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BANK OF THE JAMES FINANCIAL GROUP INC - Quarter Report: 2014 September (Form 10-Q)

Form 10-Q
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 September 30, 2014

 

 

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    ¨  Yes    x  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: 3,364,874 shares of Common Stock, par value $2.14 per share, were outstanding at November 7, 2014.

 

 

 


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

     50   
 

Item 4.

 

Controls and Procedures

     50   

PART II – OTHER INFORMATION

     50   
 

Item 1.

 

Legal Proceedings

     50   
 

Item 1A.

 

Risk Factors

     50   
 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     50   
 

Item 3.

 

Defaults Upon Senior Securities

     50   
 

Item 4.

 

Mine Safety Disclosures

     50   
 

Item 5.

 

Other Information

     50   
 

Item 6.

 

Exhibits

     51   

SIGNATURES

     52   


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) (2014 unaudited)

 

     9/30/2014     12/31/2013  

Assets

    

Cash and due from banks

   $ 14,850      $ 16,671   

Securities held-to-maturity (fair value of $2,702 in 2014 and $3,740 in 2013)

     2,530        3,537   

Securities available-for-sale, at fair value

     33,940        46,091   

Restricted stock, at cost

     1,289        1,428   

Loans, net of allowance for loan losses of $4,874 in 2014 and $5,186 in 2013

     373,390        339,994   

Loans held for sale

     2,003        1,921   

Premises and equipment, net

     8,177        8,408   

Software, net

     384        268   

Interest receivable

     1,219        1,360   

Cash value - bank owned life insurance

     9,443        9,230   

Other real estate owned, net of valuation allowance

     1,160        1,451   

Income taxes receivable

     415        448   

Deferred tax asset, net

     1,836        2,628   

Other assets

     1,050        1,076   
  

 

 

   

 

 

 

Total assets

   $ 451,686      $ 434,511   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest bearing demand

   $ 77,507      $ 63,256   

NOW, money market and savings

     224,257        226,709   

Time

     97,067        97,433   
  

 

 

   

 

 

 

Total deposits

     398,831        387,398   

Federal funds purchased

     5,976        4,108   

FHLB borrowings

     2,000        2,000   

Capital notes

     10,000        10,000   

Interest payable

     58        65   

Other liabilities

     1,385        1,168   
  

 

 

   

 

 

 

Total liabilities

   $ 418,250      $ 404,739   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 3,364,874 as of September 30, 2014 and December 31, 2013

   $ 7,201      $ 7,201   

Preferred stock; authorized 1,000,000 shares; 0 issued and outstanding as of September 30, 2014 and December 31, 2013

     —          —     

Additional paid-in-capital

     22,868        22,868   

Accumulated other comprehensive (loss)

     (883     (2,421

Retained earnings

     4,250        2,124   
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 33,436      $ 29,772   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 451,686      $ 434,511   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

1


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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

 

     For the Three Months      For the Nine Months  
     Ended September 30,      Ended September 30,  
     2014      2013      2014      2013  

Interest Income

           

Loans

   $ 4,453       $ 4,213       $ 12,909       $ 12,575   

Securities

           

US Government and agency obligations

     172         182         526         544   

Mortgage backed securities

     13         25         71         39   

Municipals

     71         124         291         417   

Dividends

     5         4         37         34   

Other (Corporates)

     8         16         34         44   

Federal Funds sold

     4         9         13         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     4,726         4,573         13,881         13,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

           

NOW, money market savings

     125         121         364         369   

Time Deposits

     281         316         879         956   

Federal Funds purchased

     2         —           4         —     

FHLB borrowings

     19         19         57         57   

Reverse repurchase agreements

     —           —           1         —     

Capital notes

     150         150         450         450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     577         606         1,755         1,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     4,149         3,967         12,126         11,845   

Provision for loan losses

     —           —           55         290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,149         3,967         12,071         11,555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other operating income

           

Mortgage fee income

     518         295         1,214         954   

Service charges, fees and commissions

     322         351         1,036         979   

Increase in cash value of life insurance

     70         75         213         226   

Other

     13         37         54         74   

Gain on sale of available-for-sale securities, net

     6         11         86         405   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     929         769         2,603         2,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other operating expenses

           

Salaries and employee benefits

     1,978         1,755         5,767         5,257   

Occupancy

     287         302         912         892   

Equipment

     322         259         937         760   

Supplies

     92         84         294         267   

Professional, data processing, and other outside expense

     593         582         1,768         1,712   

Marketing

     113         93         342         274   

Credit expense

     80         55         167         174   

Other real estate expenses

     9         60         166         400   

FDIC insurance expense

     77         143         184         430   

Other

     188         235         568         604   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expenses

     3,739         3,568         11,105         10,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,339         1,168         3,569         3,423   

Income tax expense

     425         355         1,107         1,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 914       $ 813       $ 2,462       $ 2,398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - basic

     3,364,874         3,352,725         3,364,874         3,352,725   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     3,364,874         3,356,874         3,364,874         3,354,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share - basic

   $ 0.27       $ 0.24       $ 0.73       $ 0.72   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share - diluted

   $ 0.27       $ 0.24       $ 0.73       $ 0.71   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to these consolidated financial statements

 

2


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine months ended September 30, 2014 and 2013

(dollar amounts in thousands) (unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine months
Ended September 30,
 
     2014     2013     2014     2013  

Net Income

   $ 914     $ 813     $ 2,462     $ 2,398  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Unrealized gains (losses) on securities available-for-sale net of deferred taxes of $33 and $(319) for the three month periods and $821 and $(1,290) for the nine month periods ended September 30, 2014 and 2013 respectively.

     61       (621     1,595       (2,506

Reclassification adjustment for (gains) included in net income (1), net of taxes of $(2) and $(4) for the three month periods and $(29) and $(138) for the nine month periods ended September 30, 2014 and 2013 respectively (2)

     (4     (7     (57     (267
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     57       (628     1,538       (2,773
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 971     $ 185     $ 4,000     $ (375
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Gains are included in net “gain on sale of available-for-sale securities” on the consolidated statements of income.
(2) The tax effect on these reclassifications is reflected in “income tax expense” on the consolidated statements of income.

See accompanying notes to these consolidated financial statements

 

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Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine months ended September 30, 2014 and 2013

(dollar amounts in thousands) (unaudited)

 

     Nine Months Ended September 30,  
     2014     2013  

Cash flows from operating activities

    

Net Income

   $ 2,462     $ 2,398  

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

    

Depreciation

     546       521  

Net amortization and accretion of premiums and discounts on securities

     199       260  

(Gain) on sale of available for sale securities

     (86     (405

(Gain) on sale of assets

     (3     —     

Provision for loan losses

     55       290  

(Gain) loss on sale of other real estate owned

     (1     40  

Impairment of other real estate owned

     178       304  

(Increase) decrease in loans held-for-sale

     (82     105  

(Increase) in cash value of life insurance

     (213     (226

Decrease in interest receivable

     141       248  

Decrease in other assets

     26       204  

Decrease in income taxes receivable

     33       2  

(Decrease) in interest payable

     (7     (3

Increase in other liabilities

     217       256  
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 3,465     $ 3,994  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of securities held to maturity

   $  —       $ (485

Proceeds from maturities and calls of securities held to maturity

     1,000       —     

Purchases of securities available for sale

     (3,139     (25,162

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

     120       2,188  

Proceeds from sale of securities available for sale

     17,394       22,418  

Redemption of Federal Home Loan Bank stock

     139       110  

Proceeds from sale of other real estate owned

     318       777  

Origination of loans, net of principal collected

     (33,655     (11,550

Proceeds from sale of fixed assets

     3       —     

Purchases of premises and equipment

     (431     (616
  

 

