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BANK OF THE JAMES FINANCIAL GROUP INC - Quarter Report: 2016 September (Form 10-Q)

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, 2016

 

 

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Virginia

 

001-35402

 

20-0500300

(State or other jurisdiction of

incorporation or organization)

 

(Commission

file number)

 

(I.R.S. Employer

Identification No.)

828 Main Street,

Lynchburg, VA

   

24504

(Address of principal executive offices)     (Zip Code)

(434) 846-2000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically 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).    ☒  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  

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,378,436 shares of Common Stock, par value $2.14 per share, were outstanding at November 14, 2016.

 

 

 


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      51   

Item 1.

   Legal Proceedings      51   

Item 1A.

   Risk Factors      51   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      51   

Item 3.

   Defaults Upon Senior Securities      51   

Item 4.

   Mine Safety Disclosures      51   

Item 5.

   Other Information      51   

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) (2016 unaudited)

 

     September 30,      December 31,  
     2016      2015  

Assets

     

Cash and due from banks

   $ 16,206       $ 15,952   

Federal funds sold

     9,725         12,703   
  

 

 

    

 

 

 

Total cash and cash equivalents

     25,931         28,655   

Securities held-to-maturity (fair value of $3,425 in 2016 and $2,649 in 2015)

     3,304         2,519   

Securities available-for-sale, at fair value

     39,922         35,996   

Restricted stock, at cost

     1,373         1,313   

Loans, net of allowance for loan losses of $4,953 in 2016 and $4,683 in 2015

     457,136         430,445   

Loans held for sale

     3,048         1,964   

Premises and equipment, net

     10,180         10,007   

Interest receivable

     1,307         1,248   

Cash value – bank owned life insurance

     12,586         9,781   

Other real estate owned, net of valuation allowance

     2,370         1,965   

Income taxes receivable

     1,226         1,096   

Deferred tax asset, net

     1,083         1,399   

Other assets

     486         755   
  

 

 

    

 

 

 

Total assets

   $ 559,952       $ 527,143   
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Deposits

     

Noninterest bearing demand

   $ 102,547       $ 91,325   

NOW, money market and savings

     240,885         232,864   

Time

     163,965         143,421   
  

 

 

    

 

 

 

Total deposits

     507,397         467,610   

Capital notes

     —           10,000   

Interest payable

     77         61   

Other liabilities

     1,463         1,276   
  

 

 

    

 

 

 

Total liabilities

   $ 508,937       $ 478,947   
  

 

 

    

 

 

 

Commitments and Contingencies

     

Stockholders’ equity

     

Preferred stock; authorized 1,000,000 shares; none issued and outstanding as of September 30, 2016 and December 31, 2015

   $  —         $  —     

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 4,378,436 as of September 30, 2016 and December 31, 2015

     9,370         9,370   

Additional paid-in-capital

     31,495         31,495   

Retained earnings

     10,126         7,920   

Accumulated other comprehensive income (loss)

     24         (589
  

 

 

    

 

 

 

Total stockholders’ equity

   $ 51,015       $ 48,196   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 559,952       $ 527,143   
  

 

 

    

 

 

 

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
Ended September 30,
     For the Nine Months
Ended September 30,
 

Interest Income

   2016      2015      2016      2015  

Interest Income

           

Loans

   $ 5,227       $ 4,968       $ 15,212       $ 14,354   

Securities

           

US Government and agency obligations

     104         144         368         427   

Mortgage backed securities

     46         30         166         58   

Municipals – taxable

     63         29         132         76   

Municipals – tax exempt

     10         10         31         31   

Dividends

     6         6         39         40   

Other (Corporates)

     4         2         13         5   

Interest bearing deposits

     13         3         28         9   

Federal Funds sold

     4         3         16         12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     5,477         5,195         16,005         15,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

           

NOW, money market savings

     153         130         428         375   

Time Deposits

     457         423         1,268         1,146   

Federal Funds purchased

     —           1         4         2   

FHLB borrowings

     —           —           —           28   

Capital notes

     —           150         8         450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     610         704         1,708         2,001   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     4,867         4,491         14,297         13,011   

Provision for loan losses

     145         120         595         277   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,722         4,371         13,702         12,734   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income

           

Gain on sales of loans held for sale, net

     593         623         1,765         1,759   

Service charges, fees and commissions

     373         397         1,107         1,063   

Increase in cash value of life insurance

     75         68         205         204   

Other

     31         100         91         154   

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

     209         10         437         43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,281         1,198         3,605         3,223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses

           

Salaries and employee benefits

     2,318         2,135         6,717         6,346   

Occupancy

     333         302         970         903   

Equipment

     316         360         949         963   

Supplies

     119         100         346         304   

Professional, data processing, and other outside expense

     696         591         2,059         1,637   

Marketing

     178         97         498         321   

Credit expense

     110         94         299         230   

Other real estate expenses

     52         63         57         100   

FDIC insurance expense

     92         87         275         240   

Other

     235         289         723         689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     4,449         4,118         12,893         11,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,554         1,451         4,414         4,224   

Income tax expense

     499         468         1,421         1,357   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 1,055       $ 983       $ 2,993       $ 2,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding – basic

     4,378,436         3,371,616         4,378,436         3,371,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding – diluted

     4,378,436         3,371,616         4,378,436         3,371,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share – basic

   $ 0.24       $ 0.29       $ 0.68       $ 0.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share – diluted

   $ 0.24       $ 0.29       $ 0.68       $ 0.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

For the Three and Nine Months Ended September 30, 2016 and 2015

(dollar amounts in thousands) (unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2016     2015     2016     2015  

Net Income

   $ 1,055     $ 983     $ 2,993     $ 2,867  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

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

     (293     570       1,366       125  

Tax effect

     100       (194     (465     (42

Reclassification adjustment for gains included in net income (1)

     (209     (10     (437     (43

Tax effect (2)

     71       4       149       15  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (331     370       613       55  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 724     $ 1,353     $ 3,606     $ 2,922  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Gains are included in “gain on sales of available-for-sale securities, net” 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

 

3


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2016 and 2015

(dollar amounts in thousands) (unaudited)

 

     For the Nine Months
Ended September 30,
 
     2016     2015  

Cash flows from operating activities

    

Net Income

   $ 2,993     $ 2,867  

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

    

Depreciation and amortization

     579       571  

Net amortization and accretion of premiums and discounts on securities

     419       69  

(Gain) on sales of available-for-sale securities

     (437     (43

(Gain) on call of held to maturity securities

     (7     —     

(Gain) on sales of loans held for sale

     (1,765     (1,759

Provision for loan losses

     595       277  

(Gain) on sale of other real estate owned

     (1     —     

Impairment of other real estate owned

     50       75  

(Increase) in cash value of life insurance

     (205     (204

(Increase) decrease in interest receivable

     (59     22  

Decrease (increase) in other assets

     269       (287

(Increase) decrease in income taxes receivable

     (130     6  

Increase in interest payable

     16       18  

Increase in other liabilities

     187       20  

Proceeds from sales of loans held for sale

     62,491       61,598  

Origination of loans held for sale

     (61,810     (62,632
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 3,185     $ 598  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of securities held-to-maturity

