10-Q 1 d433937d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2012

 

 

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Virginia   001-35402   20-0500300

(State or other jurisdiction of

incorporation or organization)

 

(Commission

file number)

 

(I.R.S. Employer

Identification No.)

828 Main Street, Lynchburg, VA   24504
(Address of principal executive offices)   (Zip Code)

(434) 846-2000

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

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

 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 3,342,418 shares of Common Stock, par value $2.14 per share, were outstanding at November 9, 2012.

 

 

 


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

     34   
  Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     53   
  Item 4.   

Controls and Procedures

     53   

PART II – OTHER INFORMATION

     53   
  Item 1.   

Legal Proceedings

     53   
  Item 1A.   

Risk Factors

     53   
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     53   
  Item 3.   

Defaults Upon Senior Securities

     53   
  Item 4.   

Mine Safety Disclosures

     53   
  Item 5.   

Other Information

     53   
  Item 6.   

Exhibits

     54   

SIGNATURES

     55   


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)

 

     (unaudited)
9/30/2012
    (audited)
12/31/2011
 

Assets

    

Cash and due from banks

   $ 17,861      $ 17,678   

Federal funds sold

     3,157        5,662   
  

 

 

   

 

 

 

Total cash and cash equivalents

     21,018        23,340   
  

 

 

   

 

 

 

Securities held-to-maturity (fair value of $3,445 in 2012 and $8,533 in 2011)

     3,081        8,133   

Securities available-for-sale, at fair value

     52,260        48,338   

Restricted stock, at cost

     1,899        1,977   

Loans, net of allowance for loan losses of $5,693 in 2012 and $5,612 in 2011

     318,712        318,754   

Loans held for sale

     4,163        434   

Premises and equipment, net

     8,479        8,735   

Software, net

     192        124   

Interest receivable

     1,466        1,583   

Cash value - bank owned life insurance

     8,853        8,609   

Other real estate owned, net of valuation allowance

     2,267        3,253   

Income taxes receivable

     869        675   

Deferred tax asset

     953        1,375   

Other assets

     1,865        2,106   
  

 

 

   

 

 

 

Total assets

   $ 426,077      $ 427,436   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest bearing demand

   $ 62,311      $ 55,569   

NOW, money market and savings

     229,306        230,386   

Time

     92,732        88,279   
  

 

 

   

 

 

 

Total deposits

     384,349        374,234   

Repurchase agreements

     —          8,379   

FHLB borrowings

     2,000        10,000   

Capital notes

     10,000        7,000   

Interest payable

     77        111   

Other liabilities

     642        907   
  

 

 

   

 

 

 

Total liabilities

   $ 397,068      $ 400,631   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 3,342,418 and 3,342,415 as of September 30, 2012 and December 31, 2011

     7,152        7,152   

Additional paid-in-capital

     22,775        22,775   

Accumulated other comprehensive income (loss)

     765        (54

Retained deficit

     (1,683     (3,068
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 29,009      $ 26,805   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 426,077      $ 427,436   
  

 

 

   

 

 

 

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,
 
     2012      2011      2012      2011  

Interest Income

           

Loans

   $ 4,332      $ 4,355      $ 12,734      $ 13,212  

Securities

           

US Government and agency obligations

     219        239        740        681  

Mortgage backed securities

     2        94        22        357  

Municipals

     182        140        507        352  

Dividends

     4        3        33        29  

Other (Corporates)

     17        —           40        25  

Federal Funds sold

     7        5        18        18  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     4,763        4,836        14,094        14,674  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

           

NOW, money market savings

     164        353        578        1,429  

Time Deposits

     373        436        1,186        1,293  

FHLB borrowings

     50        75        199        223  

Reverse repurchase agreements

     —           21        15        55  

Capital notes

     149        105        387        315  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     736        990        2,365        3,315  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     4,027        3,846        11,729        11,359  

Provision for loan losses

     601        1,272        1,776        2,757  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     3,426        2,574        9,953        8,602  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other operating income

           

Mortgage fee income

     402        250        917        779  

Service charges, fees and commissions

     317        320        911        875  

Increase in cash value of life insurance

     81        54        244        164  

Other

     11        10        83        46  

Gain on sale of available-for-sale securities

     241        566        411        766  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     1,052        1,200        2,566        2,630  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other operating expenses