 

   

 

 

 

Net cash (used in) investing activities

   $ (18,251   $ (12,320
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase (decrease) in deposits

   $ 11,433     $ (5,887

Net increase in federal funds purchased

     1,868       —     

Dividends paid to common stockholders

     (336     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   $ 12,965     $ (5,887
  

 

 

   

 

 

 

(Decrease) in cash and cash equivalents

     (1,821     (14,213

Cash and cash equivalents at beginning of period

   $ 16,671     $ 40,998  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 14,850     $ 26,785  
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to foreclosed assets

   $ 459     $ 710  

Portion of foreclosed assets financed

     255       347  

Fair value adjustment for securities

     2,330       (4,201
  

 

 

   

 

 

 

Cash transactions

    

Cash paid for interest

   $ 1,762     $ 1,835  

Cash paid for taxes

     1,075       1,023  
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

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Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

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

 

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

Balance at December 31, 2012

     3,352,725       $ 7,175       $ 22,806       $ (936   $ 568      $ 29,613   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           2,398        —          2,398   

Other Comprehensive Loss

     —           —           —           —          (2,773     (2,773
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     3,352,725       $ 7,175       $ 22,806       $ 1,462      $ (2,205   $ 29,238   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     3,364,874       $ 7,201       $ 22,868       $ 2,124      $ (2,421   $ 29,772   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           2,462        —          2,462   

Dividends paid on common stock (total of $0.10 per share year-to-date)

     —           —           —           (336     —          (336

Other Comprehensive Income

     —           —           —           —          1,538        1,538   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

     3,364,874       $ 7,201       $ 22,868       $ 4,250      $ (883   $ 33,436   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

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Table of Contents

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of and for the three and nine months ended September 30, 2014 and 2013 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, 2013. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2013 included in Financial’s Annual Report on Form 10-K. Results for the three and nine month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

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.

Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb loss in the existing 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 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 Bank’s policies with respect to the methodology for determining the allowance for loan losses involve a higher degree of complexity and require management to make subjective judgments that often require assumptions or estimates about uncertain matters. These critical policies and their assumptions are periodically reviewed with the Board of Directors.

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.

 

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Note 3 – Earnings Per Share

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of 1999 Financial (the “1999 Plan”) are considered in calculating dilutive earnings per share. The following is a summary of the earnings per share calculation for the three and nine months ended September 30, 2014 and 2013.

 

    Three Months Ended     Year to date  
    September 30,     September 30,  
    2014     2013     2014     2013  

Net income

  $ 914,000      $ 813,000      $ 2,462,000      $ 2,398,000   

Weighted average number of shares

    3,364,874        3,352,725        3,364,874        3,352,725   

Options affect of incremental shares

    —          4,149        —          1,565   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average diluted shares

    3,364,874        3,356,874        3,364,874        3,354,290   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic EPS (weighted avg shares)

  $ 0.27      $ 0.24      $ 0.73      $ 0.72   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS (Including Option Shares)

  $ 0.27      $ 0.24      $ 0.73      $ 0.71   
 

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the incremental shares associated with option shares that were not included in calculating the diluted earnings because their effect was anti-dilutive:

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Incremental shares excluded from calculating diluted EPS because their effect was anti-dilutive

     110,147         113,294         110,645         168,069   

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)

 

Stock option plan activity for the nine months ended September 30, 2014 is summarized below:

 

    Shares     Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Life (in years)
    Average
Intrinsic
Value
 

Options outstanding, January 1, 2014

    111,371     $ 10.73      

Granted

    —          —         

Exercised

    —          —         

Forfeited

    (1,224     10.23      
 

 

 

       

Options outstanding, September 30, 2014

    110,147       10.74       0.8     $  —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Options exercisable, September 30, 2014

    110,147     $ 10.74       0.8     $  —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Intrinsic value is calculated by subtracting the exercise price of option shares from the market price of underlying shares as of September 30, 2014 and multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is greater than the market price on a given date.

All compensation expense related to the foregoing stock option plan has been recognized. The Company’s ability to grant additional options shares under the 1999 Plan has expired.

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

 

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Note 5 – Fair Value Measurements (continued)

 

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.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, 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 September 30, 2014  

Description

  Balance as of
September 30,
2014
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

  $ 3,797      $ —        $ 3,797      $ —     

US agency obligations

    17,789        —          17,789        —     

Mortgage-backed securities

    1,951        —          1,951        —     

Municipals

    8,403        —          8,403        —     

Other (corporates)

    2,000        —          2,000        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 33,940      $ —        $ 33,940      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 
          Carrying Value at December 31, 2013  

Description

  Balance as of
December 31,
2013
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

  $ 3,611      $ —        $ 3,611      $ —     

US agency obligations

    20,108        —          20,108        —     

Mortgage-backed securities

    5,311        —          5,311        —     

Municipals

    15,138        —          15,138        —     

Other (corporates)

    1,923        —          1,923        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 46,091      $ —        $ 46,091      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

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. 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, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over one year old, then the fair 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.

 

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Note 5 – Fair Value Measurements (continued)

 

Loans held for sale

Loans held for sale are carried at 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 September 30, 2014. Gains and losses on the sale of loans are recorded within mortgage fee income 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 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.

Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The carrying values of all OREO properties are considered to be 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 September 30, 2014  

Description

  Balance as of
September 30,
2014
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable

Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Impaired loans*

  $ 4,842      $ —        $ —        $ 4,842   

Loans held for sale

    2,003        —          2,003        —     

Other real estate owned

    1,160        —          —          1,160   

 

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

 

          Carrying Value at December 31, 2013  

Description

  Balance as of
December 31,
2013
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Impaired loans*

  $ 4,307      $ —        $ —        $ 4,307   

Loans held for sale

    1,921        —          1,921        —     

Other real estate owned

    1,451        —          —          1,451   

 

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

 

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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 September 30, 2014
    (dollars in thousands)
    Fair
Value
     Valuation Technique(s)    Unobservable Input    Range (Weighted
Average)

Assets

          

Impaired loans

  $ 4,842       Discounted appraised value    Selling cost    5% - 10% (6%)
        Discount for lack of
marketability and
age of appraisal
   0% - 25% (15%)

OREO

    1,160       Discounted appraised value    Selling cost    5% - 10% (6%)
        Discount for lack of
marketability and
age of appraisal
   0% - 25% (15%)

Financial Instruments

Cash, cash equivalents and Federal Funds sold

The carrying amounts of cash and short-term instruments approximate fair values.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain fixed rate loans are based on quoted market prices of similar loans adjusted for differences in loan characteristics. Fair values for other loans such as commercial real estate and commercial and industrial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated as described above. The carrying values of all loans are considered to be Level 3.

Bank Owned Life Insurance (BOLI)

The carrying amount approximates fair value. The carrying values of all BOLI is considered to be Level 2.

 

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Note 5 – Fair Value Measurements (continued)

 

Deposits

Fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed rate certificates of deposit are estimated using discounted cash flow analyses that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying values of all deposits are considered to be Level 2.

FHLB borrowings

The fair value of FHLB borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. The carrying values of all FHLB borrowings are considered to be Level 2.

Short-term borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate fair value. The carrying values of all short term borrowings are considered to be Level 2.

