

$              947 

$         6,915 

Financing Receivables:

Ending Balance: Individually evaluated for impairment

17

2,694

59

1,316

4,086

Ending Balance: Collectively evaluated for impairment

105,050

335,455

89,043

49,750

579,298

Totals:

$      105,067 

$             338,149 

$       89,102 

$         51,066 

$     583,384 

The following sets forth the reconciliation of the allowance for loan loss:

Three Months Ended

Six Months Ended

June 30,

June 30,

(in thousands)

(in thousands)

2022

2021

2022

2021

Balance, beginning of period

$            6,870

$            7,106

$            6,915

$            7,156

Recovery of loan losses

(300)

-

(600)

-

Loans charged off

(1)

-

(9)

(64)

Recoveries of loans charged off

47

106

310

120

Net recoveries

46

106

301

56

Balance, end of period

$            6,616

$            7,212

$            6,616

$            7,212

No nonaccrual loans were excluded from the impaired loan disclosures at June 30, 2022 and December 31, 2021. If interest on these loans had been accrued, such income cumulatively would have approximated $201,000 and $177,000 on June 30, 2022 and December 31, 2021, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

The Bank’s internal risk rating system is in place to grade commercial and commercial real estate loans. Category ratings are reviewed periodically by lenders and the credit review area of the Bank based on the borrower’s individual situation. Additionally, internal and external monitoring and review of credits are conducted on an annual basis.

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Below is a summary and definition of the Bank’s risk rating categories:

RATING 1

Excellent

RATING 2

Above Average

RATING 3

Satisfactory

RATING 4

Acceptable / Low Satisfactory

RATING 5

Monitor

RATING 6

Special Mention

RATING 7

Substandard

RATING 8

Doubtful

RATING 9

Loss

We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:

“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events.

“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Income Taxes

For the three and six months ended June 30, 2022, Financial had an income tax expense of $574,000 and $1,108,000 as compared to $508,000 and $966,000 for the three and six months ended June 30, 2021. This represents an effective tax rate of 20.03% and 20.00% for the three and six months ended June 30, 2022 as compared with 20.14% and 20.06% for the three and six months ended June 30, 2021. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance.

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Net Interst Margin Analysis

Average Balance Sheets

For the Three Months Ended June 30, 2022 and 2021

(dollars in thousands)

2022

2021

Average

Average

Average

Interest

Rates

Average

Interest

Rates

Balance

Income/

Earned/

Balance

Income/

Earned

Sheet

Expense

Paid

Sheet

Expense

/Paid

ASSETS

Loans, including fees (1)(2)

$

596,775

$

6,126

4.12%

$

610,338

$

6,587

4.33%

Loans held for sale

4,074

48

4.73%

5,542

37

2.68%

Federal funds sold

103,575

164

0.64%

103,439

20

0.08%

Interest-bearing bank balances

18,863

27

0.57%

18,823

5

0.11%

Securities (3)

232,697

1,211

2.09%

116,214

559

1.93%

Federal agency equities

1,253

27

8.64%

1,276

29

9.12%

CBB equity

116

—

- %

116

—

- %

Total earning assets

957,353

7,603

3.19%

855,748

7,237

3.39%

Allowance for loan losses

(6,894)

(7,139)

Non-earning assets

80,525

69,741

Total assets

$

1,030,984 1,030,984

$

918,350

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits

Demand interest bearing

460,350

97

0.08%

404,554

109

0.11%

Savings

131,171

18

0.06%

109,813

29

0.11%

Time deposits

138,142

146

0.42%

143,633

278

0.78%

Total interest bearing deposits

729,663

261

0.14%

658,000

416

0.25%

Other borrowed funds

Other borrowings

10,807

108

4.01%

—

—

- %

Financing leases

3,359

24

2.87%

3,783

27

2.86%

Capital Notes

10,034

81

3.24%

10,029

81

3.24%

Total interest-bearing liabilities

753,863

474

0.25%

671,812

524

0.31%

Noninterest bearing deposits

194,431

171,187

Other liabilities

10,201

9,285

Total liabilities

958,495

852,284

Stockholders' equity

72,489

66,066

Total liabilities and

Stockholders’ equity

$

1,030,984 1,030,984

$

918,350

Net interest earnings

$

7,129

$

6,713

Net interest margin

2.99%

3.15%

Interest spread

2.94%

3.08%

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(1)Net accretion or amortization of deferred loan fees and costs are included in interest income.