           

Salaries and employee benefits

     1,608        1,462        4,657        4,280  

Occupancy

     280        272        857        820  

Equipment

     250        263        748        780  

Supplies

     78        91        294        288  

Professional, data processing, and other outside expense

     508        557        1,524        1,526  

Marketing

     99        119        348        306  

Credit expense

     62        44        174        187  

Other real estate expenses

     586        452        908        667  

FDIC insurance expense

     145        145        433        515  

Other

     167        301        683        711  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expenses

     3,783        3,706        10,626        10,080  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     695        68        1,893        1,152  

Income tax expense

     156        4        508        334  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 539      $ 64      $ 1,385      $ 818  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - basic

     3,342,418        3,323,743        3,342,416        3,323,743  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     3,342,771        3,327,757        3,342,812        3,331,239  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share - basic

   $ 0.16      $ 0.02      $ 0.41      $ 0.25  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share - diluted

   $ 0.16      $ 0.02      $ 0.41      $ 0.25  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Three and nine months ended September 30, 2012 and 2011

(dollar amounts in thousands) (unaudited)

 

     Three months ended     Nine months ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Net Income

   $ 539      $ 64      $ 1,385      $ 818   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

        

Unrealized gains on securities available-for-sale net of deferred taxes of $170 and $358 for the three month periods and $561 and $800 for the nine month periods ended September 30, 2012 and 2011

     330        696        1,090        1,552   

Reclassification adjustment for gains included in net income, net of taxes of $82 and $192 for the three month periods and $140 and $260 for the nine month periods ended September 30, 2012 and 2011

     (159     (374     (271     (506
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     171        322        819        1,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 710      $ 386      $ 2,204      $ 1,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2012 and 2011

(dollar amounts in thousands) (unaudited)

 

     September 30,  
     2012     2011  

Cash flows from operating activities

    

Net Income

   $ 1,385     $ 818  

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

    

Depreciation

     504       546  

Net amortization and accretion of premiums and discounts on securities

     426       529  

(Gain) on sale of available for sale securities

     (411     (766

Provision for loan losses

     1,776       2,757  

Loss on sale of other real estate owned

     74       184  

(Increase) in loans held-for-sale

     (3,729     —     

(Increase) in cash value of life insurance

     (244     (164

(Increase) decrease in interest receivable

     117       (55

(Increase) decrease in other assets

     246       374  

(Increase) in income taxes receivable

     (194     (160

(Decrease) in interest payable

     (34     (11

Increase (decrease) in other liabilities

     (265     440  

Writedown on other real estate owned

     710       483  
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 361     $ 4,975  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of securities held to maturity

   $ —        $ (1,000

Proceeds from maturities and calls of securities held to maturity

     5,000       7,000  

Purchases of securities available for sale

     (34,930     (49,403

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

     16,696       13,524  

Proceeds from sale of securities available for sale

     15,585       31,267  

Purchases of bank owned life insurance

     —          (3,000

Redemption of Federal Home Loan Bank stock

     78       150  

Proceeds from sale of other real estate owned

     2,307       1,346  

Improvements to other real estate owned

     (5     (18

Origination of loans, net of principal collected

     (3,834     (5,039

Purchases of premises and equipment

     (316     (610
  

 

 

   

 

 

 

Net cash used in investing activities

   $ 581     $ (5,783
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

   $ 10,115     $ 7,157  

Net increase (decrease) in repurchase agreements

     (8,379     1,062  

Net (decrease) in Federal Home Loan Bank advances

     (8,000     —     

Payoff of 6% senior capital notes due 4/1/2012

     (7,000     —     

Proceeds from sale of 6% senior capital notes due 4/1/2017

     10,000       —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

   $ (3,264   $ 8,219  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (2,322     7,411  

Cash and cash equivalents at beginning of period

   $ 23,340     $ 18,759  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 21,018     $ 26,170  
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to foreclosed assets

   $ 2,100     $ 3,682  

Fair value adjustment for securities

     1,236       1,586  
  

 

 

   