Capital notes

Fair values of capital notes are based on market prices for debt securities having similar maturity and interest rate characteristics. The carrying values of all capital notes are considered to be Level 2.

Accrued interest

The carrying amounts of accrued interest approximate fair value. The carrying values of all accrued interest is considered to be Level 2.

Off-balance sheet credit-related instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Fair value of off-balance sheet credit-related instruments were deemed to be immaterial at September 30, 2014 and December 31, 2013 and therefore are not included in the table below.

 

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Note 5 – Fair Value Measurements (continued)

 

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments are as follows (in thousands):

 

            Fair Value Measurements at September 30, 2014 using  
     Carrying
Amounts
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Assets

              

Cash and due from banks

   $ 14,850       $ 14,850       $ —         $ —         $ 14,850   

Securities

              

Available-for-sale

     33,940         —           33,940         —           33,940   

Held-to-maturity

     2,530         —           2,702         —           2,702   

Loans, net

     373,390         —           —           378,841         378,841   

Loans held for sale

     2,003         —           2,003         —           2,003   

Interest receivable

     1,219         —           1,219         —           1,219   

BOLI

     9,443         —           9,443         —           9,443   

Liabilities

              

Deposits

   $ 398,831       $ —         $ 400,006       $ —         $ 400,006   

FHLB borrowings

     2,000         —           2,009         —           2,009   

Federal funds purchased

     5,976         5,976         —           —           5,976   

Capital notes

     10,000         —           10,045         —           10,045   

Interest payable

     58         —           58         —           58   

 

            Fair Value Measurements at December 31, 2013 using  
     Carrying
Amounts
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Assets

              

Cash and due from banks

   $ 16,671       $ 16,671       $ —         $ —         $ 16,671   

Securities

              

Available-for-sale

     46,091         —           46,091         —           46,091   

Held-to-maturity

     3,537         —           3,740         —           3,740   

Loans, net

     339,994         —           —           346,658         346,658   

Loans held for sale

     1,921         —           1,921         —           1,921   

Interest receivable

     1,360         —           1,360         —           1,360   

BOLI

     9,230         —           9,230         —           9,230   

Liabilities

              

Deposits

   $ 387,398       $ —         $ 388,363       $ —         $ 388,363   

FHLB borrowings

     2,000         —           2,018         —           2,018   

Federal funds purchased

     4,108         4,108         —           —           4,108   

Capital notes

     10,000         —           10,091         —           10,091   

Interest payable

     65         —           65         —           65   

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time Financial’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of Financial’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on-balance-sheet and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment; a significant liability that is not considered a financial liability is accrued post-retirement benefits. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Financial assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of Financial’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to Financial. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.

Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate Financial’s overall interest rate risk.

Note 6 – Capital Notes

During the third quarter of 2012, Financial closed the private placement of unregistered debt securities (the “2012 Offering”) pursuant to which Financial issued $10,000,000 in principal of notes (the “2012 Notes”). The 2012 Notes have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The notes mature on April 1, 2017, but are subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders. Financial used $7,000,000 of the proceeds from the 2012 Offering in April 2012 to pay, on maturity, the principal due on notes issued in 2009.

 

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Note 7 - Investments

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of September 30, 2014 and December 31, 2013 (amounts in thousands):

 

     September 30, 2014  
     Amortized
Costs
     Gross Unrealized     Fair Value  
        Gains      (Losses)    

Held-to-Maturity

          

US agency obligations

   $ 2,530       $ 172       $ —        $ 2,702   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-Sale

          

US Treasuries

   $ 3,914       $ —         $ (117   $ 3,797   

US agency obligations

     18,859         —           (1,070     17,789   

Mortgage-backed securities

     2,043         —           (92     1,951   

Municipals

     8,425         109         (131     8,403   

Other (corporates)

     2,035         —           (35     2,000   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 35,276       $ 109       $ (1,445   $ 33,940   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2013  
     Amortized
Costs
     Gross Unrealized     Fair Value  
        Gains      (Losses)    

Held-to-Maturity

          

US agency obligations

   $ 3,537       $ 203       $ —        $ 3,740   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-Sale

          

US Treasuries

   $ 3,907       $ —         $ (296   $ 3,611   

US agency obligations

     22,544         —           (2,436     20,108   

Mortgage-backed securities

     5,450         11         (150     5,311   

Municipals

     15,845         35         (742     15,138   

Other (corporates)

     2,011         —           (88     1,923   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 49,757       $ 46       $ (3,712   $ 46,091   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Note 7 – Investments (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 September 30, 2014 and December 31, 2013 (amounts in thousands):

 

     Less than 12 months      More than 12 months      Total  

September 30, 2014

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

Description of securities

                 

US Treasuries

   $ —         $ —         $ 3,797       $ 117       $ 3,797       $ 117   

U.S. agency obligations

     994         6         16,795         1,064         17,789         1,070   

Mortgage-backed securities

     —           —           1,951         92         1,951         92   

Municipals

     1,510         17         4,348         114         5,858         131   

Other (corporates)

     1,004         11         996         24         2,000         35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,508       $ 34       $ 27,887       $ 1,411       $ 31,395       $ 1,445   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      More than 12 months      Total  

December 31, 2013

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

Description of securities

                 

US Treasuries

   $ 3,611       $ 296       $ —         $ —         $ 3,611       $ 296   

U.S. agency obligations

     14,087         1,473         5,021         963         19,108         2,436   

Mortgage-backed securities

     4,830         150         —           —           4,830         150   

Municipals

     11,163         574         1,479         168         12,642         742   

Other (corporates)

     1,923         88         —              1,923         88   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,614       $ 2,581       $ 6,500       $ 1,131       $ 42,114       $ 3,712   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

At September 30, 2014, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of September 30, 2014, the Bank owned 31 securities that were being evaluated for other than temporary impairment. Eight of these securities were S&P rated AAA, 22 were S&P rated AA, and one was S&P rated A. As of September 30, 2014, 15 of these securities were direct obligations of the U.S. government or government sponsored entities, 14 were municipal issues, and two were investments in domestic corporate issued securities.

 

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Table of Contents

Note 7 – Investments (continued)

 

Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because the Bank expects to recover the entire amortized cost basis, no declines currently are deemed to be other-than-temporary.

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 fee-based 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.

 

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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 and nine months ended September 30, 2014 and 2013 was as follows (dollars in thousands):

Business Segments

 

     Community
Banking
     Mortgage     Total  

Nine months ended September 30, 2014

       

Net interest income

   $ 12,126       $  —        $ 12,126   

Provision for loan losses

     55         —          55   
  

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     12,071         —          12,071   

Noninterest income

     1,389         1,214        2,603   

Noninterest expenses

     10,071         1,034        11,105   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     3,389         180        3,569   

Income tax expense

     1,044         63        1,107   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 2,345       $ 117      $ 2,462   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 449,623       $ 2,063      $ 451,686   
  

 

 

    

 

 

   

 

 

 

Nine months ended September 30, 2013

       

Net interest income

   $ 11,845       $  —        $ 11,845   

Provision for loan losses

     290         —          290   
  

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     11,555         —          11,555   

Noninterest income

     1,684         954        2,638   

Noninterest expenses

     10,006         764        10,770   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     3,233         190        3,423   

Income tax expense

     960         65        1,025   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 2,273       $ 125      $ 2,398   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 434,493       $ 879      $ 435,372   
  

 

 

    

 

 

   

 

 

 
     Community
Banking
     Mortgage     Total  

Three months ended September 30, 2014

       

