Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2019

 

 

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

      

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: 4,378,436 shares of Common Stock, par value $2.14 per share, were outstanding at May 9, 2019.

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

 

 

 


Table of Contents

Table of Contents

 

PART I – FINANCIAL INFORMATION

     1  

Item 1.

  

Consolidated Financial Statements

     1  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     47  

Item 4.

  

Controls and Procedures

     47  

PART II – OTHER INFORMATION

     48  

Item 1.

  

Legal Proceedings

     48  

Item 1A.

  

Risk Factors

     48  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     48  

Item 3.

  

Defaults Upon Senior Securities

     48  

Item 4.

  

Mine Safety Disclosures

     48  

Item 5.

  

Other Information

     49  

Item 6.

  

Exhibits

     49  

SIGNATURES

     49  


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) (2019 unaudited)

 

Assets    March 31,
2019
    December 31,
2018
 

Cash and due from banks

   $ 28,533     $ 26,725  

Federal funds sold

     20,207       23,600  
  

 

 

   

 

 

 

Total cash and cash equivalents

     48,740       50,325  

Securities held-to-maturity (fair value of $3,640 in 2019 and $3,515 in 2018)

     3,697       3,700  

Securities available-for-sale, at fair value

     53,497       52,727  

Restricted stock, at cost

     1,462       1,462  

Loans, net of allowance for loan losses of $4,673 in 2019 and $4,581 in 2018

     535,959       530,016  

Loans held for sale

     2,604       1,670  

Premises and equipment, net

     14,473       13,426  

Interest receivable

     1,946       1,742  

Cash value – bank owned life insurance

     13,442       13,359  

Other real estate owned

     2,253       2,430  

Income taxes receivable

     797       1,102  

Deferred tax asset, net

     1,480       1,755  

Other assets

     4,038       1,183  
  

 

 

   

 

 

 

Total assets

   $ 684,388     $ 674,897  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest bearing demand

   $ 93,624     $ 91,356  

NOW, money market and savings

     331,848       331,298  

Time

     191,272       189,389  
  

 

 

   

 

 

 

Total deposits

     616,744       612,043  

Capital notes

     5,000       5,000  

Interest payable

     154       127  

Other liabilities

     5,313       2,584  
  

 

 

   

 

 

 

Total liabilities

   $  627,211     $  619,754  
  

 

 

   

 

 

 

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 4,378,436 as of March 31, 2019 and December 31, 2018

     9,370       9,370  

Additional paid-in-capital

     31,522       31,495  

Retained earnings

     17,492       16,521  

Accumulated other comprehensive (loss)

     (1,207     (2,243
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 57,177     $ 55,143  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 684,388     $ 674,897  
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

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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
March 31,
 
Interest Income    2019      2018  

Loans

   $ 6,654      $ 5,674  

Securities

     

US Government and agency obligations

     185        198  

Mortgage backed securities

     61        68  

Municipals – taxable

     78        79  

Municipals – tax exempt

     3        3  

Dividends

     18        8  

Other (Corporates)

     23        23  

Interest bearing deposits

     91        35  

Federal Funds sold

     121        67  
  

 

 

    

 

 

 

Total interest income

     7,234        6,155  
  

 

 

    

 

 

 

Interest Expense

     

Deposits

     

NOW, money market savings

     306        192  

Time Deposits

     748        581  

FHLB borrowings

     —          1  

Capital notes

     50        50  
  

 

 

    

 

 

 

Total interest expense

     1,104        824  
  

 

 

    

 

 

 

Net interest income

     6,130        5,331  

Provision for loan losses

     210        22  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,920        5,309  
  

 

 

    

 

 

 

Noninterest income

     

Gain on sales of loans held for sale

     691        620  

Service charges, fees and commissions

     439        464  

Increase in cash value of life insurance

     83        85  

Other

     6        17  
  

 

 

    

 

 

 

Total noninterest income

     1,219        1,186  
  

 

 

    

 

 

 

Noninterest expenses

     

Salaries and employee benefits

     2,928        2,713  

Occupancy

     421        395  

Equipment

     458        379  

Supplies

     162        149  

Professional, data processing, and other outside expense

     815        815  

Marketing

     145        140  

Credit expense

     127        125  

Other real estate expenses

     139        40  

FDIC insurance expense

     94        101  

Other

     310        240  
  

 

 

    

 

 

 

Total noninterest expenses

     5,599        5,097  
  

 

 

    

 

 

 

Income before income taxes

     1,540        1,398  

Income tax expense

     306        275  
  

 

 

    

 

 

 

Net Income

   $ 1,234      $ 1,123  
  

 

 

    

 

 

 

Weighted average shares outstanding – basic

     4,378,436        4,378,436  
  

 

 

    

 

 

 

Weighted average shares outstanding – diluted

     4,380,959        4,378,526  
  

 

 

    

 

 

 

Earnings per common share – basic

   $  0.28      $  0.26  
  

 

 

    

 

 

 

Earnings per common share – diluted

   $  0.28      $  0.26  
  

 

 

    

 

 

 

See accompanying notes to these consolidated financial statements

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2019 and 2018

(dollar amounts in thousands) (unaudited)

 

     For the
Three Months

Ended March 31,
 
     2019     2018  

Net Income

   $ 1,234   $ 1,123
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized gains (losses) on securities available-for-sale

     1,311     (1,076

Tax effect

     (275     226
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     1,036     (850
  

 

 

   

 

 

 

Comprehensive income

   $ 2,270   $ 273
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2019 and 2018

(dollar amounts in thousands) (unaudited)

 

     For the Three Months
Ended March 31,
 
     2019     2018  

Cash flows from operating activities

    

Net Income

   $ 1,234   $ 1,123

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

    

Depreciation and amortization

     239     213

Stock-based compensation expense

     27     —    

Net amortization and accretion of premiums and discounts on securities

     100     104

(Gain) on sales of loans held for sale

     (691     (620

Proceeds from sales of loans held for sale

     20,428     24,947

Origination of loans held for sale

     (20,671     (25,149

Provision for loan losses

     210     22

Loss (gain) on sale of other real estate owned

     13     (5

Impairment of other real estate owned

     115     34

(Increase) in cash value of life insurance

     (83     (85

(Increase) in interest receivable

     (204     (114

Decrease (increase) in other assets

     135     (78

Decrease in income taxes receivable

     305     354

Increase (decrease) in interest payable

     27     (3

(Decrease) increase in other liabilities

     (261     264
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 923   $ 1,007
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from calls of securities held-to-maturity