 

 

 

Cash transactions

    

Cash paid for interest

   $ 2,399     $ 3,326  

Cash paid for taxes

     702       495  
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

4


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(dollars in thousands) (unaudited)

 

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

Balance at December 31, 2010

     3,323,743       $ 7,113       $ 22,742       $ (3,668   $ (692   $ 25,495   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           818        —          818   

Other Comprehensive Income

     —           —           —           —          1,046        1,046   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     3,323,743       $ 7,113       $ 22,742       $ (2,850   $ 354      $ 27,359   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     3,342,415       $ 7,152       $ 22,775       $ (3,068   $ (54   $ 26,805   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           1,385        —          1,385   

Additional shares issued for previous stock dividend rounding

     3         —           —           —          —          —     

Other Comprehensive Income

     —           —           —           —          819        819   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

     3,342,418       $ 7,152       $ 22,775       $ (1,683   $ 765      $ 29,009   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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 and for the three and nine months ended September 30, 2012 and 2011 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, 2011. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2011 included in Financial’s Annual Report on Form 10-K. Results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

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 City of Bedford, Bedford County, Campbell County, and the City of Lynchburg.

Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb loss in the existing loan portfolio of Bank of the James (the “Bank”), Financial’s wholly-owned subsidiary. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses (to the extent available due to limited history), 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 Share

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of 1999 Financial (the “1999 Plan”) are considered dilutive. The following is a summary of the earnings per share calculation for the three and nine months ended September 30, 2012 and 2011.

 

6


Table of Contents

Note 3 – Earnings Per Share (continued)

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2012      2011      2012      2011  

Net income

   $ 539,000       $ 64,000       $ 1,385,000       $ 818,000   

Weight average number of shares

     3,342,418         3,323,743         3,342,416         3,323,743   

Options affect of incremental shares

     353         4,014         396         7,496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted shares

     3,342,771         3,327,757         3,342,812         3,331,239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS (weighted avg shares)

   $ 0.16       $ 0.02       $ 0.41       $ 0.25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS (Including Option Shares)

   $ 0.16       $ 0.02       $ 0.41       $ 0.25   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended      Nine months ended  
     Sept 30,      Sept 30,  
     2012      2011      2012      2011  

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

     175,847         247,976         216,492         247,976   

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.

 

7


Table of Contents

Note 4 – Stock Based Compensation (continued)

 

Stock option plan activity for the nine months ended September 30, 2012 is summarized below:

 

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

Options outstanding, January 1, 2012

     216,886      $ 8.83         

Granted

     —          —           

Exercised

     —          —           

Forfeited

     (394   $ 10.82         
  

 

 

         

Options outstanding, September 30, 2012

     216,492        8.83         1.96       $ 13,413   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2012

     216,492      $ 8.83         1.96       $ 13,413   
  

 

 

   

 

 

    

 

 

    

 

 

 

Intrinsic value is calculated by subtracting exercise price of option shares from the market price of underlying shares 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.

 

8


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

Fair Value Hierarchy

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

 

   

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

 

   

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

 

   

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

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

Securities available-for-sale

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.

 

9


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

The following table summarizes the Company’s financial assets that were measured at fair value on a recurring basis during the period (in thousands):

 

            Carrying Value at September 30, 2012  

Description

   Balance as of
Sept 30,
2012
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US agency obligations

   $ 24,193       $ —         $ 24,193       $ —     

Mortgage-backed securities

     2,651         —           2,651         —     

Municipals

     22,669         —           22,669         —     

Other (corporates)

     2,747         —           2,747         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 52,260       $ —         $ 52,260       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Carrying Value at December 31, 2011  

Description

   Balance as of
December 31,
2011
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US agency obligations

   $ 25,485       $ —         $ 25,485       $ —     

Mortgage-backed securities

     3,939         —           3,939         —     

Municipals

     18,914         —           18,914         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 48,338       $ —         $ 48,338       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over one year old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

 

10


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

Loans held for sale

Loans held for sale are carried at estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended September 30, 2012. Gains and losses on the sale of loans are recorded within mortgage fee income on the Consolidated Statements of Income.