   $ (1,290   $  —    

Proceeds from maturities and calls of securities held-to-maturity

     500       —     

Purchases of securities available-for-sale

     (31,576     (20,257

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

     8,675       1,206  

Proceeds from sale of securities available-for-sale

     19,934       10,385  

Purchases of bank owned life insurance

     (2,600     —     

(Purchase) redemption of Federal Home Loan Bank stock

     (60     426  

Improvements to other real estate owned

     —          (25

Origination of loans, net of principal collected

     (27,761     (33,979

Purchases of premises and equipment

     (752     (537

Proceeds from sale of other real estate owned

     21       66  
  

 

 

   

 

 

 

Net cash (used in) investing activities

   $ (34,909   $ (42,715
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

   $ 39,787     $ 59,159  

Net (decrease) in federal funds purchased

     —          (2,829

Net (decrease) in Federal Home Loan Bank advances

     —          (12,000

Dividends paid to common stockholders

     (787     (540

Retirement of capital notes

     (10,000     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 29,000     $ 43,790  
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (2,724     1,673  

Cash and cash equivalents at beginning of period

   $ 28,655     $ 12,743  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 25,931     $ 14,416  
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to other real estate owned

   $ 475     $ 1,425  

Fair value adjustment for securities

     929       82  

Cash transactions

    

Cash paid for interest

   $ 1,692     $ 1,983  

Cash paid for taxes

     1,550       1,350  

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

For the Nine Months Ended September 30, 2016 and 2015

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

 

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

Balance at December 31, 2014

     3,371,616       $ 7,215       $ 22,919       $ 5,031      $ (389   $ 34,776   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           2,867        —          2,867   

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

     —           —           —           (540     —          (540

Other comprehensive income

     —           —           —           —          55        55   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

     3,371,616       $ 7,215       $ 22,919       $ 7,358      $ (334   $ 37,158   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

     4,378,436       $ 9,370       $ 31,495       $ 7,920      $ (589   $ 48,196   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           2,993        —          2,993   

Dividends on common stock ($0.18 per share year-to-date)

     —           —           —           (787     —          (787

Other comprehensive income

     —           —           —           —          613        613   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

     4,378,436       $ 9,370       $ 31,495       $ 10,126      $ 24      $ 51,015   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

5


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 September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 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, 2015. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2015 included in Financial’s Annual Report on Form 10-K. Results for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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

Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s estimate of an amount that is adequate to absorb probable losses inherent in the loan portfolio of Bank of the James (the “Bank”), Financial’s wholly-owned subsidiary. The allowance for loan losses is established through a provision for loan 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.

Note 3 – Earnings Per Common Share (EPS)

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 diluted earnings per share. The following is a summary of the earnings per share calculation for the three and nine months ended September 30, 2016 and 2015.

 

6


Table of Contents

Note 3 – Earnings Per Common Share (EPS) (continued)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Net income

   $ 1,055,000       $ 983,000       $ 2,993,000       $ 2,867,000   

Basic EPS weighted average shares outstanding

     4,378,436         3,371,616         4,378,436         3,371,616   

Incremental shares attributable to stock options

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS weighted average shares outstanding

     4,378,436         3,371,616         4,378,436         3,371,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.24       $ 0.29       $ 0.68       $ 0.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.24       $ 0.29       $ 0.68       $ 0.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months
Ended
September 30,
     Nine Months
Ended
September 30,
 
     2016      2015      2016      2015  

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

     636         66,313         636         66,313   

The foregoing shares were anti-dilutive because the exercise price of the options was greater than the market price on September 30, 2016 and 2015.

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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Table of Contents

Note 4 – Stock Based Compensation (continued)

 

Stock option plan activity for the nine months ended September 30, 2016 is summarized below:

 

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

Options outstanding, January 1, 2016

     636      $ 12.79        

Granted

     —           —           

Exercised

     —           —           

Forfeited

     —           —           
  

 

 

          

Options outstanding, September 30, 2016

     636        12.79        1.67      $  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2016

     636      $ 12.79        1.67      $  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Intrinsic value is calculated by subtracting the exercise price of option shares from the market price of underlying shares as of September 30, 2016 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:

Fair Value on a Recurring Basis

Securities Available-for-Sale

Fair values of securities, excluding restricted investments in Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Bankers’ Bank stock are based on quoted prices available in an active market. If quoted prices are available, these securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.

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

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

Restricted securities noted above are classified as such because their ownership is restricted to certain types of entities and there is no established market for their resale. When the stock is repurchased, the shares are repurchased at the stock’s book value; therefore, the carrying amount of restricted securities approximate fair value. Restricted securities are considered to be Level 2.

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

            Carrying Value at September 30, 2016
(in thousands)
 

Description

   Balance as of
September 30,
2016
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US agency obligations

   $ 14,096       $ —         $ 14,096       $ —     

Mortgage-backed securities

     12,927         —           12,927         —     

Municipals

     10,282         —           10,282         —     

Corporates

     2,617            2,617      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 39,922       $ —         $ 39,922       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Carrying Value at December 31, 2015
(in thousands)
 

Description

   Balance as of
December 31,
2015
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US agency obligations

   $ 18,810       $ —         $ 18,810       $ —     

Mortgage-backed securities

     10,647         —           10,647         —     

Municipals

     5,034         —           5,034         —     

Corporates

     1,505         —           1,505         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 35,996       $ —         $ 35,996       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value on a Non-recurring Basis

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, 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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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

Loans held for sale

Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended September 30, 2016. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale, net on the Consolidated Statements of Income.

Other real estate owned

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

Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO 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, 2016  

Description

   Balance as of
September 30,
2016
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans*

   $ 2,540       $ —         $ —         $ 2,540   

Loans held for sale

     3,048         —           3,048         —     

Other real estate owned

     2,370         —           —           2,370   

 

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

 

            Carrying Value at December 31, 2015  

Description

   Balance as of
December 31,
2015
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans*

   $ 2,896       $ —         $ —         $ 2,896   

Loans held for sale

     1,964         —           1,964         —     

Other real estate owned

     1,965         —           —           1,965   

 

* Includes loans charged down 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, 2016
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range (Weighted
Average)

Assets

           

Impaired loans

   $ 2,540      

Discounted appraised value

  

Selling cost

   5% - 10% (6%)
        

Discount for lack of marketability and age of appraisal

   0% - 25% (15%)

OREO

     2,370      

Discounted appraised value

  

Selling cost

   5% - 10% (6%)
        

Discount for lack of marketability and age of appraisal

   0% - 25% (15%)

 

     Quantitative information about Level 3 Fair Value Measurements for December 31, 2015
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range (Weighted
Average)

Assets

           

Impaired loans

   $ 2,896      

Discounted appraised value

  

Selling cost

   5% - 10% (6%)
        

Discount for lack of marketability and age of appraisal

   0% - 45% (15%)

OREO

     1,965      

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, 2016 and December 31, 2015 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, 2016 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

   $ 16,206       $ 16,206       $ —         $ —         $ 16,206   

Fed funds sold

     9,725         9,725               9,725   

Securities

              

Available-for-sale

     39,922         —           39,922         —           39,922   

Held-to-maturity

     3,304         —           3,425         —           3,425   

Restricted stock

     1,373            1,373            1,373   

Loans, net

     457,136         —           —           465,182         465,182   

Loans held for sale

     3,048         —           3,048         —           3,048   

Interest receivable

     1,307         —           1,307         —           1,307   

BOLI

     12,586         —           12,586         —           12,586   

Liabilities

              

Deposits

   $ 507,397       $ —         $ 510,504       $ —         $ 510,504   

Interest payable

     77         —           77         —           77   

 

            Fair Value Measurements at December 31, 2015 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