Net interest income

   $ 4,149       $  —        $ 4,149   

Provision for loan losses

     —           —          —     
  

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     4,149         —          4,149   

Noninterest income

     411         518        929   

Noninterest expenses

     3,224         515        3,739   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     1,336         3        1,339   

Income tax expense

     409         16        425   
  

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 927       $ (13   $ 914   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 449,623       $ 2,063      $ 451,686   
  

 

 

    

 

 

   

 

 

 

Three months ended September 30, 2013

       

Net interest income

   $ 3,967       $  —        $ 3,967   

Provision for loan losses

     —           —          —     
  

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,967         —          3,967   

Noninterest income

     474         295        769   

Noninterest expenses

     3,376         192        3,568   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     1,065         103        1,168   

Income tax expense

     332         23        355   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 733       $ 80      $ 813   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 434,493       $ 879      $ 435,372   
  

 

 

    

 

 

   

 

 

 

 

19


Table of Contents

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

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

 

     As of:  
     September 30,      December 31,  
     2014      2013  

Commercial

   $ 65,050       $ 55,803   

Commercial real estate

     190,675         172,117   

Consumer

     72,528         71,165   

Residential

     50,011         46,095   
  

 

 

    

 

 

 

Total loans

     378,264         345,180   

Less allowance for loan losses

     4,874         5,186   
  

 

 

    

 

 

 

Net loans

   $ 373,390       $ 339,994   
  

 

 

    

 

 

 

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.

 

20


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

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

 

RATING 1    Excellent
RATING 2    Above Average
RATING 3    Satisfactory
RATING 4    Acceptable / Low Satisfactory
RATING 5    Monitor
RATING 6    Special Mention
RATING 7    Substandard
RATING 8    Doubtful
RATING 9    Loss

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

 

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

 

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

 

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

 

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

 

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

 

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

 

21


Table of Contents

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

 

Financing Receivables on Non-Accrual Status

(dollars in thousands)

 

     As of  
     September 30, 2014      December 31, 2013  

Commercial

   $ 2,116       $ 1,585   

Commercial Real Estate:

     

Commercial Mortgages-Owner Occupied

     212         537   

Commercial Mortgages-Non-Owner Occupied

     72         353   

Commercial Construction

     460         375   

Consumer

     

Consumer Unsecured

     —           —     

Consumer Secured

     —           33   

Residential:

     

Residential Mortgages

     312         183   

Residential Consumer Construction

     91         —     
  

 

 

    

 

 

 

Totals

   $ 3,263       $ 3,066   
  

 

 

    

 

 

 

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO decreased to $1,160,000 on September 30, 2014 from $1,451,000 on December 31, 2013. The following table represents the changes in OREO balance during the nine months ended September 30, 2014.

OREO Changes

(dollars in thousands)

 

     Nine Months ended  
     September 30, 2014  

Balance at the beginning of the year (net)

   $ 1,451   

Transfers from loans

     459   

Capitalized costs

     —     

Writedowns

     (178

Sales proceeds

     (573

Gain on disposition

     1   
  

 

 

 

Balance at the end of the period (net)

   $ 1,160   
  

 

 

 

 

22


Table of Contents

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

 

     Impaired Loans  
     (dollars in thousands)  
     As of and For the Nine Months Ended September 30, 2014  
2014    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 2,558       $ 2,798       $ —         $ 2,912       $ 68   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,300         2,350         —           1,420         110   

Commercial Mortgage Non-Owner Occupied

     712         712         —           858         32   

Commercial Construction

     84         531         —           418         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     21         21         —           21         1   

Residential

              

Residential Mortgages

     463         463         —           467         47   

Residential Consumer Construction

     —           —           —           —           —     

With An Allowance Recorded:

              

Commercial

   $ 1,806       $ 2,234       $ 832       $ 1,190       $ 32   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     1,056         1,225         60         1,738         45   

Commercial Mortgage Non-Owner Occupied

     306         306         33         263         12   

Commercial Construction

     376         644         17         188         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     119         119         119         80         6   

Residential

              

Residential Mortgages

     1,497         1,659         284         1,591         50   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 4,364       $ 5,032       $ 832       $ 4,102       $ 100   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     3,356         3,575         60         3,158         155   

Commercial Mortgage Non-Owner Occupied

     1,018         1,018         33         1,121         44   

Commercial Construction

     460         1,175         17         606         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     140         140         119         101         7   

Residential

              

Residential Mortgages

     1,960         2,122         284         2,058         97   

Residential Consumer Construction

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,298       $ 13,062       $ 1,345       $ 11,146       $ 403   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

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

 

     Impaired Loans  
     (dollars in thousands)  
     As of and For the Year Ended December 31, 2013  
2013    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 3,265       $ 3,699       $ —         $ 2,898       $ 101   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     539         593         —           1,566         38   

Commercial Mortgage Non-Owner Occupied

     1,003         1,003         —           3,686         47   

Commercial Construction

     751         1,274         —           746         8   

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     21         21         —           245         1   

Residential

              

Residential Mortgages

     470         517         —           1,304         24   

Residential Consumer Construction

     —           —           —           —           —     

With An Allowance Recorded:

              

Commercial

   $ 573       $ 573       $ 406       $ 597       $ 38   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,420         2,617         280         3,046         108   

Commercial Mortgage Non-Owner Occupied

     220         221         14         530         15   

Commercial Construction

     —           —           —           412         —     

Consumer

              

Consumer Unsecured

     —           —           —           1         —     

Consumer Secured

     40         40         40         285         3   

Residential

              

Residential Mortgages

     1,684         1,820         224         1,350         118   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 3,838       $ 4,272       $ 406       $ 3,495       $ 139   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,959         3,210         280         4,612         146   

Commercial Mortgage Non-Owner Occupied

     1,223         1,224         14         4,216         62   

Commercial Construction

     751         1,274         —           1,158         8   

Consumer

              

Consumer Unsecured

     —           —           —           1         —     

Consumer Secured

     61         61         40         530         4   

Residential

              

Residential Mortgages

     2,154         2,337         224         2,654         142   

Residential Consumer Construction

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,986       $ 12,378       $ 964       $ 16,666       $ 501   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

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

 

     Allowance for Credit Losses and Recorded Investment in Financing Receivables  
     (dollars in thousands)  
     For the Nine Months Ended September 30, 2014  
2014    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 1,015      $ 2,631      $ 935      $ 605      $ 5,186   

Charge-offs

     (165     (188     (34     (40     (427

Recoveries

     27        9        24        —          60   

Provision

     473        (490     (182     254        55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,350      $ 1,962      $ 743      $ 819      $ 4,874   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 832      $ 110      $ 119      $ 284      $ 1,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     518        1,852        624        535        3,529   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,350      $ 1,962      $ 743      $ 819      $ 4,874   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

   $ 4,364      $ 4,834      $ 140      $ 1,960      $ 11,298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     60,686        185,841        72,388        48,051        366,966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 65,050      $ 190,675      $ 72,528      $ 50,011      $ 378,264   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

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

 

    

Allowance for Credit Losses and Recorded Investment in

Financing Receivables

 
     (dollars in thousands)  
     For the Year Ended December 31, 2013  
2013    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 987      $ 2,849      $ 1,057      $ 642      $ 5,535   