Other real estate owned

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

Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate is over one year old, then the fair value is considered Level 3. Any fair value adjustments are recorded in the period incurred and expensed against current earnings.

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

 

            Carrying Value at September 30, 2012  

Description

   Balance as of
September 30,
2012
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Impaired loans*

   $ 5,162       $ —         $ 732       $ 4,430   

Loans held for sale

     4,163         —           4,163         —     

Other real estate owned

     2,267         —           2,267         —     

 

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

 

            Carrying Value at December 31, 2011  

Description

   Balance as of
December 31,
2011
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Impaired loans*

   $ 10,655       $ —         $ 2,710       $ 7,945   

Loans held for sale

     434         —           434         —     

Other real estate owned

     3,253         —           3,253         —     

 

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

 

11


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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

 

    Quantitative information about Level 3 Fair Value Measurements for September 30, 2012
(dollars in thousands)
    Fair
Value
   

Valuation Technique(s)

 

Unobservable Input

  Range (Weighted
Average)

Assets

       

Impaired loans

  $ 4,430     

Discounted appraised value

 

Selling cost

  5% - 10% (6%)
     

Discount for lack of marketability and age of appraisal

  0% - 25% (15%)

The following table summarizes activity at the Level 3 valuation for the first nine months of 2012:

Nine Months ended September 30, 2012

(dollars in thousands)

 

Balance as of December 31, 2011

   $ 7,945   

Transfers to Level 3

     2,298   

Changes in loan balances due to payments

     (107

Loans no longer considered impaired or transferred to Level 2

     (5,706
  

 

 

 

Ending balance as of September 30, 2012

   $ 4,430   
  

 

 

 

Financial Instruments

Cash, cash equivalents and Federal Funds sold

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

Securities

Fair values of securities, excluding Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Bankers’ Bank stock are based on quoted market prices.

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 nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans held for sale

The carrying amount is a reasonable estimate of fair value.

Bank Owned Life Insurance (BOLI)

The carrying amount approximates fair value.

 

12


Table of Contents

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.

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.

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.

Capital notes

Fair values of capital notes are based on market prices for debt securities having similar maturity and interest rate characteristics.

Accrued interest

The carrying amounts of accrued interest approximate fair value.

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, 2012 and December 31, 2011 and therefore are not included in the table below.

 

13


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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

 

            Fair Value Measurements at September 30, 2012 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

   $ 17,861       $ 17,861       $ —         $ —         $ 17,861   

Federal funds sold

     3,157         3,157         —           —           3,157   

Securities

              

Available-for-sale

     52,260         —           52,260         —           52,260   

Held-to-maturity

     3,081         —           3,445         —           3,445   

Loans, net

     318,712         —           326,234         4,430         330,664   

Loans held for sale

     4,163         —           4,163         —           4,163   

Interest receivable

     1,466         —           1,466         —           1,466   

BOLI

     8,853         —           8,853         —           8,853   

Liabilities

              

Deposits

   $ 384,349       $ —         $ 386,655       $ —         $ 386,655   

FHLB borrowings

     2,000         —           1,966         —           1,966   

Capital notes

     10,000         —           9,831         —           9,831   

Interest payable

     77         —           77         —           77   

 

14


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

            Fair Value Measurements at December 31, 2011 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

   $ 17,678       $ 17,678       $ —         $ —         $ 17,678   

Federal funds sold

     5,662         5,662         —           —           5,662   

Securities

              

Available-for-sale

     48,338         —           48,338         —           48,338   

Held-to-maturity

     8,133         —           8,533         —           8,533   

Loans, net

     318,754         —           320,658         7,945         328,603   

Loans held for sale

     434         —           434         —           434   

Interest receivable

     1,583         —           1,583         —           1,583   

BOLI

     8,609         —           8,609         —           8,609   

Liabilities

              

Deposits

   $ 374,234       $ —         $ 375,544       $ —         $ 375,544   

FHLB borrowings

     10,000         —           9,752         —           9,752   

Repurchase agreements

     8,379         —           8,392         —           8,392   

Capital notes

     7,000         —           6,826         —           6,826   

Interest payable

     111         —           111         —           111   

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 the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’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 the Bank. 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.