   $ —       $ 2,000

Purchases of securities available-for-sale

     —         (998

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

     444     502

Purchase of Federal Home Loan Bank stock

     —         (382

Proceeds from sale of other real estate owned

     349     525

Origination of loans, net of principal collected

     (6,453     (10,877

Purchases of premises and equipment

     (1,286     (267
  

 

 

   

 

 

 

Net cash (used in) investing activities

   $ (6,946   $ (9,497
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

   $  4,701   $ 17,023

Proceeds from Federal Home Loan Bank advances

     —         10,000

Dividends paid to common stockholders

     (263     (263
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 4,438   $ 26,760
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (1,585     18,270

Cash and cash equivalents at beginning of period

   $ 50,325   $ 37,018
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 48,740   $ 55,288
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to other real estate owned

   $ 300   $ —    

Fair value adjustment for securities available-for-sale

     1,311     (1,076

Lease liabilities arising from right-of-use assets

     2,990     —    

Cash transactions

    

Cash paid for interest

   $ 1,077   $ 827

Cash paid for income taxes

     —         —    

See accompanying notes to these consolidated financial statements

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2019 and 2018

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

 

     Shares
Outstanding
     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss)
    Total  

Balance at December 31, 2017

     4,378,436      $ 9,370      $ 31,495      $ 12,269       (1,469   $ 51,665  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          1,123       —         1,123  

Dividends paid on common stock ($0.06 per share)

     —          —          —          (263     —         (263

Other comprehensive loss

     —          —          —          —         (850     (850
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     4,378,436      $ 9,370      $ 31,495      $ 13,129       (2,319   $ 51,675  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

     4,378,436      $ 9,370      $ 31,495      $ 16,521       (2,243   $ 55,143  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          1,234       —         1,234  

Dividends paid on common stock ($0.06 per share)

     —          —          —          (263     —         (263

Stock-based compensation expense

     —          —          27        —         —         27  

Other comprehensive income

     —          —          —          —         1,036       1,036  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     4,378,436      $ 9,370      $ 31,522      $ 17,492     $ (1,207   $ 57,177  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

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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 March 31, 2019 and for the three months ended March 31, 2019 and 2018 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, 2018. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2018 included in Financial’s Annual Report on Form 10-K. Results for the three-month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Certain immaterial reclassifications have been made to prior period balances to conform to the current period presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

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, and Harrisonburg.

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 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.

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.

 

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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 months ended March 31, 2019 and 2018.

 

     Three Months Ended
March 31,
 
     2019      2018  

Net income

   $ 1,234,000      $ 1,123,000  

Weighted average number of shares

     4,378,436        4,378,436  

Restricted stock units/stock options affect of incremental shares

     2,523        90  
  

 

 

    

 

 

 

Weighted average diluted shares

     4,380,959        4,378,526  
  

 

 

    

 

 

 

Basic EPS (weighted avg shares)

   $ 0.28      $ 0.26  
  

 

 

    

 

 

 

Diluted EPS (Including incremental shares)

   $ 0.28      $ 0.26  
  

 

 

    

 

 

 

No restricted stock units or stock options were excluded in calculating diluted earnings per share for any of the periods presented.

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 date of grant.

 

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Note 4 – Stock Based Compensation (continued)

 

At December 31, 2018, there were no stock-based compensation awards outstanding that were issued under the Company’s 1999 Stock Option Plan. The final stock-based compensation issued under this plan consisting solely of employee stock options expired during the second quarter of 2018,

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 receive shares 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 grant date fair value of the Company’s stock of $13.00 per share. Shares vest over 3 years in thirds with the first one-third vesting one year from the grant date. The total expense recognized for the three months ended March 31, 2019, in connection with the restricted stock unit awards was approximately $27,000. There were no forfeitures during the three-month period ending March 31, 2019.

At March 31, 2019, the unrecognized stock-based compensation expense related to unvested restricted stock awards amounted to $292,000. The unrecognized expense will be recognized ratably over the remaining vesting period of 2.75 years. The Company accounts for forfeitures as they occur.

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

 

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Note 5 – Fair Value Measurements (continued)

 

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.

 

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Note 5 – Fair Value Measurements (continued)

 

The following table summarizes the Company’s financial assets that were measured at fair value on a recurring basis during the period.

 

            Carrying Value at March 31, 2019
(in thousands)
 

Description

   Balance as of
March 31,
2019
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

   $ 1,893      $ —        $ 1,893      $ —    

US agency obligations

     23,880        —          23,880        —    

Mortgage-backed securities

     11,604        —          11,604        —    

Municipals

     12,198        —          12,198        —    

Corporates

     3,922        —          3,922        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 53,497      $ —        $ 53,497      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
            Carrying Value at December 31, 2018
(in thousands)
 

Description

   Balance as of
December 31,
2018
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

   $ 1,845      $        $ 1,845      $    

US agency obligations

     23,267        —          23,267        —    

Mortgage-backed securities

     11,876        —          11,876        —    

Municipals

     12,009        —          12,009        —    

Corporates

     3,730        —          3,730        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 52,727      $ —        $ 52,727      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

10


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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 March 31, 2019. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale, net 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 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, loans held for sale, and OREO measured at fair value on a nonrecurring basis during the period (in thousands).

 

            Carrying Value at March 31, 2019  

Description

   Balance as of
March 31,
2019
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Impaired loans*

   $ 1,680      $ —        $ —        $ 1,680  

Other real estate owned

     2,253        —          —          2,253  

 

  *

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

 

            Carrying Value at December 31, 2018  

Description

   Balance as of
December 31,
2018
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Impaired loans*

   $ 1,587      $ —        $ —        $ 1,587  

Other real estate owned

     2,430        —          —          2,430  

 

  *

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

 

11


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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 March 31, 2019
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range
(Weighted
Average)

Assets

           

Impaired loans

   $ 1,680      Discounted appraised value    Selling cost    0% – 10% (8%)
         Discount for lack of marketability and age of appraisal    0% – 20% (6%)

OREO

     2,253      Discounted appraised value    Selling cost    0% – 10% (6%)
         Discount for lack of marketability and age of appraisal    0% –25% (15%)

 

     Quantitative information about Level 3 Fair Value Measurements for December 31, 2018
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range
(Weighted
Average)

Assets

           

Impaired loans

   $ 1,587      Discounted appraised value    Selling cost    0% –10% (8%)
         Discount for lack of marketability and age of appraisal    0% – 20% (6%)

OREO

     2,430      Discounted appraised value    Selling cost    0% – 10% (6%)
         Discount for lack of marketability and age of appraisal    0% –25% (15%)

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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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 March 31, 2019 and December 31, 2018 was as follows (in thousands):

 