   $ 15,952       $ 15,952       $ —         $ —         $ 15,952   

Fed funds sold

     12,703         12,703               12,703   

Securities

              

Available-for-sale

     35,996         —           35,996         —           35,996   

Held-to-maturity

     2,519         —           2,649         —           2,649   

Restricted stock

     1,313         —           1,313            1,313   

Loans, net

     430,445         —           —           438,322         438,322   

Loans held for sale

     1,964         —           1,964         —           1,964   

Interest receivable

     1,248         —           1,248         —           1,248   

BOLI

     9,781         —           9,781         —           9,781   

Liabilities

              

Deposits

   $ 467,610       $ —         $ 468,773       $ —         $ 468,773   

Capital notes

     10,000         —           10,024         —           10,024   

Interest payable

     61         —           61         —           61   

 

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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

As of December 31, 2015, Financial had $10,000,000 categorized as “Capital Notes” which represents the proceeds of the private placement of $10,000,000 in unregistered debt securities as previously disclosed (the “2012 Notes”). The 2012 Notes bore interest at the rate of 6% per year with interest payable quarterly in arrears. On December 3, 2015, Financial closed a private placement of common stock pursuant to which it received gross proceeds of $11,520,000 by selling an aggregate of 1,000,000 shares of Financials’ Common Stock at a price of $11.52 per share, as part of a private placement (the “Common Stock Private Placement”). Financial used $10,000,000 of the proceeds from the Common Stock Private Placement to prepay in full the 2012 Notes on January 5, 2016.

 

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Table of Contents

Note 7 – Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of September 30, 2016 and December 31, 2015 (amounts in thousands):

 

     Amortized
Costs
     September 30, 2016
Gross Unrealized
     Fair Value  
        Gains      (Losses)     

Held-to-Maturity

           

US agency obligations

   $ 3,304       $ 121       $ —         $ 3,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US agency obligations

     14,372         10         (286      14,096   

Mortgage-backed securities

     12,809         125         (7      12,927   

Municipals

     10,078         256         (52      10,282   

Corporates

     2,627         2         (12      2,617   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 39,886       $ 393       $ (357    $ 39,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Amortized
Costs
     December 31, 2015
Gross Unrealized
     Fair Value  
        Gains      (Losses)     

Held-to-Maturity

           

US agency obligations

   $ 2,519       $ 130       $ —         $ 2,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US agency obligations

     19,606         3         (799      18,810   

Mortgage-backed securities

     10,778         4         (135      10,647   

Municipals

     4,984         84         (34      5,034   

Corporates

     1,521         —           (16      1,505   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 36,889       $ 91       $ (984    $ 35,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 7 – Securities (continued)

 

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2016 and December 31, 2015 (amounts in thousands):

 

     Less than 12 months      More than 12 months      Total  

September 30, 2016

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

Description of securities

                 

U.S. agency obligations

   $ 13,077       $ 286       $ —         $ —         $ 13,077       $ 286   

Mortgage-backed securities

     3,461         7         —           —           3,461         7   

Municipals

     3,964         52         —           —           3,964         52   

Corporates

     2,087         12         —           —           2,087         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,589       $ 357       $ —         $ —         $ 22,589       $ 357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 months      More than 12 months      Total  

December 31, 2015

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

Description of securities

                 

U.S. agency obligations

   $ 7,160       $ 353       $ 10,650       $ 446       $ 17,810       $ 799   

Mortgage-backed securities

     6,726         77         1,979         58         8,705         135   

Municipals

     2,341         25         503         9         2,844         34   

Corporates

     1,505         16         —           —           1,505         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,732       $ 471       $ 13,132       $ 513       $ 30,864       $ 984   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016, 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, 2016, the Bank owned 18 securities that were being evaluated for other than temporary impairment. Six of these securities were S&P rated AAA, 11 were rated AA and one was rated A. As of September 30, ten of these securities were direct obligations of the U.S. government or government sponsored entities, six were municipal issues, and two were investments in domestic corporate issued securities.

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

 

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Table of Contents

Note 8 – Business Segments

The Company has two reportable business segments: (i) a traditional full service community banking segment and, (ii) a mortgage loan origination business. The community banking business segment includes Bank of the James which provides loans, deposits, investments and insurance to retail and commercial customers throughout Region 2000 and other areas within Central Virginia. The mortgage segment provides a variety of mortgage loan products principally within Region 2000. Mortgage loans are originated and sold in the secondary market through purchase commitments from investors with servicing released. Because of the pre-arranged purchase commitments, there is minimal risk to the Company.

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

 

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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, 2016 and 2015 was as follows (dollars in thousands):

Business Segments

 

     Community
Banking
     Mortgage      Total  

Nine months ended September 30, 2016

        

Net interest income

   $ 14,297       $  —         $ 14,297   

Provision for loan losses

     595         —           595   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     13,702         —           13,702   

Noninterest income

     1,816         1,789         3,605   

Noninterest expenses

     11,466         1,427         12,893   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     4,052         362         4,414   

Income tax expense

     1,298         123         1,421   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 2,754       $ 239       $ 2,993   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 556,824       $ 3,128       $ 559,952   
  

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2015

        

Net interest income

   $ 13,011       $  —         $ 13,011   

Provision for loan losses

     277         —           277   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     12,734         —           12,734   

Noninterest income

     1,428         1,795         3,223   

Noninterest expenses

     10,390         1,343         11,733   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     3,772         452         4,224   

Income tax expense

     1,203         154         1,357   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 2,569       $ 298       $ 2,867   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 503,741       $ 3,874       $ 507,615   
  

 

 

    

 

 

    

 

 

 

Three months ended September 30, 2016

        

Net interest income

   $ 4,867       $  —         $ 4,867   

Provision for loan losses

     145         —           145   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,722         —           4,722   

Noninterest income

     688         593         1,281   

Noninterest expenses

     3,985         464         4,449   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,425         129         1,554   

Income tax expense

     455         44         499   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 970       $ 85       $ 1,055   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 556,824       $ 3,128       $ 559,952   
  

 

 

    

 

 

    

 

 

 

Three months ended September 30, 2015

        

Net interest income

   $ 4,491       $  —         $ 4,491   

Provision for loan losses

     120         —           120   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,371         —           4,371   

Noninterest income

     561         637         1,198   

Noninterest expenses

     3,613         505         4,118   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,319         132         1,451   

Income tax expense

     423         45         468   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 896       $ 87       $ 983   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 503,741       $ 3,874       $ 507,615   
  

 

 

    

 

 

    

 

 

 

 

19


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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,
2016
     December 31,
2015
 

Commercial

   $ 85,330       $ 76,773   

Commercial real estate

     228,689         217,125   

Consumer

     84,148         81,531   

Residential

     63,922         59,699   
  

 

 

    

 

 

 

Total loans (1)

     462,089         435,128   

Less allowance for loan losses

     4,953         4,683   
  

 

 

    

 

 

 

Net loans

   $ 457,136       $ 430,445   
  

 

 

    

 

 

 

 

(1) Includes deferred costs of $199 and $263, respectively.