 

15


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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 the Bank’s overall interest rate risk.

Note 6 – Capital Notes

During the third quarter, Financial closed the private placement of unregistered debt securities (the “2012 Offering”) pursuant to which Financial issued $10,000,000 in principal ($373,000 of which was received in the third quarter) of notes (the “2012 Notes”). The 2012 Notes have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first interest payment of $133,000 was due on July 1, 2012 and paid on or about June 29, 2012. The notes mature on April 1, 2017, but are subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders. Financial used $7,000,000 of the proceeds from the 2012 Offering in April to pay on maturity the principal due on notes issued in 2009.

 

16


Table of Contents

Note 7 – Investments

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of September 30, 2012 and December 31, 2011 (amounts in thousands):

 

     Amortized      September 30, 2012
Gross Unrealized
    Fair Value  
     Costs      Gains      (Losses)    

Held-to-Maturity

          

US agency obligations

   $ 3,081       $ 364       $ —        $ 3,445   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-Sale

          

US agency obligations

   $ 23,824       $ 384       ($ 15   $ 24,193   

Mortgage-backed securities

     2,639         12         —          2,651   

Municipals

     21,967         748         (46     22,669   

Other

     2,672         75         —          2,747   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 51,102       $ 1,219       ($ 61   $ 52,260   
  

 

 

    

 

 

    

 

 

   

 

 

 
     Amortized      December 31, 2011
Gross Unrealized
    Fair Value  
     Costs      Gains      (Losses)    

Held-to-Maturity

          

US agency obligations

   $ 8,133       $ 400       $ —        $ 8,533   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-Sale

          

US agency obligations

   $ 25,416       $ 117       ($ 48   $ 25,485   

Mortgage-backed securities

     3,938         5         (4     3,939   

Municipals

     19,062         241         (389     18,914   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 48,416       $ 363       ($ 441   $ 48,338   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

17


Table of Contents

Note 7 – Investments (continued)

 

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011 (amounts in thousands):

 

     Less than 12 months      More than 12 months      Total  

September 30, 2012

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

Description of securities

                 

U.S. agency obligations

   $ 1,120       $ 15       $ —         $ —         $ 1,120       $ 15   

Municipals

     1,236         46         —           —           1,236         46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,356       $ 61       $ —         $ —         $ 2,356       $ 61   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      More than 12 months      Total  

December 31, 2011

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

Description of securities

                 

U.S. agency obligations

   $ 13,593       $ 48       $ —         $ —         $ 13,593       $ 48   

Mortgage-backed securities

     985         4         —           —           985         4   

Municipals

     12,852         389         —           —           12,852         389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,430       $ 441       $ —         $ —         $ 27,430       $ 441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2012, 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, 2012, the Bank owned 4 securities that were being evaluated for other than temporary impairment. One of these securities was S&P rated AAA and 3 were S&P rated AA. As of September 30, 2012, one of these securities was an obligation of a government sponsored entity and three were municipal issues.

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.

 

18


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. 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. Because of the pre-arranged purchase commitments, there is minimal risk to the Company.

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

 

19


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, 2012 and 2011 was as follows (dollars in thousands):

Business Segments

 

     Community
Banking
     Mortgage      Total  

Nine months ended September 30, 2012

        

Net interest income

   $ 11,729      $ —         $ 11,729  

Provision for loan losses

     1,776        —           1,776  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     9,953        —           9,953  

Noninterest income

     1,649        917        2,566  

Noninterest expenses

     9,898        728        10,626  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,704        189        1,893  

Income tax expense

     444        64        508  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,260      $ 125      $ 1,385  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 421,830      $ 4,247      $ 426,077  
  

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2011

        

Net interest income

   $ 11,359      $ —         $ 11,359  

Provision for loan losses

     2,757        —           2,757  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     8,602        —           8,602  

Noninterest income

     1,851        779        2,630  

Noninterest expenses

     9,415        665        10,080  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,038        114        1,152  

Income tax expense

     295        39        334  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 743      $ 75      $ 818  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 428,924      $ 516      $ 429,440  
  

 

 

    

 

 

    

 

 

 

 