            Fair Value Measurements at March 31, 2019 using  
Assets    Carrying
Amounts
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Cash and due from banks

   $ 28,533      $ 28,533      $ —        $ —        $ 28,533  

Fed funds sold

     20,207        20,207        —          —          20,207  

Securities

              

Available-for-sale

     53,497        —          53,497        —          53,497  

Held-to-maturity

     3,697        —          3,640        —          3,640  

Restricted stock

     1,462           1,462        —          1,462  

Loans, net (1)

     535,959        —          —          534,401        534,401  

Loans held for sale

     2,604        —          2,604        —          2,604  

Interest receivable

     1,946        —          1,946        —          1,946  

BOLI

     13,442        —          13,442        —          13,442  

Liabilities

              

Deposits

   $ 616,744      $ —        $ 617,404      $ —        $ 617,404  

Capital notes

     5,000        —          4,731        —          4,731  

Interest payable

     154        —          154        —          154  

 

            Fair Value Measurements at December 31, 2018 using  
Assets    Carrying
Amounts
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Cash and due from banks

   $ 26,725      $ 26,725      $ —        $ —        $ 26,725  

Fed funds sold

     23,600        23,600              23,600  

Securities

              

Available-for-sale

     52,727        —          52,727        —          52,727  

Held-to-maturity

     3,700        —          3,515        —          3,515  

Restricted stock

     1,462        —          1,462           1,462  

Loans, net (1)

     530,016        —          —          522,782        522,782  

Loans held for sale

     1,670        —          1,670        —          1,670  

Interest receivable

     1,742        —          1,742        —          1,742  

BOLI

     13,359        —          13,359        —          13,359  

Liabilities

              

Deposits

   $ 612,043      $ —        $ 612,532      $ —        $ 612,532  

Capital notes

     5,000        —          4,710           4,710  

Interest payable

     127        —          127        —          127  

 

  (1)

Carrying amount is net of unearned income and the Allowance.

 

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Table of Contents

Note 6 – Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10-K, the implementation of the new standard resulted in recognition of right-of-use assets and lease liabilities of $3.0 million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

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

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

The following tables present information about the Company’s leases:

 

(Dollars in thousands)    March 31,
2019
 

Lease liabilities

   $ 2,856  

Right-of-use assets

   $ 2,852  

Weighted average remaining lease term

     10.8 years  

Weighted average discount rate

     3.08

 

Lease cost (in thousands)    For the Three
Months Ended
March 31, 2019
 

Operating lease cost

   $ 161  
  

 

 

 

Total lease cost

   $ 161  
  

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

   $ 156  

 

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Table of Contents

Note 6 – Leases (continued)

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:

 

Lease payments due (in thousands)    As of
March 31, 2019
 

Nine months ending December 31, 2019

   $ 381  

Twelve months ending December 31, 2020

     418  

Twelve months ending December 31, 2021

     346  

Twelve months ending December 31, 2022

     344  

Twelve months ending December 31, 2023

     346  

Twelve months ending December 31, 2024

     249  

Thereafter

     1,352  
  

 

 

 

Total undiscounted cash flows

   $ 3,436  
  

 

 

 

Discount

     (580
  

 

 

 

Lease liabilities

   $ 2,856  
  

 

 

 

 

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Table of Contents

Note 7 – Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2019 and December 31, 2018 (amounts in thousands):

 

     March 31, 2019  
     Amortized
Costs
     Gross Unrealized     Fair
Value
 
     Gains      (Losses)  

Held-to-Maturity

          

US agency obligations

   $ 3,697      $ 2      $ (59   $ 3,640  
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-Sale

          

US Treasuries

     1,962        —          (69     1,893  

US agency obligations

     24,658        6        (784     23,880  

Mortgage-backed securities

     11,932        5        (333     11,604  

Municipals

     12,375        17        (194     12,198  

Corporates

     4,098        —          (176     3,922  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 55,025      $ 28      $ (1,556   $ 53,497  
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2018  
     Amortized
Costs
     Gross Unrealized     Fair
Value
 
     Gains      (Losses)  

Held-to-Maturity

          

US agency obligations

   $ 3,700      $ 3      $ (185   $ 3,515  
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-Sale

          

US Treasuries

     1,961        —          (116     1,845  

US agency obligations

     24,701        —          (1,434     23,267  

Mortgage-backed securities

     12,390        —          (514     11,876  

Municipals

     12,412        3        (406     12,009  

Corporates

     4,102        —          (372     3,730  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 55,566      $ 3      $ (2,842   $ 52,727  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Note 7 – 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 March 31, 2019 and December 31, 2018 (amounts in thousands):

 

     Less than 12
months
     More than 12 months      Total  

March 31, 2019

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Description of securities

                 

Held-to-maturity

                 

US agency obligations

   $ —        $ —        $ 3,640      $ 59      $ 3,640      $ 59  

Available-for-sale

                 

US Treasuries

     —          —          1,893        69        1,893        69  

US agency obligations

     —          —          21,504        784        21,504        784  

Mortgage-backed securities

     —          —          10,617        333        10,617        333  

Municipals

     —          —          9,994        194        9,994        194  

Corporates

     —          —          3,922        176        3,922        176  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 47,930      $ 1,556      $ 47,930      $ 1,556  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12
months
     More than 12 months      Total  

December 31, 2018

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Description of securities

                 

Held-to-maturity

                 

US agency obligations

   $ —        $ —        $ 3,515      $ 185      $ 3,515      $ 185  

Available-for-sale

                 

US Treasuries

     —          —          1,845        116        1,845        116  

US agency obligations

     —          —          23,267        1,434        23,267        1,434  

Mortgage-backed securities

     966        20        10,910        494        11,876        514  

Municipals

     —          —          10,994        406        10,994        406  

Corporates

     —          —          3,730        372        3,730        372  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 966      $ 20      $ 50,746      $ 2,822      $ 51,712      $ 2,842  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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).

 

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Table of Contents

Note 7 – Securities (continued)

 

At March 31, 2019, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of March 31, 2019, the Bank owned 53 securities in an unrealized loss position that were being evaluated for other than temporary impairment. Eleven of these securities were S&P rated AAA, 39 were rated AA, two were rated A, and one was rated BBB+. As of March 31, 2019, 32 of these securities were direct obligations of the U.S. government or government sponsored entities, 16 were municipal issues, and five were investments in domestic corporate issued securities.

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 gross gains on sales of available-for-sale securities during the three-month periods ended March 31, 2019 and 2018. There were no gross losses on sales of available-for-sale securities and no sales of held-to-maturity securities during the three-month periods ended March 31, 2019 and 2018.