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

 

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


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

 

Loans on Non-Accrual Status

(dollars in thousands)

 

     As of  
     September 30, 2016      December 31, 2015  

Commercial

   $ 369       $ 483   

Commercial Real Estate:

     

Commercial Mortgages – Owner Occupied

     859         799   

Commercial Mortgages – Non-Owner Occupied

     —           514   

Commercial Construction

     256         367   

Consumer

     

Consumer Unsecured

     —           31   

Consumer Secured

     27         269   

Residential:

     

Residential Mortgages

     853         695   

Residential Consumer Construction

     71         248   
  

 

 

    

 

 

 

Totals

   $ 2,435       $ 3,406   
  

 

 

    

 

 

 

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 increased to $2,370,000 on September 30, 2016 from $1,965,000 on December 31, 2015. The following table represents the changes in OREO balance during the nine months ended September 30, 2016 and year ended December 31, 2015.

OREO Changes

(dollars in thousands)

 

     Nine months ended
September 30, 2016
     Year ended
December 31, 2015
 

Balance at the beginning of the year (net)

   $ 1,965       $ 956   

Transfers from loans

     475         1,425   

Capitalized costs

     —           25   

Writedowns

     (50      (75

Sales proceeds

     (21      (360

Gain (loss) on disposition

     1         (6
  

 

 

    

 

 

 

Balance at the end of the period (net)

   $ 2,370       $ 1,965   
  

 

 

    

 

 

 

At September 30, 2016 and December 31, 2015, the Company had no consumer mortgage loan secured by residential real estate for which foreclosure was in process. The Company held one residential real estate property in other real estate owned as of September 30, 2016 and no residential real estate property in other real estate owned as of December 31, 2015.

 

22


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

 

     Impaired Loans
(dollars in thousands)
As of and For the Nine Months Ended September 30, 2016
 
2016    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 528       $ 528       $ —         $ 264       $ 23   

Commercial Real Estate

              

Commercial Mortgages – Owner Occupied

     3,042         3,088         —           3,062         108   

Commercial Mortgage Non-Owner Occupied

     352         352         —           265         18   

Commercial Construction

     —           —           —           14         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     19         19         —           20         1   

Residential

              

Residential Mortgages

     1,741         1,795         —           1,869         51   

Residential Consumer Construction

     —           —           —           86         —     

With An Allowance Recorded:

              

Commercial

   $ 986       $ 1,081       $ 535       $ 1,083       $ 25   

Commercial Real Estate

              

Commercial Mortgages – Owner Occupied

     1,598         1,619         260         1,238         65   

Commercial Mortgage Non-Owner Occupied

     75         75         20         374         4   

Commercial Construction

     169         647         75         255         —     

Consumer

              

Consumer Unsecured

     —           —           —           16         —     

Consumer Secured

     111         111         111         151         6   

Residential

              

Residential Mortgages

     451         478         72         551         19   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 1,514       $ 1,609       $ 535       $ 1,347       $ 48   

Commercial Real Estate

              

Commercial Mortgages – Owner Occupied

     4,640         4,707         260         4,300         173   

Commercial Mortgage Non-Owner Occupied

     427         427         20         639         22   

Commercial Construction

     169         647         75         269         —     

Consumer

              

Consumer Unsecured

     —           —           —           16         —     

Consumer Secured

     130         130         111         171         7   

Residential

              

Residential Mortgages

     2,192         2,273         72         2,420         70   

Residential Consumer Construction

     —           —           —           86         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,072       $ 9,793       $ 1,073       $ 9,248       $ 320   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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, 2015
 
2015    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ —         $ —         $ —         $ 1,009       $ —     

Commercial Real Estate

              

Commercial Mortgages – Owner Occupied

     3,082         3,100         —           2,959         174   

Commercial Mortgage Non-Owner Occupied

     177         177         —           628         12   

Commercial Construction

     27         514         —           244         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     20         20         —           21         1   

Residential

              

Residential Mortgages

     1,997         2,027         —           1,466         86   

Residential Consumer Construction

     171         176         —           86         4   

With An Allowance Recorded:

              

Commercial

   $ 1,180       $ 1,256       $ 610       $ 1,293       $ 38   

Commercial Real Estate

              

Commercial Mortgages – Owner Occupied

     877         883         163         865         35   

Commercial Mortgage Non-Owner Occupied

     672         738         175         399         38   

Commercial Construction

     340         700         75         170         —     

Consumer

              

Consumer Unsecured

     31         32         31         16         1   

Consumer Secured

     190         193         153         155         10   

Residential

              

Residential Mortgages

     650         800         87         740         42   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 1,180       $ 1,256       $ 610       $ 2,302       $ 38   

Commercial Real Estate

              

Commercial Mortgages – Owner Occupied

     3,959         3,983         163         3,824         209   

Commercial Mortgage Non-Owner Occupied

     849         915         175         1,027         50   

Commercial Construction

     367         1,214         75         414         —     

Consumer

              

Consumer Unsecured

     31         32         31         16         1   

Consumer Secured

     210         213         153         176         11   

Residential

              

Residential Mortgages

     2,647         2,827         87         2,206         128   

Residential Consumer Construction

     171         176         —           86         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,414       $ 10,616       $ 1,294       $ 10,051       $ 441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Nine Months Ended September 30, 2016
 
2016    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

   $ 1,195      $ 1,751      $ 1,073      $ 664      $ 4,683   

Charge-offs

     (97     (156     (239     —          (492

Recoveries

     5        126        35        1        167   

Provision

     392        332        53        (182     595   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,495      $ 2,053      $ 922      $ 483      $ 4,953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 535      $ 355      $ 111      $ 72      $ 1,073   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     960        1,698        811        411        3,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,495      $ 2,053      $ 922      $ 483      $ 4,953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,514      $ 5,236      $ 130      $ 2,192      $ 9,072   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     83,816        223,453        84,018        61,730        453,017   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 85,330      $ 228,689      $ 84,148      $ 63,922      $ 462,089   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Year Ended December 31, 2015
 
2015    Commercial     Commercial
Real Estate
    Consumer     Residential      Total  

Allowance for Loan Losses:

           

Beginning Balance

   $ 1,235      $ 2,194      $ 812      $ 549       $ 4,790   

Charge-offs

     (294     (64     (257     —           (615

Recoveries

     14        122        54        36         226   

Provision

     240        (501     464        79         282   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,195      $ 1,751      $ 1,073      $ 664       $ 4,683   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 610      $ 413      $ 184      $ 87       $ 1,294   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: Collectively evaluated for impairment

     585        1,338        889        577         3,389   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Totals:

   $ 1,195      $ 1,751      $ 1,073      $ 664       $ 4,683   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

           

Ending Balance: Individually evaluated for impairment

   $ 1,180      $ 5,175      $ 241      $ 2,818       $ 9,414   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: Collectively evaluated for impairment

     75,593        211,950        81,290        56,881         425,714   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Totals:

   $ 76,773      $ 217,125      $ 81,531      $ 59,699       $ 435,128   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

26


Table of Contents

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

 

     Age Analysis of Past Due Loans as of
September 30, 2016
(dollars in thousands)
 
2016    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than
90 Days
     Total Past
Due
     Current      Total
Loans
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 13       $ —         $ 369       $ 382       $ 84,948       $ 85,330       $ —     

Commercial Real Estate:

                    

Commercial Mortgages – Owner Occupied

     625         —           859         1,484         86,852         88,336         —     

Commercial Mortgages – Non-Owner Occupied

     88         —           —           88         128,429         128,517         —     

Commercial Construction

     —           —           256         256         11,580         11,836         —     

Consumer:

                    

Consumer Unsecured

     19         —           —           19         7,551         7,570         —     

Consumer Secured

     362         —           —           362         76,216         76,578         —     

Residential:

                    

Residential Mortgages

     1,071         258         802         2,131         50,636         52,767         —     