     Community
Banking
    Mortgage      Total  

Three months ended September 30, 2012

       

Net interest income

   $ 4,027     $ —         $ 4,027  

Provision for loan losses

     601       —           601  
  

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     3,426       —           3,426  

Noninterest income

     650       402        1,052  

Noninterest expenses

     3,491       292        3,783  
  

 

 

   

 

 

    

 

 

 

Income before income taxes

     585       110        695  

Income tax expense

     119       37        156  
  

 

 

   

 

 

    

 

 

 

Net income

   $ 466     $ 73      $ 539  
  

 

 

   

 

 

    

 

 

 

Total assets

   $ 421,830     $ 4,247      $ 426,077  
  

 

 

   

 

 

    

 

 

 

Three months ended September 30, 2011

       

Net interest income

   $ 3,846     $ —         $ 3,846  

Provision for loan losses

     1,272       —           1,272  
  

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,574       —           2,574  

Noninterest income

     950       250        1,200  

Noninterest expenses

     3,500       206        3,706  
  

 

 

   

 

 

    

 

 

 

Income before income taxes

     24       44        68  

Income tax expense

     (11     15        4  
  

 

 

   

 

 

    

 

 

 

Net income

   $ 35     $ 29      $ 64  
  

 

 

   

 

 

    

 

 

 

Total assets

   $ 428,924     $ 516      $ 429,440  
  

 

 

   

 

 

    

 

 

 

 

20


Table of Contents

Note 9 – Loans, allowance for loan losses and OREO

Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes. 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

 

21


Table of Contents

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

 

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

 

     As of:  
     Sept 30,
2012
     December 31,
2011
 

Commercial

   $ 56,191       $ 59,623   

Commercial real estate

     152,398         150,622   

Consumer

     71,063         72,488   

Residential

     44,753         41,633   
  

 

 

    

 

 

 

Total loans

     324,405         324,366   

Less allowance for loan losses

     5,693         5,612   
  

 

 

    

 

 

 

Net loans

   $ 318,712       $ 318,754   
  

 

 

    

 

 

 

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.

 

22


Table of Contents

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.

 

23


Table of Contents

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

 

Financing Receivables on Non-Accrual Status

(dollars in thousands)

 

     As of  
     September 30, 2012      December 31, 2011  

Commercial

   $ 1,985       $ 3,570   

Commercial Real Estate:

     

Commercial Mortgages-Owner Occupied

     582         1,610   

Commercial Mortgages-Non-Owner Occupied

     1,395         2,794   

Commercial Construction

     729         782   

Consumer

     

Consumer Unsecured

     —           —     

Consumer Secured

     126         415   

Residential:

     

Residential Mortgages

     936         1,205   

Residential Consumer Construction

     —           —     
  

 

 

    

 

 

 

Totals

   $ 5,753       $ 10,375   
  

 

 

    

 

 

 

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO decreased to $2,267,000 on September 30, 2012 from $3,253,000 on December 31, 2011. The following table represents the changes in OREO balance during the Nine Months ended September 30, 2012.

OREO Changes

(dollars in thousands)

 

     Nine Months ended
September  30, 2012
 

Balance at the beginning of the year (net)

   $ 3,253   

Transfers from loans

     2,100   

Capitalized costs

     5   

Writedowns

     (710

Sales proceeds

     (2,307

(Loss) on disposition

     (74
  

 

 

 

Balance at the end of the period (net)

   $ 2,267   
  

 

 

 

 

24


Table of Contents

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

 

    

Impaired Loans

(dollars in thousands)

 
     For the Nine Months Ended September 30, 2012  
2012   

Recorded

Investment

    

Unpaid

Principal

Balance

    

Related

Allowance

    

Average

Recorded

Investment

    

Interest

Income

Recognized

 

With No Related Allowance Recorded:

              

Commercial

   $ 2,279       $ 2,538       $ —         $ 2,818       $ 11   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,703         2,801         —           2,457         143   

Commercial Mortgage Non-Owner Occupied

     5,261         5,456         —           5,071         172   

Commercial Construction

     950         950         —           1,027         38   

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     652         713         —           473         37   

Residential

              