Note 8 – Business Segments

The Company has two reportable business segments: (i) a traditional full-service community banking segment and, (ii) a mortgage loan origination 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.

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

 

18


Table of Contents

Note 8 – Business Segments (continued)

 

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three months ended March 31, 2019 and 2018 was as follows (dollars in thousands):

Business Segments

     Community
Banking
     Mortgage      Total  

Three months ended March 31, 2019

        

Net interest income

   $ 6,130      $ —        $ 6,130  

Provision for loan losses

     210        —          210  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,920        —          5,920  

Noninterest income

     528        691        1,219  

Noninterest expenses

     5,025        574        5,599  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,423        117        1,540  

Income tax expense

     281        25        306  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,142      $ 92      $ 1,234  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 681,531      $ 2,857      $ 684,388  
  

 

 

    

 

 

    

 

 

 

Three months ended March 31, 2018

        

Net interest income

   $ 5,331      $ —        $ 5,331  

Provision for loan losses

     22        —          22  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,309        —          5,309  

Noninterest income

     566        620        1,186  

Noninterest expenses

     4,604        493        5,097  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,271        127        1,398  

Income tax expense

     248        27        275  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,023      $ 100      $ 1,123  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 650,068      $ 3,567      $ 653,635  
  

 

 

    

 

 

    

 

 

 

Note 9 – 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

 

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Table of Contents

Note 9 – Loans, allowance for loan losses and OREO (continued)

 

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

 

     As of:  
     March 31,      December 31,  
     2019      2018  

Commercial

   $ 99,327      $ 92,877  

Commercial real estate

     289,964        289,171  

Consumer

     85,289        86,191  

Residential

     66,052        66,358  
  

 

 

    

 

 

 

Total loans (1)

     540,632        534,597  

Less allowance for loan losses

     4,673        4,581  
  

 

 

    

 

 

 

Net loans

   $ 535,959      $ 530,016  
  

 

 

    

 

 

 

 

  (1)

Includes net deferred costs and premiums of $454 and $457 as of March 31, 2019 and December 31, 2018, 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.

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.

 

20


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Note 9 – Loans, allowance for loan losses and OREO (continued)

 

   

“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.

 

21


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Note 9 – Loans, allowance for loan losses and OREO (continued)

 

Loans on Non-Accrual Status  
( dollars in thousands )  
     As of  
     March 31,
2019
     December 31,
2018
 

Commercial

   $ 992      $ 973  

Commercial Real Estate:

 

Commercial Mortgages-Owner Occupied

     308        317  

Commercial Mortgages-Non-Owner Occupied

     629        173  

Commercial Construction

     —          —    

Consumer

     

Consumer Unsecured

     —          —    

Consumer Secured

     254        84  

Residential:

 

  

Residential Mortgages

     1,439        1,391  

Residential Consumer Construction

     —          —    
  

 

 

    

 

 

 

Totals

   $ 3,622      $ 2,939  
  

 

 

    

 

 

 

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 decreased to $2,253 on March 31, 2019 from $2,430 on December 31, 2018. The following table represents the changes in OREO balance during the three months ended March 31, 2019 and year ended December 31, 2018.

 

OREO Changes  
( dollars in thousands )  
     Three months ended
March 31, 2019
     Year ended
December 31,
2018
 

Balance at the beginning of the year (net)

   $ 2,430      $ 2,650  

Transfers from loans

     300        850  

Capitalized costs

     —          —    

Valuation adjustments

     (115      (185

Sales proceeds

     (349      (846

Loss on disposition

     (13      (39
  

 

 

    

 

 

 

Balance at the end of the period (net)

   $ 2,253      $ 2,430  
  

 

 

    

 

 

 

At March 31, 2019 and December 31, 2018, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held one residential real estate property carried on the books in other real estate owned at a value of $68 as of March 31, 2019 and four residential real estate properties carried on the books at a value of $156 in other real estate owned as of December 31, 2018.

 

22


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Note 9 – Loans, allowance for loan losses and OREO (continued)

 

     Impaired Loans  
     ( dollars in thousands)  
     As of and For the Three months Ended March 31, 2019  
2019    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 1,418      $ 1,933      $ —        $ 1,424      $ 11  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,514        2,613        —          2,464        44  

Commercial Mortgage Non-Owner Occupied

     629        645        —          380        7  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          —          —    

Consumer Secured

     86        86        —          87        1  

Residential

              

Residential Mortgages

     2,066        2,134        —          1,971        26  

Residential Consumer Construction

     —          —          —          —          —    

With An Allowance Recorded:

              

Commercial

   $ 53      $ 53      $ 37      $ 42      $ 1  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     33        124        27        36        2  

Commercial Mortgage Non-Owner Occupied

     17        17        12        54        —    

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          1        —    

Consumer Secured

     197        205        39        151        —    

Residential

              

Residential Mortgages

     305        317        51        340        4  

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              

Commercial

   $ 1,471      $ 1,986      $ 37      $ 1,466      $ 12  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,547        2,737        27        2,500        46  

Commercial Mortgage Non-Owner Occupied

     646        662        12        434        7  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          1        —    

Consumer Secured

     283        291        39        238        1  

Residential

              

Residential Mortgages

     2,371        2,451        51        2,311        30  

Residential Consumer Construction

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,318      $ 8,127      $ 166      $ 6,950      $ 96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


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Note 9 – Loans, allowance for loan losses and OREO (continued)

 

     Impaired Loans  
     ( dollars in thousands)  
     As of and For the Year Ended December 31, 2018  
2018    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 1,430      $ 1,922      $ —        $ 1,178      $ 24  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,414        2,511        —          2,421        167  

Commercial Mortgage Non-Owner Occupied

     131        132        —          403        8  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          —          —    

Consumer Secured

     88        88        —          184        6  

Residential

              

Residential Mortgages

     1,876        1,953        —          1,728        89  

Residential Consumer Construction

     —          —          —          —          —    

With An Allowance Recorded:

              

Commercial

   $ 31      $ 31      $ 15      $ 174      $ 3  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     39        132        36        352        3  

Commercial Mortgage Non-Owner Occupied

     90        90        20        82        6  

Commercial Construction

     —          —          —          85        —    

Consumer

              

Consumer Unsecured

     1        1        1        2        —    

Consumer Secured

     105        105        105        266        7  

Residential

              

Residential Mortgages

     375        390        61        263        11  

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              

Commercial

   $ 1,461      $ 1,953      $ 15      $ 1,352      $ 27  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,453        2,643        36        2,773        170  

Commercial Mortgage Non-Owner Occupied

     221        222        20        485        14  

Commercial Construction

     —          —          —          85        —    

Consumer

              