Residential Consumer Construction

     —           —           71         71         11,084         11,155         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,178       $ 258       $ 2,357       $ 4,793       $ 457,296       $ 462,089       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Age Analysis of Past Due Loans as of
December 31, 2015
(dollars in thousands)
 
2015    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than
90 Days
     Total Past
Due
     Current      Total
Loans
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ —         $ 244       $ 483       $ 727       $ 76,046       $ 76,773       $ —     

Commercial Real Estate:

                    

Commercial Mortgages – Owner Occupied

     425         571         426         1,422         75,549         76,971         —     

Commercial Mortgages – Non-Owner Occupied

     189         90         438         717         126,138         126,855         —     

Commercial Construction

     —           —           367         367         12,932         13,299         —     

Consumer:

                    

Consumer Unsecured

     2         —           31         33         6,828         6,861         —     

Consumer Secured

     198         68         128         394         74,276         74,670         —     

Residential:

                    

Residential Mortgages

     512         468         543         1,523         48,490         50,013         —     

Residential Consumer Construction

     —           —           248         248         9,438         9,686         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,326       $ 1,441       $ 2,664       $ 5,431       $ 429,697       $ 435,128       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

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

 

     Credit Quality Information – by Class
September 30, 2016
(dollars in thousands)
 
2016    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 81,422       $ 1,690       $ 649       $ 1,569       $ —         $ 85,330   

Commercial Real Estate:

                 

Commercial Mortgages – Owner Occupied

     80,305         3,014         304         4,713         —           88,336   

Commercial Mortgages – Non Owner Occupied

     123,754         3,546         652         565         —           128,517   

Commercial Construction

     11,580         —           —           256         —           11,836   

Consumer

                 

Consumer Unsecured

     7,570         —           —           —           —           7,570   

Consumer Secured

     76,231         —           —           347         —           76,578   

Residential:

                 

Residential Mortgages

     50,058         —           246         2,463         —           52,767   

Residential Consumer Construction

     11,084         —           —           71         —           11,155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 442,004       $ 8,250       $ 1,851       $ 9,984       $ —         $ 462,089   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Credit Quality Information – by Class
December 31, 2015
(dollars in thousands)
 
2015    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 73,831       $ 290       $ 1,457       $ 1,195       $ —         $ 76,773   

Commercial Real Estate:

                 

Commercial Mortgages – Owner Occupied

     68,813         1,353         2,801         4,004         —           76,971   

Commercial Mortgages – Non Owner Occupied

     120,462         1,558         3,895         940         —           126,855   

Commercial Construction

     12,932         —           —           367         —           13,299   

Consumer

                 

Consumer Unsecured

     6,830         —           —           31         —           6,861   

Consumer Secured

     73,825         276         50         519         —           74,670   

Residential:

                 

Residential Mortgages

     47,180         —           —           2,833         —           50,013   

Residential Consumer Construction

     9,438         —           —           248         —           9,686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 413,311       $ 3,477       $ 8,203       $ 10,137       $ —         $ 435,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 TDRs during the three and nine months ended September 30, 2016.

There were no loan modifications that would have been classified as TDRs during the three months ended September 30, 2015

The following table describe the loan modifications classified as TDRs during the nine months ended September 30, 2015:

 

For the Nine Months Ended September 30, 2015

(dollars in thousands)

 

Troubled Debt Restructurings

During the Period

   Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Commercial

     1       $ 19       $ 19   

Commercial Real Estate

     2         452         452   

The loans noted in the table above were modified during the period to extend maturity only. These loans are factored into the determination of the allowance for loan losses as of the period indicated and are included in the Bank’s impaired loan analysis and individually evaluated for impairment.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and nine months ended September 30, 2016 and 2015.

At September 30, 2016 and December 31, 2015, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

Note 10 – Recent accounting pronouncements

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.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires

 

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Note 10 – Recent accounting pronouncements (continued)

 

separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

During March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

 

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Note 10 – Recent accounting pronouncements (continued)

 

During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 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-

 

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looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

GENERAL

Critical Accounting Policies

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

The allowance for loan losses is management’s estimate of an amount that is adequate to absorb probable losses inherent in the 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 division”), investment services through the Bank’s Investment division (which we refer to as “Investment division”), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance business”). Of these three other business activities, only the Mortgage division is material to the Bank’s results and operations.

 

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

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

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

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

 

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

Full Service Branches

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  A branch located at 180 Old Courthouse Rd, Appomattox, VA (the “Appomattox Branch”)

Limited Service Branches

 

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

 

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

 

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

Loan Production Offices

 

  Residential mortgage loan production office located at the Forest Branch,

 

  Commercial loan and residential mortgage loan production office located at 3959 Electric Road SW, Suite 280, Roanoke, Virginia,

 

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

 

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

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

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

 

    Real property located in the Timberlake Road area of Campbell County (Lynchburg), Virginia. The Timberlake property is not suitable for its intended use as a branch bank. Management anticipates that it will be necessary to raze the current structures and replace it with appropriate new construction.

 

    Real property located at 5 Village Highway (near the intersection of Routes 501 and 24) in Rustburg, Virginia. The structure on the property has been demolished and removed. The Bank does not anticipate opening a branch at this location prior to 2017.

 

    Real property located near the intersection of Confederate Boulevard and Moses Avenue in Appomattox, Virginia. There is no structure on the property. The bank is considering opening a temporary full-service branch while it builds a permanent facility. The Bank does not anticipate opening the temporary branch at this location prior to the fourth quarter of 2016.

 

    Real property located at 45 South Main Street, Lexington, Virginia. The bank does not anticipate opening a branch at this location prior to the second quarter of 2017.

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

In addition, the Bank determined that a portion of real property located on Route 460 (Bedford County) is suitable for branch expansion and has reclassified the property accordingly.

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

 

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

 

     September 30, 2016
(in thousands)
 

Commitments to extend credit

   $ 90,163   

Letters of Credit

     3,214   
  

 

 

 

Total

   $ 93,377   
  

 

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.

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

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

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of September 30, 2016 and December 31, 2015 and the results of operations of Financial for the three and nine month periods ended September 30, 2016 and 2015. 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, 2016 as Compared to December 31, 2015

Total assets were $559,952,000 on September 30, 2016 compared with $527,143,000 at December 31, 2015, an increase of 6.22%. The increase in total assets was due to an increase in deposits which were used to fund loan growth for the nine months of 2016. On January 5, 2016, the Company retired $10,000,000 in capital notes issued by the Company in 2012, which offset the increase in deposits as of September 30, 2016 from December 31, 2015.

Total deposits increased from $467,610,000 as of December 31, 2015 to $507,397,000 on September 30, 2016, an increase of 8.51%. The increase resulted from an increase in each of our deposit categories. In particular, noninterest bearing demand deposits increased from $91,325,000 on December 31, 2015 to $102,547,000 on September 30, 2016 and time deposits increased from $143,421,000 on December 31, 2015 to $163,965,000 on September 30, 2016.