(2)Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with non-accrual loans.

(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities. Assumed income tax rates of 21% were used for the periods presented.


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Net Interst Margin Analysis

Average Balance Sheets

For the Six Months Ended June 30, 2022 and 2021

(dollars in thousands)

2022

2021

Average

Average

Average

Interest

Rates

Average

Interest

Rates

Balance

Income/

Earned/

Balance

Income/

Earned

Sheet

Expense

Paid

Sheet

Expense

/Paid

ASSETS

Loans, including fees (1)(2)

$

592,702

$

12,003

4.08%

$

610,876

$

13,379

4.42%

Loans held for sale

3,856

76

3.97%

5,848

105

3.62%

Federal funds sold

100,437

201

0.40%

93,067

34

0.07%

Interest-bearing bank balances

18,883

34

0.36%

18,740

19

0.20%

Securities (3)

215,718

2,178

2.04%

106,283

1,032

1.96%

Federal agency equities

1,231

31

5.08%

1,355

35

5.21%

CBB equity

116

—

- %

116

—

- %

Total earning assets

932,943

14,523

3.14%

836,285

14,604

3.52%

Allowance for loan losses

(6,929)

(7,147)

Non-earning assets

80,307

68,779

Total assets

$

1,006,321 1,006,321

$

897,917

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits

Demand interest bearing

455,376

204

0.09%

391,298

216

0.11%

Savings

127,835

37

0.06%

106,009

57

0.11%

Time deposits

140,031

324

0.47%

146,580

651

0.90%

Total interest bearing deposits

723,242

565

0.16%

643,887

924

0.29%

Other borrowed funds

Other borrowings

10,873

222

4.12%

—

—

0.00%

Financing leases

3,419

49

2.89%

3,841

54

2.84%

Capital Notes

10,033

163

3.28%

10,028

163

3.28%

Total interest-bearing liabilities

747,567

999

0.27%

657,756

1,141

0.35%

Noninterest bearing deposits

176,950

164,974

Other liabilities

10,204

9,753

Total liabilities

934,721

832,483

Stockholders' equity

71,600

65,434

Total liabilities and

Stockholders’ equity

$

1,006,321 1,006,321

$

897,917

Net interest earnings

$

13,524

$

13,463

Net interest margin

2.92%

3.25%

Interest spread

2.87%

3.17%

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(1)Net accretion or amortization of deferred loan fees and costs are included in interest income.

(2)Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with non-accrual loans.

(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities. Assumed income tax rates of 21% were used for the periods presented.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Financial’s management, including Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes during the quarter ended June 30, 2022, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those controls subsequent to the date of our most recent evaluation of internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 29, 2022. There have been no material changes from risk factors as previously disclosed in Part 1 Item 1A of the Company’s Form 10-K for the year ended December 31, 2021.

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

Not applicable

Item 5. Other Information

Not applicable


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Item 6. Exhibits

Exhibit No.

Description of Exhibit

31.1

Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2022

31.2

Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2022

32.1

Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 12, 2022

101

The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of June 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive Loss (unaudited) for the three and six months ended June 30, 2022 and 2021 (iv) Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2022 and 2021 (v) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2022 and 2021; (vi) Notes to Unaudited Consolidated Financial Statements.

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.

BANK OF THE JAMES FINANCIAL GROUP, INC.

Date: August 12, 2022

By /S/ Robert R. Chapman III

Robert R. Chapman III, President

(Principal Executive Officer)

Date: August 12, 2022

By /S/ J. Todd Scruggs

J. Todd Scruggs, Secretary and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

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