Consumer Unsecured

     1        1        1        2        —    

Consumer Secured

     193        193        105        450        13  

Residential

              

Residential Mortgages

     2,251        2,343        61        1,991        100  

Residential Consumer Construction

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,580      $ 7,355      $ 238      $ 7,138      $ 324  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Note 9 – 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 Three months Ended March 31, 2019
 
2019    Commercial      Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

           

Beginning Balance

   $ 1,136      $ 1,831     $ 956     $ 658     $ 4,581  

Charge-offs

     —          (6     (106     (21     (133

Recoveries

     1        —         12       2       15  

Provision

     129        32       29       20       210  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,266      $ 1,857     $ 891     $ 659     $ 4,673  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 37      $ 39     $ 39     $ 51     $ 166  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,229        1,818       852       608       4,507  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,266      $ 1,857     $ 891     $ 659     $ 4,673  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

           

Ending Balance: Individually evaluated for impairment

   $ 1,471      $ 3,193     $ 283     $ 2,371     $ 7,318  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     97,856        286,771       85,006       63,681       533,314  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 99,327      $ 289,964     $ 85,289     $ 66,052     $ 540,632  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

Note 9 – 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, 2018
 
2018    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

   $ 1,264     $ 1,738     $ 1,172     $ 578     $ 4,752  

Charge-offs

     (395     (230     (405     (34     (1,064

Recoveries

     113       4       60       —         177  

Provision

     154       319       129       114       716  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,136     $ 1,831     $ 956     $ 658     $ 4,581  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 15     $ 56     $ 106     $ 61     $ 238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,121       1,775       850       597       4,343  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,136     $ 1,831     $ 956     $ 658     $ 4,581  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,461     $ 2,674     $ 194     $ 2,251     $ 6,580  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     91,416       286,497       85,997       64,107       528,017  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 92,877     $ 289,171     $ 86,191     $ 66,358     $ 534,597  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

Note 9 – Loans, allowance for loan losses and OREO (continued)

 

     Age Analysis of Past Due Loans as of  
     March 31, 2019  
     ( dollars in thousands )  
2019    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than 90
Days
     Total Past
Due
     Current      Total
Loans
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 25      $ 29      $ 244      $ 298      $ 99,029      $ 99,327      $ —    

Commercial Real Estate:

                    

Commercial Mortgages- Owner Occupied

     456        —          299        755        98,701        99,456        —    

Commercial Mortgages-Non-Owner Occupied

     17        —          501        518        173,797        174,315        —    

Commercial Construction

     —          —          —          —          16,193        16,193        —    

Consumer:

                    

Consumer Unsecured

     187        —          —          187        8,354        8,541        —    

Consumer Secured

     531        17        197        745        76,003        76,748        —    

Residential:

                    

Residential Mortgages

     732        162        420        1,314        55,771        57,085        —    

Residential Consumer Construction

     —          —          —          —          8,967        8,967        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,948      $ 208      $ 1,661      $ 3,817      $ 536,815      $ 540,632      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Age Analysis of Past Due Loans as of  
     December 31, 2018  
     ( dollars in thousands )  
2018    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than 90
Days
     Total Past
Due
     Current      Total
Loans
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 54      $ 56      $ 220      $ 330      $ 92,547      $ 92,877      $ —    

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     209        —          307        516        97,910        98,426        —    

Commercial Mortgages-Non-Owner Occupied

     149        468        —          617        174,657        175,274        —    

Commercial Construction

     —          —          —          —          15,471        15,471        —    

Consumer:

                    

Consumer Unsecured

     8        1        —          9        8,745        8,754        —    

Consumer Secured

     369        44        —          413        77,024        77,437        —    

Residential:

                    

Residential Mortgages

     882        164        567        1,613        56,559        58,172        —    

Residential Consumer Construction

     —          —          —          —          8,186        8,186        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,671      $ 733      $ 1,094      $ 3,498      $ 531,099      $ 534,597      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

Note 9 – Loans, allowance for loan losses and OREO (continued)

 

     Credit Quality Information—by Class  
     March 31, 2019  
     ( dollars in thousands )  
2019    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 92,958      $ 312      $ 4,506      $ 1,551      $ —        $ 99,327  

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

     87,093        5,763        4,053        2,547        —          99,456  

Commercial Mortgages-Non-Owner Occupied

     170,980        2,175        422        738        —          174,315  

Commercial Construction

     15,613        580        —          —          —          16,193  

Consumer

                 

Consumer Unsecured

     8,493        39        9        —          —          8,541  

Consumer Secured

     76,222        118        88        320        —          76,748  

Residential:

                 

Residential Mortgages

     53,529        896        —          2,660        —          57,085  

Residential Consumer Construction

     8,967        —          —          —          —          8,967  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 513,855      $ 9,883      $ 9,078      $ 7,816      $ —        $ 540,632  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Credit Quality Information—by Class  
     December 31, 2018  
     ( dollars in thousands )  
2018    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 90,142      $ 818      $ 374      $ 1,543      $ —        $ 92,877  

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

     90,995        1,461        3,517        2,453        —          98,426  

Commercial Mortgages-Non -Owner Occupied

     172,342        2,285        332        315        —          175,274  

Commercial Construction

     14,892        579        —          —          —          15,471  

Consumer

                 

Consumer Unsecured

     8,747        —          6        1        —          8,754  

Consumer Secured

     77,092        —          88        257        —          77,437  

Residential:

                 

Residential Mortgages

     55,336        334        —          2,502        —          58,172  

Residential Consumer Construction

     8,186        —          —          —          —          8,186  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 517,732      $ 5,477      $ 4,317      $ 7,071      $ —        $ 534,597  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

Note 9 – Loans, allowance for loan losses and OREO (continued)

 

Troubled Debt Restructurings (TDR)

There were no loan modifications that would have been classified as TDRs during the three months ended March 31, 2019 and 2018.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended March 31, 2019 and 2018.

At March 31, 2019 and December 31, 2018, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

Note 10 – Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

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. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. 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.

 

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Note 10 – 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 11 – Recent accounting pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements The Company has been in discussions with its core processor to coordinate its plans for implementation and has contracted with an additional vendor to begin implementation. It is too early to determine the impact of ASU 2016-13. Management anticipates that it will be able to test a preliminary version of the model that the Company believes will comply with ASU 2016-13 in the third quarter of 2019.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

 

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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. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); 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 the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

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 “Impairment of a Loan”, 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”).

 

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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 for Loan Losses and Loan Loss Reserve” 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.

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 three other business activities: mortgage banking through the Bank’s Mortgage division (which we refer to as “Mortgage division”), investment services through the Bank’s Investment division (which we refer to as “Investment division”), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance business”). Of these three other business activities, only the Mortgage division is material to the Bank’s results and operations.