 

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Total loans, excluding loans held for sale, increased to $462,089,000 on September 30, 2016 from $435,128,000 on December 31, 2015. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $457,136,000 on September 30, 2016 from $430,445,000 on December 31, 2015, an increase of 6.20%. 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, 2016     December 31, 2015  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 85,330         18.47   $ 76,773         17.64

Commercial Real Estate

     228,689         49.49     217,125         49.90

Consumer

     84,148         18.21     81,531         18.74

Residential

     63,922         13.83     59,699         13.72
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 462,089         100.00   $ 435,128         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (“OREO”) decreased to $4,805,000 on September 30, 2016 from $5,371,000 on December 31, 2015. OREO increased to $2,370,000 on September 30, 2016 from $1,965,000 on December 31, 2015. This increase was due to the Bank’s foreclosure on four properties in the nine months ended September 30, 2016 (two properties in the first quarter and two properties in the second quarter) on real estate that secured loans then classified as non-performing. Following the foreclosure and subsequent re-categorization, non-performing loans decreased from $3,406,000 at December 31, 2015 to $2,435,000 at September 30, 2016. As discussed in more detail below under “Results of Operations – Allowance for Loan Losses,” management had provided for the anticipated losses on these loans in the allowance for loan losses. If interest on non-accrual loans had been accrued, such interest cumulatively would have approximated $423,000 and $472,000 as of September 30, 2016 and December 31, 2015, 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 loan 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, 2015, the Bank was carrying three OREO properties on its books at a value of $1,965,000. During the nine months ended September 30, 2016, the Bank acquired four additional OREO properties and disposed of one OREO property, and as of September 30, 2016 the Bank is carrying six OREO properties at a value of $2,370,000. 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 $457,000 at September 30, 2016 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $646,000 at December 31, 2015. 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.

 

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Cash and cash equivalents decreased to $25,931,000 on September 30, 2016 from $28,655,000 on December 31, 2015. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). The decrease in cash and cash equivalents was due primarily to the use of $10,000,000 from the common stock private placement to retire the Company’s capital notes in the first quarter. In addition, cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts. The increase in time deposits discussed above has been used to fund loans and investments.

Securities held-to-maturity increased to $3,304,000 on September 30, 2016 from $2,519,000 on December 31, 2015. Following the call of a security in the amount of $500,000, the Bank reinvested the proceeds plus an additional $790,000 in another security. Securities available-for-sale increased to $39,922,000 on September 30, 2016, from $35,996,000 on December 31, 2015. The increase resulted from the Bank’s desire to build on-balance sheet liquidity and because of a slight increase in interest rates. During the nine months ended September 30, 2016 the Bank received $8,675,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale and $19,934,000 in proceeds from the sale of securities available-for-sale. The Bank purchased $31,576,000 in securities available-for sale during the same period.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $565,000 at September 30, 2016 and $505,000 at December 31, 2015, an increase of $60,000. This increase is attributable to the FHLBA’s increase in minimum ownership requirements. 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, 2016, Financial, on a consolidated basis, had liquid assets of $65,853,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $9,529,000 of the available-for-sale securities are pledged as collateral with $4,316,000 pledged as security for public deposits and $5,213,000 pledged as security on a line of credit the Bank may draw on from time to time to meet liquidity needs. This line of credit currently has a zero balance. Management believes that liquid assets were adequate at September 30, 2016. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, if additional liquidity is needed, the Bank has the ability to purchase federal funds on the open market, borrow from the FHLBA using loans or investments within the Bank’s portfolio as collateral, and to borrow from the Federal Reserve Bank’s discount window.

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

As of December 31, 2015, Financial had $10,000,000 categorized as “Capital Notes” which represents the proceeds of the private placement of $10,000,000 in unregistered debt securities as previously disclosed (the “2012 Notes”). The 2012 Notes bore interest at the rate of 6% per year with interest payable quarterly in arrears. On December 3, 2015, Financial closed a private placement of common stock pursuant to which it received gross proceeds of $11,520,000 by selling an aggregate of 1,000,000 shares of Financials’ Common Stock at a price of $11.52 per share, as part of a private placement (the “Common Stock Private Placement”). Financial used $10,000,000 of the proceeds from the Common Stock Private Placement to prepay in full the 2012 Notes on January 5, 2016.

 

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At September 30, 2016, the Bank had a leverage ratio of approximately 9.14%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 10.65% and a total risk-based capital ratio of approximately 11.69%. As of September 30, 2016 and December 31, 2015 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, 2016 and December 31, 2015:

Bank Level Only Capital Ratios

 

Analysis of Capital (in 000’s)    September 30,
2016
     December 31,
2015
 

Tier 1 capital

     

Common Stock

   $ 3,742       $ 3,742   

Surplus

     19,325         19,325   

Retained earnings

     27,542         24,711   
  

 

 

    

 

 

 

Total Tier 1 capital

   $ 50,609       $ 47,778   
  

 

 

    

 

 

 

Tier 2 capital

     

Allowance for loan losses

   $ 4,953       $ 4,683   

Total Tier 2 capital:

   $ 4,953       $ 4,683   
  

 

 

    

 

 

 

Total risk-based capital

   $ 55,562       $ 52,461   
  

 

 

    

 

 

 

Risk weighted assets

   $ 475,318       $ 446,201   

Average total assets

   $ 553,575       $ 518,096   

 

     Actual     Regulatory Benchmarks  
     September 30,
2016
    December 31,
2015
    For Capital
Adequacy
Purposes
    For Well
Capitalized
Purposes
 

Capital Ratios:

        

Tier 1 capital to average total assets

     9.14     9.22     4.00     5.00

Common Equity Tier 1 capital

     10.65     10.71     4.50     6.50

Tier 1 risk-based capital ratio

     10.65     10.71     6.00     8.00

Total risk-based capital ratio

     11.69     11.76     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 $1,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis at September 30, 2016 would be comparable to those of the Bank.

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. The phase-in period for this rule began in January 2015. 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.

 

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The capital conservation buffer will be phased in between January 1, 2016 when it will begin at 0.625% and increase by an additional 0.625% annually until it reaches 2.5% on January 1, 2019. This will result in an effective Tier 1 capital ratio of 8.5% upon full implementation. The capital conservation buffer will limit capital distributions, stock redemptions, and certain discretionary bonuses. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and Financial to pay dividends, repurchase shares or pay discretionary bonuses. The rule also 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.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2016 and 2015

Earnings Summary

Financial had net income including all operating segments of $1,055,000 and $2,993,000 for the three and nine months ended September 30, 2016, compared to $983,000 and $2,867,000 for the comparable periods in 2015. Basic and diluted earnings per common share for the three and nine months ended September 30, 2016 were $0.24 and $0.68, compared to basic and diluted earnings per share of $0.29 and $0.85 for the three and nine months ended September 30, 2015. Diluted earnings per share in the third quarter and nine months of 2016 reflected a 30% increase in the number of weighted average shares outstanding compared with the third quarter and nine months of 2015, resulting primarily from the issuance of one million new shares of the Company’s common stock on December 3, 2015.

The increase in net income for the three and nine months ended September 30, 2016 as compared to the prior year was due primarily to increases in net interest income and non-interest income. The increases were partially offset by an increase in non-interest expense arising from the Bank’s recent expansion into Charlottesville, Harrisonburg, and Roanoke. These expansions resulted in increases in personnel expense, occupancy expense, professional and data processing expense, and marketing expense.