Charge-offs

     (19     (932     (126     (28     (1,105

Recoveries

     37        42        137        —          216   

Provision

     10        672        (133     (9     540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,015      $ 2,631      $ 935      $ 605      $ 5,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 406      $ 294      $ 40      $ 224      $ 964   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     609        2,337        895        381        4,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,015      $ 2,631      $ 935      $ 605      $ 5,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

   $ 3,838      $ 4,933      $ 61      $ 2,154      $ 10,986   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     51,965        167,184        71,104        43,941        334,194   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 55,803      $ 172,117      $ 71,165      $ 46,095      $ 345,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

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

 

     Age Analysis of Past Due Financing Receivables as of  
     September 30, 2014  
     (dollars in thousands)  
2014    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than
90 Days
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 88       $ 94       $ 2,116       $ 2,298       $ 62,752       $ 65,050       $ —     

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     646         857         212         1,715         68,798         70,513         —     

Commercial Mortgages-Non-Owner Occupied

     —           55         72         127         111,078         111,205         —     

Commercial Construction

     —           —           460         460         8,497         8,957         —     

Consumer:

                    

Consumer Unsecured

     32         —           —           32         4,204         4,236         —     

Consumer Secured

     379         107         —           486         67,806         68,292         —     

Residential:

                    

Residential Mortgages

     595         657         312         1,564         41,347         42,911         —     

Residential Consumer Construction

     —           —           —           —           7,100         7,100         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,740       $ 1,770       $ 3,172       $ 6,682       $ 371,582       $ 378,264       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Age Analysis of Past Due Financing Receivables as of  
     December 31, 2013  
     (dollars in thousands)  
2013    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than
90 Days
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 389       $ —         $ 1,586       $ 1,975       $ 53,828       $ 55,803       $ —     

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     1,099         —           409         1,508         63,813         65,321         —     

Commercial Mortgages-Non-Owner Occupied

     96         —           85         181         94,542         94,723         —     

Commercial Construction

     —           —           375         375         11,698         12,073         —     

Consumer:

                    

Consumer Unsecured

     5         —           —           5         4,717         4,722         —     

Consumer Secured

     71         —           33         104         66,339         66,443         —     

Residential:

                    

Residential Mortgages

     704         —           183         887         39,909         40,796         —     

Residential Consumer Construction

     —           95         —           95         5,204         5,299         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,364       $ 95       $ 2,671       $ 5,130       $ 340,050       $ 345,180       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

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

 

     Credit Loss Disclosures  
     Credit Quality Information - by Class  
     September 30, 2014  
     (dollars in thousands)  
2014    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 59,258       $ 1,210       $ 90       $ 4,492       $ —         $ 65,050   

Commercial Real Estate:

                 

Commercial Mortgages-Owner Occupied

     65,844         1,098         308         3,263         —           70,513   

Commercial Mortgages-Non Owner Occupied

     104,323         1,809         4,338         735         —           111,205   

Commercial Construction

     8,073         424         —           460         —           8,957   

Consumer

                 

Consumer Unsecured

     4,236         —           —           —           —           4,236   

Consumer Secured

     67,260         510         97         425         —           68,292   

Residential:

                 

Residential Mortgages

     39,149         776         843         2,143         —           42,911   

Residential Consumer Construction

     7,009         —           —           91         —           7,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 355,152       $ 5,827       $ 5,676       $ 11,609       $ —         $ 378,264   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Credit Loss Disclosures  
     Credit Quality Information - by Class  
     December 31, 2013  
     (dollars in thousands)  
2013    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 48,827       $ 2,109       $ 979       $ 3,888       $ —         $ 55,803   

Commercial Real Estate:

                 

Commercial Mortgages-Owner Occupied

     58,740         2,355         1,356         2,870         —           65,321   

Commercial Mortgages-Non Owner Occupied

     85,474         2,737         5,468         1,044         —           94,723   

Commercial Construction

     11,455         —           —           618         —           12,073   

Consumer

                 

Consumer Unsecured

     4,721         —           —           1         —           4,722   

Consumer Secured

     65,056         814         283         290         —           66,443   

Residential:

                 

Residential Mortgages

     36,962         786         589         2,459         —           40,796   

Residential Consumer Construction

     5,299         —           —           —           —           5,299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 316,534       $ 8,801       $ 8,675       $ 11,170       $ —         $ 345,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

There were no loan modifications that would have been classified as Troubled Debt Restructurings (TDR) during the three and nine months ended September 30, 2014 and 2013.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and nine months ended September 30, 2014 and 2013.

Note 10 – Subsequent Events

In preparing these financial statements, Financial has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Note 11 – Recent accounting pronouncements

In January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company is currently assessing the impact that ASU 2014-01 will have on its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently assessing the impact that ASU 2014-04 will have on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results and include

 

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Note 11 – Recent accounting pronouncements (continued)

 

disposals of a major geographic area, a major line of business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-08 to have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”. This ASU applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition”, most industry-specific guidance, and some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts”. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must apply a five step process including: identification of the contract(s) with a customer, identification of performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation. Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer have also been amended to be consistent with the guidance on recognition and measurement. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2014-09 will have on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation”. The amendments in this ASU remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915, “Development Stage Entities”, from the FASB Accounting Standards Codification. In addition, this ASU adds an example disclosure and removes an exception provided to development stage entities in Topic 810, “Consolidation”, for determining whether an entity is a variable interest entity. The presentation and disclosure requirements in Topic 915 will no longer be required for the first annual period beginning after December 15, 2014. The revised consolidation standards are effective for annual periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-10 to have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the

 

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Note 11 – Recent accounting pronouncements (continued)

 

exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2014-11 will have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718)”, should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company is currently assessing the impact that ASU 2014-12 will have on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

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

 

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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.

The allowance for loan losses is management’s estimate of the losses that may be sustained in our loan portfolio. 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”). 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.

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”), investment services through the Bank’s Investment division (which we refer to as “Investment”), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance”).

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 in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of

 

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Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. 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 area.

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.com.

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.

The Bank intends to enhance its profitability by increasing its market share in the Region 2000 area, providing additional services to its customers, and controlling costs.

The Bank now services its banking customers through the following nine full service branch locations in the Region 2000 area.

 

    The main office located at 828 Main Street in Lynchburg (opened October 2004) (the “Main Street Office”),

 

    A branch located at 615 Church Street in Lynchburg (opened July 1999) (the “Church Street Branch”),

 

    A branch located at 5204 Fort Avenue in Lynchburg (opened November 2000) (the “Fort Avenue Branch”),

 

    A branch located on South Amherst Highway in Amherst County (opened June 2002) (the “Madison Heights Branch”),

 

    A branch located at 17000 Forest Road in Forest (opened February 2005) (the “Forest Branch”),

 

    A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (opened April 2006) (the “Boonsboro Branch”),

 

    A branch located at 164 South Main Street, Amherst, Virginia (opened January 2007) (the “Amherst Branch”),

 

    A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford, Virginia, located off of Independence Boulevard (opened October 2008) (the “Bedford Branch”),

 

    A branch located at 1110 Main Street, Altavista, Virginia (relocated from temporary branch in June 2009) (the “Altavista Branch”), and

The Bank also has opened a limited-service branch located in the Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia 24503 and a limited service branch and commercial loan production office located at Luxor Office Park LLC, 1430 Rolkin Court Suite 203, Charlottesville, Virginia.

 

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In addition, the Bank, through its Mortgage division, originates residential mortgage loans through two offices—one located at the Forest Branch and the other located at 133 Salem Avenue, NW, in Roanoke, Virginia.

The Investment division operates primarily out of its office located at the Church Street Branch.