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, and Harrisonburg. 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.

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 non-interest income, including loan fees and service charges, and its non-interest 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.

 

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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 615 Church Street in Lynchburg (the “Church Street Branch”),

 

   

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”),

 

   

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

 

   

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

 

   

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”)

Limited Service Branches

 

   

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

 

   

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

 

   

Luxor Office Park LLC, 1430 Rolkin Court Suite 203, Charlottesville, Virginia (the “Charlottesville Branch”).

 

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Loan Production Offices

 

   

Residential mortgage loan production office located at the Forest Branch,

 

   

Commercial, consumer and mortgage loan production office located at the Charlottesville Branch.

The Investment division and the Insurance business operate primarily out of offices located at the Church Street Branch.

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 anticipates opening 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.

 

   

Real property located at 5 Village Highway (near the intersection of Routes 501 and 24) in Rustburg, Virginia . The structure on the property has been demolished and removed. The Bank does not anticipate opening a branch at this location prior to the fourth quarter of 2019.

 

   

Real property located at 550 Water Street, Charlottesville, Virginia . The Bank intends to relocate the Charlottesville Branch mentioned above in the second quarter of 2019.

The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit each property will be between $900,000 and $1,500,000 per location.

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.

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.

 

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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:

 

     March 31, 2019
(in thousands)
 

Commitments to extend credit

   $ 132,545  

Letters of Credit

     2,915  
  

 

 

 

Total

   $ 135,460  
  

 

 

 

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 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 March 31, 2019 and December 31, 2018 and the results of operations of Financial for the three-month periods ended March 31, 2019 and 2018. 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

March 31, 2019 as Compared to December 31, 2018

Total assets were $684,388,000 on March 31, 2019 compared with $674,897,000 at December 31, 2018, an increase of 1.41%. The increase in total assets was primarily funded from the growth in deposits.

Total deposits increased slightly from $612,043,000 as of December 31, 2018 to $616,744,000 on March 31, 2019, an increase of 0.77%. The increase resulted in large part from increases in non-interest- bearing demand deposits and an increase in time deposits. Noninterest bearing demand deposits increased slightly from $91,356,000 on December 31, 2018 to $93,624,000 on March 31, 2019. Time deposits increased slightly from $189,389,000 on December 31, 2018 to $191,272,000 on March 31, 2019.

 

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Total loans, excluding loans held for sale, increased to $540,632,000 on March 31, 2019 from $534,597,000 on December 31, 2018. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $535,959,000 on March 31, 2019 from $530,016,000 on December 31, 2018, an increase of 1.12%. 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):

 

     March 31, 2019     December 31, 2018  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 99,327        18.37   $ 92,877        17.37

Commercial Real Estate

     289,964        53.63     289,171        54.10

Consumer

     85,289        15.78     86,191        16.12

Residential

     66,052        12.22     66,358        12.41
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 540,632        100.00   $ 534,597        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (“OREO”) increased to $5,875,000 on March 31, 2019 from $5,369,000 on December 31, 2018. OREO decreased to $2,253,000 on March 31, 2019 from $2,430,000 on December 31, 2018. This decrease was due in large part to a downward adjustment of the carrying value of certain OREO resulting from a change in appraised value and the Bank’s ability to sell OREO properties during the three months ended March 31, 2019 and was offset in part by new foreclosures during the period. Non-performing loans increased from $2,939,000 at December 31, 2018 to $3,622,000 at March 31, 2019. As discussed in more detail below under “Results of Operations—Allowance 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.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2018, the Bank was carrying ten OREO properties on its books at a value of $2,430,000. During the three months ended March 31, 2019, the Bank acquired 3 additional OREO properties and disposed of 4 OREO properties, and as of March 31, 2019 the Bank is carrying 9 OREO properties at a value of $2,253,000. The OREO properties are available for sale and are being actively marketed.

The Bank had loans in the amount of $422,000 at March 31, 2019 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $424,000 at December 31, 2018. 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.

Cash and cash equivalents decreased to $48,740,000 on March 31, 2019 from $50,325,000 on December 31, 2018. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). The decrease in cash and cash equivalents occurred because loans increased more than deposits during the quarter ended March 31, 2019. Cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

 

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Securities held-to-maturity were flat, decreasing to $3,697,000 on March 31, 2019 from $3,700,000 on December 31, 2018. This slight 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 $53,497,000 on March 31, 2019, from $52,727,000 on December 31, 2018. The increase resulted from an increase in fair value related to a decrease in interest rates. The increase in fair value was partially offset by a decrease from the normal amortization of premiums and principal payments on mortgage-backed securities in the available-for-sale portfolio. During the three months ended March 31, 2019 the Bank received $444,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale. No proceeds were received from the sale of securities available-for-sale in the three months ended March 31, 2019. The Bank did not purchase any additional available-for-sale securities in during the same period.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $564,000 at March 31, 2019 and December 31, 2018. 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 March 31, 2019, Financial, on a consolidated basis, had liquid assets of $102,237,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $20,254,000 (representing current book value) of the available-for-sale securities are pledged as collateral with $11,837,000 pledged as security for public deposits, and $8,417,000 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 March 31, 2019. 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.

Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material negative impact on Financial’s short-term or long-term liquidity. Based in part on recent loan growth, the Bank is monitoring liquidity to ensure it is able to fund future loans.

 

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At March 31, 2019, the Bank had a leverage ratio of approximately 9.31%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 10.97% and a total risk-based capital ratio of approximately 11.78%. As of March 31, 2019 and December 31, 2018 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 March 31, 2019 and December 31, 2018:

Bank Level Only Capital Ratios

 

Analysis of Capital (in 000’s)    March 31,
2019
    December 31,
2018
             

Tier 1 capital

        

Common Stock

   $  3,742     $  3,742      

Surplus

     22,325       22,325      

Retained earnings

     36,921       35,985      
  

 

 

   

 

 

     

Total Tier 1 capital

   $  62,988     $  62,052      
  

 

 

   

 

 

     

Tier 2 capital

        

Allowance for loan losses

   $  4,673     $  4,581      

Total Tier 2 capital:

   $  4,673     $  4,581      
  

 

 

   

 

 

     

Total risk-based capital

   $  67,661     $  66,633      
  

 

 

   

 

 

     

Risk weighted assets

   $  574,387     $  564,184      

Average total assets

   $  676,473     $  670,879      
     Actual     Regulatory Benchmarks  
     March 31,
2019
    December 31,
2018
    For Capital
Adequacy
Purposes (1)
    For Well
Capitalized
Purposes
 

Capital Ratios:

        

Tier 1 capital to average total assets

     9.31     9.25     4.000     5.000

Common Equity Tier 1 capital

     10.97     11.00     7.000     6.500

Tier 1 risk-based capital ratio

     10.97     11.00     8.500     8.000

Total risk-based capital ratio

     11.78     11.81     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 March 31, 2019 would be slightly lower than those of the Bank because proceeds from the sale of the capital notes were contributed to the Bank and counted as equity at the Bank level.