These operating results represent an annualized return on average stockholders’ equity of 8.34% and 8.10% for the three and nine months ended September 30, 2016, compared with 10.64% for both the three and nine months ended September 30, 2015. This decrease for the three and nine months was the result of an increase in outstanding shares resulting from the company’s issuance of common stock in December 2015. The Company had an annualized return on average assets of 0.76% and 0.75% for the three and nine months ended September 30, 2016 compared with 0.79% and 0.78% for the same periods in 2015. The decrease for the three and nine months ended September 30, 2016 largely resulted from an increase in average assets since September 30, 2015.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $5,477,000 and $16,005,000 for the three and nine months ended September 30, 2016 from $5,195,000 and $15,012,000 for the same periods in 2015, an increase of 5.43% and 6.61%, respectively. Interest income increased primarily because of increased balances in the loan portfolio. The average rate received on earning assets decreased to 4.22% and 4.25% for the three and nine months ended September 30, 2016 as compared with 4.35% and 4.37% for each of the comparable periods in 2015. The rate on total average earning assets decreased primarily because of a decrease in the rate received on loans 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.

 

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Interest expense decreased to $610,000 and $1,708,000 for the three and nine months ended September 30, 2016 from $704,000 and $2,001,000 for the same periods in 2015, decreases of 13.35% and 14.64%, respectively. The decreases in interest expense resulted primarily from the elimination of interest paid on capital notes which the Company retired in January. This decrease was offset by an increase in interest paid on time deposits as well as interest bearing demand deposits. The Bank’s average rate paid on interest bearing deposits was 0.61% and 0.58% during the three and nine month periods ended September 30, 2016 as compared to 0.62% and 0.57% for the same periods in 2015.

The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2016 was $4,867,000 and $14,297,000 compared to $4,491,000 and $13,011,000 for the same periods in 2015, increases of 8.37% and 9.88%, respectively. The change in net interest income for the three and nine months ended September 30, 2016 as compared with the comparable period in 2015 primarily is attributable to the increase in loan balances previously discussed. The net interest margin was 3.75% and 3.80% for the three and nine months ended September 30, 2016, as compared to 3.76% and 3.79% 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, gains on sales of mortgage loans held for sale, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income increased to $1,281,000 and $3,605,000 for the three and nine months ended September 30, 2016 from $1,198,000 and $3,223,000 for the three and nine months ended September 30, 2015. These increases for the three and nine months ended September 30, 2016 as compared to the same periods last year were due primarily due to an increase in gains on sales of securities from $10,000 and $43,000 for three and nine months ended September 30, 2015 to $218,000 and $446,000 the same periods this year. The increase for the three months ended September 30, 2016 was partially offset by a decrease in service charges, fees, and commissions and a decrease in gains on sales of loans held for sale from $397,000 and $623,000 for three months ended September 30, 2015 to $373,000 and $593,000, respectively for the three months ended September 30, 2016.

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

Purchase mortgage originations totaled approximately $11,922,000 and $38,402,000, or 54.43% and 62.13% of the total mortgage loans originated in both the three and nine months ended September 30, 2016 as compared to approximately $16,118,000 and $42,427,000, or 70.42% and 67.74%, of the total mortgage loans originated in the same periods in 2015. The decrease in amount of purchase mortgage originations resulted from a slight increase in longer-term interest rates. However, despite the increase in longer-term rates, refinancing activity continued to remain elevated primarily due to the relatively low interest rate environment as compared to long-term historical interest rate levels. Management anticipates that purchase mortgage originations will continue to represent a majority of mortgage originations. 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.

 

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Despite the recent fluctuations in rates, management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2016. Management expects that attractive rates coupled with the Mortgage division’s reputation in Region 2000 and the hiring of additional mortgage loan originators will allow us to maintain or increase revenue at the Mortgage division. 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. In the event that interest rates rise, management expects revenue from the mortgage segment could be under pressure.

Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by 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 2016.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three full-time employees 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 2016.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2016 increased to $4,449,000 and $12,893,000 from $4,118,000 and $11,733,000, an increase of 8.04% and 9.89%, respectively, from the comparable periods in 2015. This resulted from increases for personnel expense primarily related to the expansion into Charlottesville, Harrisonburg, and Roanoke, as well as increases in professional, data processing and outside expenses, marketing expenses, occupancy expenses, equipment expenses, and supplies expense. The increase in credit expense also increased primarily because of related to the increase in the number of mortgage originations. Total personnel expense was $2,318,000 and $6,717,000 for the three and nine month periods ended September 30, 2016 as compared to $2,135,000 and $6,346,000 for the same periods in 2015.

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision 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 two components – specific impairment and general reserves. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the loan loss calculation, the Bank provided $145,000 and $595,000 to the allowance for loan losses for the three and nine month periods ended September 30, 2016. This compares to provisions of $120,000 and $277,000 for the comparable periods in 2015, representing increases of 20.83% and 114.80%, respectively.

 

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General reserves related to historical loss experience have trended downward for several quarters. This downward trend is directly attributable to the Bank’s charge-off history through the most recent negative credit cycle. A significant part of the general reserve calculation incorporates how a particular loan class performs over a period of time (that is, its charge-off history). Following the financial crisis in 2008 and beyond that disrupted the banking and financial systems, the Bank’s asset quality deteriorated. This deterioration resulted in a significant increase in charge-offs against the Bank’s loan portfolio. The elevated charge-offs continued through 2011. During this period, the Bank’s loan loss methodology, which is based in part on the Bank’s charge-off history, dictated an increase in the amount allocated to the general reserve component of the loan loss reserve. Beginning in 2011, asset quality began to rapidly improve. While general reserves declined over the time period from 2011-2015, general reserves as a percentage of unimpaired loans have increased since December 31, 2015 as specific reserves have decreased.

Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for loan losses and constitute a realized loss. Charged-off loans were $114,000 and $492,000 for the three and nine months ended September 30, 2016 as compared to $29,000 and $489,000 for the comparable periods in 2015. 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, 2016, the Bank had recoveries of charged off loans of $35,000 and $167,000 as compared with $71,000 and $170,000 for the comparable periods in 2015.

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. As set forth in the tables below, the Bank’s allowance arising from the specific impairment evaluation as of September 30, 2016 decreased as compared to December 31, 2015.

The percentage of the allowance for loan losses to total loans was 1.07% as of September 30, 2016 and 1.08% as of December 31, 2015. The overall balance in the allowance for loan losses increased from $4,683,000 as of December 31, 2015 to $4,953,000 as of September 30, 2016. Despite the decrease in specific and general reserves, primarily due to the overall improvement in asset quality and the improvement in historical charge-off trends, the inherent risks associated with the increasing industry concentrations and commercial real estate concentrations within the portfolio have increased the qualitative portion of the general reserve. Management believes that the current allowance for loan losses is adequate.

 

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

 

    

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

 
     As of and For the Nine months Ended September 30, 2016  
        2016    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

   $ 1,195      $ 1,751      $ 1,073      $ 664      $ 4,683   

Charge-offs

     (97     (156     (239     —          (492

Recoveries

     3        126        35        1        167   

Provision

     392  (2)      332  (2)      53        (182 ) (1)      595   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,495      $ 2,053      $ 922      $ 483      $ 4,953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 535      $ 355      $ 111      $ 72      $ 1,073   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     960        1,698        811        411        3,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,495      $ 2,053      $ 922      $ 483      $ 4,953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,514      $ 5,236      $ 130      $ 2,192      $ 9,072   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     83,816        223,453        84,018        61,730        453,017   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 85,330      $ 228,689      $ 84,148      $ 63,922      $ 462,089   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 this segment.
(2) The increased concentration of loan balances in the commercial segments resulted in an increase in the provision for these categories. Management has a process for the ongoing evaluation of our loans and the specific risks associated with concentrations in each segment.