The Bank continuously evaluates areas located within Region 2000 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.

Timberlake Road Area, Campbell County (Lynchburg), Virginia. As previously disclosed, the Bank has purchased certain real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank has not determined when it will open a branch at this location. The Bank has determined that the existing structure is not suitable for use as a bank branch.

Rustburg, Virginia. In March, 2011 the Bank purchased certain real property near the intersection of Routes 501 and 24 in Rustburg, Virginia. The structure on the property is being demolished and removed. The Bank has not determined when it will open a branch at this location.

Appomattox, Virginia. In July, 2013 the Bank purchased certain real property located near the intersection of Confederate Boulevard and Moses Avenue for future branch expansion. The Bank has not determined when it will open a branch at this location.

The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit the 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.

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

 

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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:

 

     September 30,
2014
(in thousands)
 

Commitments to extend credit

   $ 76,907   

Letters of Credit

     1,905   
  

 

 

 

Total

   $ 78,812   
  

 

 

 

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. Collateral is required in instances that the Bank deems necessary.

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 September 30, 2014 and December 31, 2013 and the results of operations of Financial for the three and nine month periods ended September 30, 2014 and 2013. 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

September 30, 2014 as Compared to December 31, 2013

Total assets were $451,686,000 on September 30, 2014 compared with $434,511,000 at December 31, 2013, an increase of 3.95%. The increase as of September 30, 2014 reflects the increased demand deposit accounts generated from new commercial relationships.

Total deposits increased from $387,398,000 as of December 31, 2013 to $398,831,000 on September 30, 2014, an increase of 2.95%. Total deposits increased for the reasons set forth in the prior paragraph.

Total loans, excluding loans held for sale, increased to $378,264,000 on September 30, 2014 from $345,180,000 on December 31, 2013. Loans, excluding loans held for sale and net of unearned income and allowance, increased to $373,390,000 on September 30, 2014 from $339,994,000 on December 31, 2013, an increase of 9.82%. 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):

 

     September 30, 2014     December 31, 2013  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 65,050         17.20   $ 55,803         16.17

Commercial Real Estate

     190,675         50.40     172,117         49.86

Consumer

     72,528         19.17     71,165         20.61

Residential

     50,011         13.23     46,095         13.36
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 378,264         100.00   $ 345,180         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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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”) decreased slightly to $4,423,000 on September 30, 2014 from $4,518,000 on December 31, 2013. This decrease was due to a decrease in OREO, which was partially offset by an increase in total non-accrual loans. Non-accrual loans increased 6.42% to $3,263,000 on September 30, 2014 from $3,066,000 on December 31, 2013. 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 loan loss reserve. If interest on non-accrual loans had been accrued, such interest on a cumulative basis would have approximated $823,000 and $676,000 as of September 30, 2014 and December 31, 2013, respectively. 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 credit losses charged against earnings. These loans were included in the non-performing loan totals listed above.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure, deeds in lieu of foreclosure or repossession. On December 31, 2013, the Bank was carrying 17 OREO properties on its books at a value of $1,451,000. During the nine months ended September 30, 2014, the Bank acquired 3 additional OREO properties and disposed of 16 OREO properties, and as of September 30, 2014 the Bank is carrying 4 OREO properties at a value of $1,160,000. The OREO properties are available for sale and are being actively marketed on the Bank’s website and through other means.

The Bank had loans in the amount of $556,000 at September 30, 2014 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $564,000 at December 31, 2013. 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 $14,850,000 on September 30, 2014 from $16,671,000 on December 31, 2013. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease is in large part due to a decrease in the target balance held in a settlement account at the Bank’s primary correspondent. The proceeds from this decrease were used to fund loans. Cash and cash equivalents also vary due to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations.

Securities held-to-maturity decreased to $2,530,000 on September 30, 2014 from $3,537,000 on December 31, 2013. Securities available-for-sale decreased to $33,940,000 on September 30, 2014, from $46,091,000 December 31, 2013. During the nine months ended September 30, 2014 the Bank received $1,000,000 in proceeds from maturities, paydowns, and/or calls of securities held to maturity and $120,000 in proceeds from principal payments received from securities available-for-sale and proceeds from the sale of securities available-for-sale were $17,394,000. The Bank purchased no securities held-to-maturity

 

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and $3,139,000 in securities available-for sale during the same period. The decrease from December 31, 2013 in securities available-for-sale was primarily due to the liquidation of securities in funding loan growth and anticipating future loan growth.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $481,000 at September 30, 2014 and $620,000 at December 31, 2013, a decrease of $139,000. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Liquidity and Capital

At September 30, 2014, Financial, on a consolidated basis, had liquid assets of $48,790,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold and available-for-sale investments. Management believes that liquid assets were adequate at September 30, 2014. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary.

Financial has $12,000,000 categorized as “Other borrowings” which consists of the following: i) $2,000,000, on which the Bank pays a fixed rate of 3.785%, from a Federal Home Loan Bank Advance that matures in April 2015; and ii) $10,000,000 from the private placement of unregistered debt securities as previously disclosed (the “2012 Notes”). The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The notes mature on April 1, 2017, but are subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders.

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 September 30, 2014, the Bank had a leverage ratio of approximately 9.43%, a Tier 1 risk-based capital ratio of approximately 12.07% and a total risk-based capital ratio of approximately 13.32%. As of September 30, 2014 and December 31, 2013 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 September 30, 2014 and December 31, 2013:

Bank Level Only Capital Ratios

 

Analysis of Capital (in 000’s)    September 30,
2014
     December 31,
2013
 

Tier 1 capital

     

Common Stock

   $ 3,742       $ 3,742   

Surplus

     19,325         19,325   

Retained earnings

     19,403         16,563   
  

 

 

    

 

 

 

Total Tier 1 capital

   $ 42,470       $ 39,630   
  

 

 

    

 

 

 

Tier 2 capital

     

Allowance for loan losses

   $ 4,405       $ 4,166   

Total Tier 2 capital:

   $ 4,405       $ 4,166   
  

 

 

    

 

 

 

Total risk-based capital

   $ 46,875       $ 43,796   
  

 

 

    

 

 

 

Risk weighted assets

   $ 351,936       $ 332,280   

Average total assets

   $ 450,347       $ 435,236   

 

     Actual     Regulatory Benchmarks  
     September 30,
2014
    December 31,
2013
    For Capital
Adequacy
Purposes
    For Well
Capitalized
Purposes
 

Capital Ratios:

        

Tier 1 capital to average total assets

     9.43     9.11     4.00     5.00

Tier 1 risk-based capital ratio

     12.07     11.93     4.00     6.00

Total risk-based capital ratio

     13.32     13.18     8.00     10.00

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $500,000,000, 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, while remaining “well capitalized,” would be lower than the comparable capital ratios of the Bank because the proceeds from the private placement of the 6% capital notes due on April 1, 2017 do not qualify as equity capital on a consolidated basis.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises 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. The phase-in period for this rule is not scheduled to begin until January 2015. We are currently evaluating the impact of the implementation of the new capital standards.

 

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Results of Operations

Comparison of the Three and Nine months Ended September 30, 2014 and 2013

Earnings Summary

Financial had net income including all operating segments of $914,000 and $2,462,000 for the three and nine months ended September 30, 2014 compared to $813,000 and $2,398,000 for the comparable periods in 2013. The basic and diluted earnings per common share for the three and nine months ended September 30, 2014 were $0.27 and $0.73, compared to basic and diluted earnings per share of $0.24 for the three months and basic earnings of $0.72 ($0.71 diluted) for the nine months ended September 30, 2013.