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 result, the Bank is requited 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 capital ratio of 8.5% (inclusive of the capital conservation buffer) The capital conservation buffer will limit capital distributions, stock redemptions, and certain discretionary bonuses. 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.

 

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Recently enacted legislation directs the federal bank regulatory agencies to develop a “Community Bank Leverage Ratio,” calculated by dividing tangible equity capital by average consolidated total assets, of not less than 8% and not more than 10%. On November 21, 2018, pursuant to the Regulatory Relief Act, the federal banking agencies issued a notice of proposed rulemaking proposing a community bank leverage ratio of 9%. The comment period for the proposed rule has since closed, but the regulation is not yet finalized. The final community bank ratio is not known at this time.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

Earnings Summary

Financial had net income including all operating segments of $1,234,000 for the three months ended March 31, 2019, compared to $1,123,000 for the comparable period in 2018. Basic and diluted earnings per common share for the three months ended March 31, 2019 was $0.28, compared to basic and diluted earnings per share of $0.26 for the three months ended March 31, 2018.

The increase in net income for the three months ended March 31, as compared to the prior year was due primarily to an increase in interest income and non-interest income and was partially offset by an increase in interest expense and non-interest expense. Non-interest expense increased in large part because of the Bank’s continued emphasis on growth in Charlottesville, Harrisonburg, Roanoke, and, most recently, Lexington. These efforts resulted primarily in increases in personnel, occupancy, equipment, and other outside expenses. Additional expenses related to properties held in OREO also contributed to an increase in noninterest expenses when comparing the two quarters.

These operating results represent an annualized return on average stockholders’ equity of 8.73% for the three months ended March 31, 2019, compared with 8.62% for the three months ended March 31, 2018. This increase for the three months was a direct result of the increase in net income as compared to the comparable period in 2018. The Company had an annualized return on average assets of 0.74% for the three months ended March 31, 2019 compared with 0.72% for the same period in 2018. The increase for the three months ended March 31, 2019 largely resulted from an increase in net income.

See “ Non-Interest Income” below for mortgage business segment discussion.

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $7,234,000 for the three months ended March 31, 2019 from $6,155,000 for the same period in 2018, an increase of 17.53%. Interest income increased primarily because of increased balances in the loan portfolio and increases in interest rates tied to floating rate loans. The average rate received on earning assets increased from 4.22% to 4.62% for the three months ended March 31, 2019 from the comparable period in 2018. The rate on total average earning assets increased for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 primarily because of multiple recent short term rate increases by the FOMC, which, as noted above, resulted in an increase in the rates paid by borrowers on floating rate loans.

Interest expense increased to $1,104,000 for the three months ended March 31, 2019 from $824,000 for the same period in 2018, an increase of 33.98%. The increase in interest expense resulted primarily from an increase on the rates paid on and balances of deposits. The Bank’s average rate paid on interest bearing deposits was 0.82% during the three months ended March 31, 2019 as compared to 0.64% for the same period in 2018.

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 months ended March 31, 2019 was $6,130,000 as compared to $5,331,000 for the same period in 2018, an increase of 14.99%. The increase in net interest income for the three months ended March 31, 2019 as

 

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compared with the comparable period in 2018 primarily is attributable to the increase in interest income resulting from increased loan balances and the previously discussed increase in short term rates by the FOMC. The net interest margin was 3.92% for the three months ended March 31, 2019 as compared with 3.65% for the same period in 2018.

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

Non-Interest Income

Non-interest 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 and the Bank’s ownership interest in a title insurance agency. Non-interest income increased to $1,219,000 for the three months ended March 31, 2019 from $1,186,000 for the three months ended March 31, 2018.

This increase for the three months ended March 31, 2019 as compared to the same period last year was due primarily due to an increase in gains on sales of loans held for sale from $620,000 for the three months ended March 31, 2018 to $691,000 for the period ended March 31, 2019. Despite lower volume of mortgage originations, the Bank was able to achieve better pricing from purchasers as a result of lower long-term interest rates. This was offset in part by a slight decrease in service charges, fees, and commissions from the comparable three-month period ended March 31, 2018.

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 $11,223,000, or 54.29% of the total mortgage loans originated in the three months ended March 31, 2019 as compared to $16,085,000, or 63.96% of the total mortgage loans originated in the same periods in 2018. Loan originations related to refinancing were $9,448,000 for the three months ended March 31, 2019 as compared to $9,064,000 for the comparable three months in 2018. The decrease in the volume of purchase mortgage originations for the three months of 2019 resulted from lower housing inventory in the Bank’s markets. Management anticipates that purchase mortgage originations will continue to represent a majority of mortgage originations as they have in the recent past.

Despite a slight decrease in the first quarter of 2019, Management anticipates that residential mortgage rates will remain flat or trend slightly upward during the remainder of 2019. 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 and Charlottesville, and Blacksburg, will result in strong mortgage originations through the remainder of 2019. In addition, Management believes that regulatory pressure may result in a decreased number of competitors to the Mortgage division and this could result in an increase in market share. Management also believes that in the event that interest rates rise, revenue from the mortgage segment could be 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 2019.

 

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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 and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2019.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2019 increased to $5,599,000 from $5,097,000, increases of 9.85% from the comparable period in 2018. This increase resulted from increases for personnel expense primarily related to the expansion into Lexington and Roanoke, as well as increases in occupancy, equipment, and other real estate expense. Total personnel expense was $2,928,000 for the three-month period ended March 31, 2019 as compared to $2,713,000 for the same period in 2018.

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 provided $210,000 to the allowance for loan losses for the three-month period ended March 31, 2019. This compares to a provision of $22,000 for the comparable period in 2018, representing an increase of 854.55%.

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 $133,000 for the three months ended March 31, 2019 as compared to $240,000 for the comparable period in 2018. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three months ended March 31, 2019, the Bank had recoveries of charged-off loans of $15,000 as compared with $137,000 for the comparable periods in 2018.

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 March 31, 2019 decreased slightly as compared to December 31, 2018.