 

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Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

 
     As of and For the Year Ended December 31, 2015  
        2015    Commercial     Commercial
Real Estate
    Consumer     Residential      Total  

Allowance for Loan Losses:

           

Beginning Balance

   $ 1,235      $ 2,194      $ 812      $ 549       $ 4,790   

Charge-offs

     (294     (64     (257     —           (615

Recoveries

     14        122        54        36         226   

Provision

     240        (501 ) (1)      464        79         282   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,195      $ 1,751      $ 1,073      $ 664       $ 4,683   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 610      $ 413      $ 184      $ 87       $ 1,294   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: Collectively evaluated for impairment

     585        1,338        889        577         3,389   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Totals:

   $ 1,195      $ 1,751      $ 1,073      $ 664       $ 4,683   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

           

Ending Balance: Individually evaluated for impairment

   $ 1,180      $ 5,175      $ 241      $ 2,818       $ 9,414   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: Collectively evaluated for impairment

     75,593        211,950        81,290        56,881         425,714   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Totals:

   $ 76,773      $ 217,125      $ 81,531      $ 59,699       $ 435,128   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 this segment.

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)
 
     2016      2015      2016      2015  

Balance, beginning of period

   $ 4,887       $ 4,586       $ 4,683       $ 4,790   

Provision for loan losses

     145         120         595         277   

Loans charged off

     (114      (29      (492      (489

Recoveries of loans charged off

     35         71         167         170   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge offs) recoveries

     (79      42         (325      (319
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 4,953       $ 4,748       $ 4,953       $ 4,748   
  

 

 

    

 

 

    

 

 

    

 

 

 

No nonaccrual loans were excluded from impaired loan disclosure under current accounting rules at September 30, 2016 and December 31, 2015. If interest on these loans had been accrued, such income cumulatively would have approximated $423,000 and $472,000 on September 30, 2016 and December 31, 2015, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

 

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

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

 

RATING 1

   Excellent   

RATING 2

   Above Average   

RATING 3

   Satisfactory   

RATING 4

   Acceptable / Low Satisfactory   

RATING 5

   Monitor   

RATING 6

   Special Mention   

RATING 7

   Substandard   

RATING 8

   Doubtful   

RATING 9

   Loss   

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

 

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

 

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

 

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

 

 

“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated

 

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with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

 

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

 

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

Income Taxes

For the three and nine months ended September 30, 2016, Financial had an income tax expense of $499,000 and $1,421,000 as compared to $468,000 and $1,357,000 for the same periods in 2015. This represents an effective tax rate of 32.11% and 32.19% for the three and nine months ended September 30, 2016 as compared with 32.25% and 32.13% for the three and nine months ended September 30, 2015. Our effective rate was lower than the statutory corporate tax rate in both quarters because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance and certain tax free municipal securities.

 

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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended September 30, 2016 and 2015

(dollars in thousands)

 

     2016     2015  
    

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)

   $ 460,505      $ 5,186         4.52   $ 423,988      $ 4,940         4.62

Loans held for sale

     4,082        41         4.03     3,009        28         3.69

Fed funds sold

     7,237        4         0.22     5,935        3         0.20

Interest bearing bank balances

     6,000        13         0.87     5,000        3         0.24

Securities (3)

     40,890        232         2.28     34,726        220         2.52

Federal agency equities

     1,257        6         1.91     1,197        6         1.99

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     520,087        5,482         4.23     473,971        5,200         4.35
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,963          (4,629     

Non-earning assets

     37,223             24,681        
  

 

 

        

 

 

      

Total assets

   $ 552,347           $ 494,023        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 130,523      $ 93         0.29   $ 108,260      $ 69         0.25

Savings

     109,028        60         0.22     112,833        61         0.21

Time deposits

     161,781        457         1.13     135,627        423         1.24
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     401,332        610         0.61     356,720        553         0.62

Other borrowed funds

              

Fed funds purchased

     —          —           —          16        1         24.80

Other borrowings

     —          —           —          —          —           —     

Capital Notes

     —          —           —          10,000        150         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     401,332        610         0.61     366,736        704         0.76
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     99,839             90,103        

Other liabilities

     1,016             540        
  

 

 

        

 

 

      

Total liabilities

     502,187             457,379        

Stockholders’ equity

     50,160             36,644        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 552,347           $ 494,023        
  

 

 

        

 

 

      

Net interest income

     $ 4,872           $ 4,496      
    

 

 

        

 

 

    

Net interest margin

          3.76          3.76
       

 

 

        

 

 

 

Interest spread

          3.62          3.59
       

 

 

        

 

 

 

 

(1) Net accretion or amortization of deferred loan fees and costs are included in interest income.
(2) Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with non-accrual loans.
(3) The interest income and yields calculated on securities have been tax affected to reflect any tax exempt interest on municipal securities.

 

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Net Interest Margin Analysis

Average Balance Sheets

For the Nine months Ended September 30, 2016 and 2015

(dollars in thousands)

 

     2016     2015  
    

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)

   $ 446,637      $ 15,115         4.52   $ 412,366      $ 14,292         4.63

Loans held for sale

     3,615        97         3.59     2,263        62         3.66

Federal funds sold

     5,814        16         0.37     7,520        12         0.21

Interest bearing bank balances

     6,000        28         0.62     5,000        9         0.24

Securities (3)

     39,851        726         2.44     30,862        613         2.66

Federal agency equities

     1,237        39         4.22     1,292        40         4.14

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     503,270        16,021         4.26     459,419        15,028         4.37
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,803          (4,706     

Non-earning assets

     36,109             34,412        
  

 

 

        

 

 

      

Total assets

   $ 534,576           $ 489,125        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 124,942      $ 248         0.27   $ 105,866      $ 184         0.23

Savings

     111,011        180         0.22     115,079        191         0.22

Time deposits

     152,003        1,268         1.12     134,912        1,146         1.14
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     387,956        1,696         0.58     355,857        1,521         0.57

Other borrowed funds

              

Fed funds purchased

     494        4         1.08     168        2         1.59

Repurchase agreements

     —          —           —          —          —           —     

Other borrowings

     —          —           —          3,033        28         1.23

Capital Notes

     109        8         6.00     10,000        450         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     388,559        1,708         0.59     369,058        2,001         0.72
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     95,291             83,444        

Other liabilities

     1,309             595        
  

 

 

        

 

 

      

Total liabilities

     485,159             453,097        

Stockholders’ equity

     49,417             36,028        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 534,576           $ 489,125        
  

 

 

        

 

 

      

Net interest income

     $ 14,313           $ 13,027      
    

 

 

        

 

 

    

Net interest margin

          3.80          3.79
       

 

 

        

 

 

 

Interest spread

          3.66          3.65
       

 

 

        

 

 

 

 

(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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Table of Contents
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, 2016, 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.

 

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Table of Contents

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

We described the most significant risk factors applicable to the Company in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 17, 2016. We believe there have been no material changes from the risk factors disclosed on Form 10-K.

 

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

 

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 14, 2016
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 14, 2016
  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 14, 2016
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, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2016 and December 31, 2015; (ii) Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2016 and 2015 (iv) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2016 and 2015; (vi) Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

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 14, 2016     By   /S/ Robert R. Chapman III
     

Robert R. Chapman III, President

(Principal Executive Officer)

Date: November 14, 2016     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 14, 2016
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 14, 2016
  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 14, 2016
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, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2016 and December 31, 2015; (ii) Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2016 and 2015 (iv) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2016 and 2015; (vi) Notes to Unaudited Consolidated Financial Statements.

 

53