The increase in net income for the three and nine months ended September 30, 2014 as compared to the prior year was due primarily to an increase in interest received due to an increase in interest earning assets, a decrease in the provision for loan losses, and was partially offset by an increase in non-interest expense. Non-interest income increased for the three months ended September 30, 2014 but decreased for the nine months ended September 30, 2014 due to higher gains on sales of securities in the nine months ended September 30, 2013 as compared to 2014.

These operating results represent an annualized return on stockholders’ equity of 10.82% and 10.02% for the three and nine months ended September 30, 2014, compared with 10.55% and 10.76% for the same periods in 2013. The Company had an annualized return on average assets for the three and nine months ended September 30, 2014 of 0.80% and 0.74% compared with 0.74% and 0.74% for the same periods in 2013.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $4,726,000 and $13,881,000 for the three and nine months ended September 30, 2014 from $4,573,000 and $13,677,000 for the same periods in 2013, an increase of 3.35% and 1.49%, respectively. Interest income increased primarily because of increased balances in the loan portfolio. The average rate received on earning assets decreased to 4.52% and 4.55% for the three and nine months ended September 30, 2014 as compared with 4.66% and 4.69% for the comparable periods in 2013. The rate on total average earning assets decreased primarily because of a decrease in market rates of interest resulting from a competitive banking environment. Management expects that competition will continue to pressure the rates we receive on loans and therefore may negatively impact our interest income.

Interest expense decreased to $577,000 and $1,755,000 for the three and nine months ended September 30, 2014 from $606,000 and $1,832,000 for the same periods in 2013, decreases of 4.79% and 4.20%, respectively. These decreases in interest expense resulted in large part from a decrease in rates paid on time deposits. The Bank’s average rate paid on interest earning deposits was 0.49% and 0.51% during the three and nine month periods ended September 30, 2014 as compared to 0.53% and 0.55% for the same periods in 2013. This resulted from management’s efforts to minimize the Bank’s interest expense and maximize its net interest margin.

The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2014 was $4,149,000 and $12,126,000 compared with $3,967,000 and $11,845,000 for the same periods in 2013. The change in net interest income for the three and nine months ended September 30, 2014 as compared with the comparable period in 2013 was minor because

 

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the increase in interest earning assets offset the decrease in rates received. The net interest margin was 3.97% and 3.98% for the three and nine months ended September 30, 2014, as compared to 4.06% and 4.06% for the same periods a year ago.

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, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income exclusive of gains on sales of securities increased to $923,000 and $2,517,000 for the three and nine months ended September 30, 2014 from $758,000 and $2,233,000 for the three and nine months ended September 30, 2013. This increase for the three and nine months ended September 30, 2014 as compared to the same periods last year was due primarily to an increase in mortgage fee income of $223,000 and $260,000, respectively. The increase in mortgage fee income is directly attributable to the production in the Bank’s Roanoke mortgage office in 2014. For the three months ended September 30, 2014, service charges and commissions decreased by $29,000 and for the nine months ended September 30, 2014, service charges and fees increased by $57,000.

Purchase mortgage originations totaled $13,427,000 or 67.91% of the total mortgage loans originated and $32,325,115 or 69.32% of the total mortgage loans originated in the three and nine months ended September 30, 2014 respectively. The percentage and amount of home purchase mortgages increased as a result of an increase in interest rates and the resulting decrease in refinancing activity. Management expects that although purchase money loans will offset a portion of the decline in refinance activity, revenue from the mortgage segment will be under pressure during the rising interest rate environment. 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. Net gain on sales of securities decreased to $6,000 and $86,000 for the three and nine months ended September 30, 2014 from $11,000 and $405,000 for the same periods in 2013.

The Bank, through the Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the Region 2000 area. 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 no credit or interest rate risk on these mortgages.

Despite the recent increase in rates, management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2014. Management expects that low rates and government-assisted programs such as Home Affordable Refinance Program (HARP) coupled with the Mortgage division’s reputation in Region 2000 will allow us to maintain revenue at the Mortgage division. Because many people able to refinance mortgages have already done so, management expects refinancing activity to decrease. As a result of the rising interest rates, management expects that loans for home purchases (as opposed to refinances) will constitute the majority of mortgage originations.

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 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 2014.

 

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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 two full-time and one part-time employee that are dedicated to selling 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 2014.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2014 increased to $3,739,000 and $11,105,000 from $3,568,000 and $10,770,000, an increase of 4.79% and 3.11%, respectively, for the comparable periods in 2013. This resulted from increases for data processing, compensation and employee benefit expense, equipment, and marketing expenses, primarily related to the expansion into Roanoke and Charlottesville. These increases were offset in part by a decrease in OREO expense from $60,000 and $400,000 for the three and nine months ended September 30, 2013 to $9,000 and $166,000 for the same periods in 2014. Total personnel expense was $1,978,000 and $5,767,000 for the three and nine month periods ended September 30, 2014 as compared to $1,755,000 and $5,257,000 for the same periods in 2013. For the three months ended September 30, 2014, the Bank also had an increase in credit expenses which is directly related to the volume of loans originated by the Mortgage Division.

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision to 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 many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $0 and $55,000 to the allowance for loan losses for the three and nine month periods ended September 30, 2014. This compares to a provision of $0 and $290,000 for the comparable periods in 2013, representing decreases of 100.00% and 81.03%, respectively.

The decrease in the loan loss provision for the three and nine months ended September 30, 2014 as compared to the same periods in 2013 was due to the following factors:

 

    The Bank’s asset quality has improved as problem assets, including certain commercial loans and residential speculative housing construction loans have decreased as the collateral for those loans has been liquidated or the loans have been paid off. Management’s evaluation of these asset classes resulted in the decreased provision in the three and nine months ended September 30, 2014.

 

    In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. The Bank’s provision for the three and nine months ended September 30, 2014 decreased as compared to the same periods in 2013. The decrease resulted from a decrease in the unallocated environmental reserves. That decrease was offset by an increase to the specific impairment component of the reserve as allocations within the reserve were reclassified from general to specific on a small number of loans within the commercial real estate and consumer segments.

 

   

Charged-off loans, which are loans that management deems uncollectible, are written against the loan loss reserve and constitute a realized loss. Charged-off loans decreased to $326,000 and $427,000 for the three and nine months ended September 30, 2014 from $513,000

 

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and $970,000 for the comparable periods in 2013. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three and nine months ended September 30, 2014, the Bank had recoveries of charged off loans of $23,000 and $60,000 as compared with $21,000 and $128,000 for the comparable periods in 2013.

 

    A decline in historical charge-offs resulting from an improvement in credit quality has had the effect of lowering the need for provision. The improvements in credit quality are reflected in the below tables.

The decrease in the percentage of the allowance for loan loss reserve to total loans as of September 30, 2014 to 1.29% as compared to 1.50% as of December 31, 2013 resulted from a decline in historical charge offs as discussed above. The overall balance in the allowance for loan loss decreased from $5,186,000 as of December 31, 2013 to $4,874,000 as of September 30, 2014. Management believes that the current allowance for loan is adequate.