As shown in the table below, the total balance in the allowance increased, from $4,581,000 as of December 31, 2018 to $4,673,000 on March 31, 2019. The allowance for loan losses as a percent of loans remained consistent at 0.86% as of both March 31, 2019 and December 31, 2018. Increased loan balances during the three months led to an increase in the balance of the general reserve as of March 31, 2019 as compared to December 31, 2018, but this increase was more than offset by a decrease in specific reserves when comparing the same periods. The allowance for loan losses as a percent of unimpaired loans increased slightly to 0.88% as of March 31, 2019 from 0.87% as of December 31, 2018 due to an overall increase in total loan balances. The general reserve as a percentage of unimpaired loan balances

 

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increased slightly to 0.85% as of March 31, 2109 as compared to 0.82% as of December 31, 2018. This increase was primarily due to a slight increase in the rate of qualitative factors assessed in the general reserve based on management’s evaluation of those factors at March 31, 2019. Management believes that the current allowance for loan losses is adequate.

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 Three Months Ended March 31, 2019  
2019    Commercial      Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

           

Beginning Balance

   $ 1,136      $ 1,831     $ 956     $ 658     $ 4,581  

Charge-offs

     —          (6     (106     (21     (133

Recoveries

     1        —         12       2       15  

Provision

     129        32       29       20       210  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,266      $ 1,857     $ 891     $ 659     $ 4,673  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 37      $ 39     $ 39     $ 51     $ 166  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,229        1,818       852       608       4,507  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,266      $ 1,857     $ 891     $ 659     $ 4,673  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

           

Ending Balance: Individually evaluated for impairment

   $ 1,471      $ 3,193     $ 283     $ 2,371     $ 7,318  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     97,856        286,771       85,006       63,681       533,314  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 99,327      $ 289,964     $ 85,289     $ 66,052     $ 540,632  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 2018  
2018    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

   $ 1,264     $ 1,738     $ 1,172     $ 578     $ 4,752  

Charge-offs

     (395     (230     (405     (34     (1,064

Recoveries

     113       4       60       —         177  

Provision

     154       319       129       114       716  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,136     $ 1,831     $ 956     $ 658     $ 4,581  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 15     $ 56     $ 106     $ 61     $ 238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,121       1,775       850       597       4,343  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,136     $ 1,831     $ 956     $ 658     $ 4,581  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,461     $ 2,674     $ 194     $ 2,251     $ 6,580  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     91,416       286,497       85,997       64,107       528,017  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 92,877     $ 289,171     $ 86,191     $ 66,358     $ 534,597  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
March 31,
(in thousands)
 
     2019      2018  

Balance, beginning of period

   $ 4,581      $ 4,752  

Provision for loan losses

     210        22  

Loans charged off

     (133      (240

Recoveries of loans charged off

     15        137  
  

 

 

    

 

 

 

Net (charge offs)

     (118      (103
  

 

 

    

 

 

 

Balance, end of period

   $ 4,673      $ 4,671  
  

 

 

    

 

 

 

No nonaccrual loans were excluded from the impaired loan disclosures at March 31, 2019 and December 31, 2018. If interest on these loans had been accrued, such income cumulatively would have approximated $229,000 and $198,000 on March 31, 2019 and December 31, 2018, 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.

 

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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.

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.

 

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“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 months ended March 31, 2019, Financial had an income tax expense of $306,000 as compared to $275,000 for the three months ended March 31, 2018. This represents an effective tax rate of 19.87% for the three months ended March 31, 2019 as compared with 19.67% for the three months ended March 31, 2018. Our effective rate was lower than the statutory corporate tax rate in all periods because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance and certain tax free municipal securities.

 

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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended March 31, 2019 and 2018

(dollars in thousands)

 

     2019     2018  
     Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates Earned/
Paid
    Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
 

ASSETS

              

Loans, including fees (1) (2)

   $ 537,937     $ 6,622        4.99   $ 497,177     $ 5,649        4.61

Loans held for sale

     2,004       32        6.68     2,439       25        4.16

Fed funds sold

     20,628       121        2.36     18,506       67        1.49

Interest bearing bank balances

     14,194       91        2.60     10,000       35        1.42

Securities (3)

     58,770       351        2.42     62,673       372        2.40

Federal agency equities

     1,346       18        5.42     1,401       8        2.32

CBB equity

     116       —          —         116       —          —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     634,995       7,235        4.62     592,312       6,156        4.22
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,623          (4,708     

Non-earning assets

     47,974            42,344       
  

 

 

        

 

 

      

Total assets

   $ 678,346          $ 629,948       
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 233,044     $ 253        0.44   $ 202,198     $ 139        0.28

Savings

     98,306       53        0.22     103,485       55        0.22

Time deposits

     190,144       748        1.60     182,770       581        1.29
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     521,494       1,054        0.82     488,453       773        0.64

Other borrowed funds

              

FHLB borrowings

     —         —          —         222       1        1.83

Capital Notes

     5,000       50        4.06     5,000       50        4.06
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     526,494       1,104        0.85     493,675       824        0.68
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     92,572            82,227       

Other liabilities

     1,963            1,199       
  

 

 

        

 

 

      

Total liabilities

     621,029            577,101       

Stockholders’ equity

     57,317            52,847       
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 678,346          $ 629,948       
  

 

 

        

 

 

      

Net interest income

     $ 6,131          $ 5,332     
    

 

 

        

 

 

    

Net interest margin

          3.92          3.65
       

 

 

        

 

 

 

Interest spread

          3.77          3.54
       

 

 

        

 

 

 

 

  (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 first quarter of 2019 and 2018.

 

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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 March 31, 2019, 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.

 

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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, 2018, filed with the Securities and Exchange Commission on March 22, 2019. 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, 2018.

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

 

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Table of Contents

Item 5. Other Information

Not applicable

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 May 10, 2019
31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 10, 2019
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 May 10, 2019
101    The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of March 31, 2019 and December 31, 2018; (ii) Consolidated Statements of Income (unaudited) for the three months ended March 31, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2019 and 2018 (iv) Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018 (v) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2019 and 2018; (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: May 10, 2019     By   /s/ Robert R. Chapman III
     

Robert R. Chapman III, President

(Principal Executive Officer)

 

Date: May 10, 2019     By   /s/ J. Todd Scruggs
     

J. Todd Scruggs, Secretary and Treasurer

(Principal Financial Officer and Principal

Accounting Officer)

 

 

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Index of 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 May 10, 2019
31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 10, 2019
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 May 10, 2019
101    The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of March 31, 2019 and December 31, 2018; (ii) Consolidated Statements of Income (unaudited) for the three months ended March 31, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2019 and 2018 (iv) Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018 (v) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2019 and 2018; (vi) Notes to Unaudited Consolidated Financial Statements.

 

50

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