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

 

     Allowance for Credit Losses and Recorded Investment in Financing Receivables
(dollars in thousands)
For the Nine months Ended September 30, 2014
 
2014    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 1,015      $ 2,631      $ 935      $ 605      $ 5,186   

Charge-offs

     (165     (188     (34     (40     (427

Recoveries

     27        9        24        —          60   

Provision

     473        (490 ) (1)      (182 ) (1)      254        55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,350      $ 1,962      $ 743      $ 819      $ 4,874   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 832      $ 110      $ 119      $ 284      $ 1,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     518        1,852        624        535        3,529   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,350      $ 1,962      $ 743      $ 819      $ 4,874   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

   $ 4,364      $ 4,834      $ 140      $ 1,960      $ 11,298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     60,686        185,841        72,388        48,051        366,966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 65,050      $ 190,675      $ 72,528      $ 50,011      $ 378,264   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The experience within the historical charge-off period used to calculate the allowance has improved which reduced the need for a provision relating to these segments.

 

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     Allowance for Credit Losses and Recorded Investment in Financing Receivables
(dollars in thousands)
For the Year Ended December 31, 2013
 
2013    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 987      $ 2,849      $ 1,057      $ 642      $ 5,535   

Charge-offs

     (19     (932     (126     (28     (1,105

Recoveries

     37        42        137        —          216   

Provision

     10        672        (133 ) (1)      (9 ) (1)      540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     1,015        2,631        935        605        5,186   

Ending Balance: Individually evaluated for impairment

   $ 406      $ 294      $ 40      $ 224      $ 964   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     609        2,337        895        381        4,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,015      $ 2,631      $ 935      $ 605      $ 5,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

   $ 3,838      $ 4,933      $ 61      $ 2,154      $ 10,986   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     51,965        167,184        71,104        43,941        334,194   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 55,803      $ 172,117      $ 71,165      $ 46,095      $ 345,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The experience within the historical charge-off period used to calculate the allowance has improved which reduced the need for a provision relating to these segments.

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

 

    

Three months ended

September 30,

(in thousands)

   

Nine months ended

September 30,

(in thousands)

 
     2014     2013     2014     2013  

Balance, beginning of period

   $ 5,177      $ 5,475      $ 5,186      $ 5,535   

Provision for loan losses

     —          —          55        290   

Loans charged off

     (326     (513     (427     (970

Recoveries of loans charged off

     23        21        60        128   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge offs

     (303     (492     (367     (842
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 4,874      $ 4,983      $ 4,874      $ 4,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 and nine months ended September 30, 2014, Financial had an income tax expense of $425,000 and $1,107,000, as compared to $355,000 and $1,025,000 for the three and nine months ended September 30, 2013. This represents an effective tax rate of 31.70% and 31.00% the for the three and nine month periods ended September 30, 2014 as compared with 30.40% and 29.90% for the three and nine month periods ended September 30, 2013.

 

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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended September 30, 2014 and 2013

 

     2014     2013  
    

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)

   $ 371,244      $ 4,427         4.73   $ 334,296      $ 4,205         4.99

Loans held for sale

     2,198        26         4.69     891        8         3.56

Federal funds sold

     2,333        4         0.68     10,121        9         0.35

Securities (3)

     38,033        271         2.83     50,404        440         3.46

Federal agency equities

     1,173        5         1.69     1,312        4         1.21

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     415,097        4,733         4.52     397,140        4,666         4.66
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (5,349          (5,349     

Non-earning assets

     43,000             42,885        
  

 

 

        

 

 

      

Total assets

   $ 452,748           $ 434,676        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 104,645      $ 53         0.21   $ 95,997      $ 50         0.21

Savings

     126,176        69         0.22     133,461        71         0.21

Time deposits

     96,563        281         1.15     95,939        316         1.31
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     327,384        406         0.49     325,397        437         0.53

Other borrowed funds

              

Fed funds purchased

     913        2         0.87     —          —           —     

Other borrowings

     2,000        19         3.77     2,000        19         3.77

Capital Notes

     10,000        150         6.00     10,000        150         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     340,297        577         0.67     337,397        606         0.71
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     78,086             66,267        

Other liabilities

     849             442        
  

 

 

        

 

 

      

Total liabilities

     419,232             404,106        

Stockholders’ equity

     33,516             30,570        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 452,748           $ 434,676        
  

 

 

        

 

 

      

Net interest income

     $ 4,156           $ 4,060      
    

 

 

        

 

 

    

Net interest margin

          3.97          4.06
       

 

 

        

 

 

 

Interest spread

          3.85          3.95
       

 

 

        

 

 

 

 

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(1) Net 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.

 

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Net Interest Margin Analysis

Average Balance Sheets

For the Nine months Ended September 30, 2014 and 2013

 

     2014     2013  
    

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)

   $ 359,229      $ 12,863         4.79   $ 331,198      $ 12,550         5.07

Loans held for sale

     1,463        46         4.20     921        25         3.63

Federal funds sold

     2,471        13         0.70     8,607        24         0.37

Securities (3)

     44,785        973         2.90     50,601        1,137         3.00

Federal agency equities

     1,213        37         4.08     1,344        34         3.38

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     409,277        13,932         4.55     392,787        13,770         4.69
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (5,174          (5,488     

Non-earning assets

     42,935             43,774        
  

 

 

        

 

 

      

Total assets

   $ 447,038           $ 431,073        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 101,038      $ 161         0.21   $ 92,670      $ 155         0.22

Savings

     127,928        203         0.21     135,289        214         0.21

Time deposits

     97,605        879         1.20     94,551        956         1.35
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     326,571        1,243         0.51     322,510        1,325         0.55

Other borrowed funds

              

Fed funds purchased

     581        4         0.92     16        —           —     

Repurchase agreements

     297        1         0.45     —          —           —     

Other borrowings

     2,000        57         3.81     2,000        57         3.81

Capital Notes

     10,000        450         6.00     10,000        450         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     339,449        1,755         0.69     334,526        1,832         0.73
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     73,930             66,317        

Other liabilities

     814             436        
  

 

 

        

 

 

      

Total liabilities

     414,193             401,279        

Stockholders’ equity

     32,845             29,794        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 447,038           $ 431,073        
  

 

 

        

 

 

      

Net interest income

     $ 12,177           $ 11,938      
    

 

 

        

 

 

    

Net interest margin

          3.98          4.06
       

 

 

        

 

 

 

Interest spread

          3.86          3.96
       

 

 

        

 

 

 

 

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(1) Net 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.

 

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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 three and nine months ended September 30, 2014, 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, including any corrective actions with regard to significant deficiencies and material weaknesses.

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

Not applicable

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

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

 

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Item 6. Exhibits

 

Exhibit
No.

  

Description of Exhibit

  31.1    Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 7, 2014
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 7, 2014
  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 November 7, 2014
101    The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Income (unaudited) for the Three and Nine months Ended September 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine months Ended September 30, 2014 and 2013 (iv) Consolidated Statements of Cash Flows (unaudited) for the Nine months Ended September 30, 2014 and 2013 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine months Ended September 30, 2014 and 2013; (vi) Notes to Unaudited Consolidated Financial Statements.*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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: November 7, 2014     By  

/S/ Robert R. Chapman III

      Robert R. Chapman III, President
      (Principal Executive Officer)
Date: November 7, 2014     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 November 7, 2014
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 7, 2014
  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 November 7, 2014
101    The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Income (unaudited) for the Three and Nine months Ended September 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine months Ended September 30, 2014 and 2013 (iv) Consolidated Statements of Cash Flows (unaudited) for the Nine months Ended September 30, 2014 and 2013 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine months Ended September 30, 2014 and 2013; (vi) Notes to Unaudited Consolidated Financial Statements.*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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