Residential Mortgages

     1,968         1,999         —           1,415         86   

Residential Consumer Construction

     —           —           —           —           —     

With An Allowance Recorded:

              

Commercial

   $ 1,376       $ 1,377       $ 421       $ 2,172       $ 54   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     1,605         1,851         468         2,061         81   

Commercial Mortgage Non-Owner Occupied

     754         754         87         1,672         25   

Commercial Construction

     1,274         1,546         144         1,487         8   

Consumer

              

Consumer Unsecured

     1         1         1         1         —     

Consumer Secured

     564         741         426         753         18   

Residential

              

Residential Mortgages

     1,336         1,683         201         1,629         34   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 3,655       $ 3,915       $ 421       $ 4,990       $ 65   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     4,308         4,652         468         4,518         224   

Commercial Mortgage Non-Owner Occupied

     6,015         6,210         87         6,743         197   

Commercial Construction

     2,224         2,496         144         2,514         46   

Consumer

              

Consumer Unsecured

     1         1         1         1         —     

Consumer Secured

     1,216         1,454         426         1,226         55   

Residential

              

Residential Mortgages

     3,304         3,682         201         3,044         120   

Residential Consumer Construction

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,723       $ 22,410       $ 1,748       $ 23,036       $ 707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

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

 

    

Impaired Loans

(dollars in thousands)

 
     For the Year Ended December 31, 2011  
2011   

Recorded

Investment

    

Unpaid

Principal

Balance

    

Related

Allowance

    

Average

Recorded

Investment

    

Interest

Income

Recognized

 

With No Related Allowance Recorded:

              

Commercial

   $ 3,357       $ 3,570       $ —         $ 8,978       $ 118   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,211         3,108         —           2,457         124   

Commercial Mortgage Non-Owner Occupied

     4,880         5,170         —           5,418         227   

Commercial Construction

     1,103         1,103         —           984         38   

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     293         642         —           330         6   

Residential

              

Residential Mortgages

     862         1,007         —           633         15   

Residential Consumer Construction

     —           —           —           33         —     

With An Allowance Recorded:

              

Commercial

   $ 2,968       $ 3,052       $ 440       $ 2,170       $ 106   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,516         2,686         555         3,815         137   

Commercial Mortgage Non-Owner Occupied

     2,590         3,129         228         1,858         117   

Commercial Construction

     1,700         1,964         275         2,454         42   

Consumer

              

Consumer Unsecured

     —           —           —           286         —     

Consumer Secured

     942         1,021         357         699         49   

Residential

              

Residential Mortgages

     1,922         2,180         128         1,847         89   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 6,325       $ 6,622       $ 440       $ 11,147       $ 224   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     4,727         5,794         555         6,272         261   

Commercial Mortgage Non-Owner Occupied

     7,470         8,299         228         7,275         344   

Commercial Construction

     2,803         3,067         275         3,438         80   

Consumer

              

Consumer Unsecured

     —           —           —           286         —     

Consumer Secured

     1,235         1,663         357         1,029         55   

Residential

              

Residential Mortgages

     2,784         3,187         128         2,480         104   

Residential Consumer Construction

     —           —           —           33         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,344       $ 28,632       $ 1,983       $ 31,960       $ 1,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

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

 

Allowance for Credit Losses and Recorded Investment in Financing Receivables                               
(dollars in thousands)                               

For the Nine Months Ended September 30, 2012

                              
2012    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 892      $ 2,677      $ 1,486      $ 557      $ 5,612   

Charge-offs

     (504     (816     (463     (67     (1,850

Recoveries

     18        112        18        7        155   

Provision

     592        785        218        181        1,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 998      $ 2,758      $ 1,259      $ 678      $ 5,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 421      $ 699      $ 427      $ 201      $ 1,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     577        2,059        832        477        3,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 998      $ 2,758      $ 1,259      $ 678      $ 5,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     3,655        12,546        1,217        3,305        20,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     52,536        139,852        69,846        41,448        303,682   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 56,191      $ 152,398      $ 71,063      $ 44,753      $ 324,405   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

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

 

Allowance for Credit Losses and Recorded Investment in Financing Receivables                               
(dollars in thousands)                               

For the Year Ended December 31, 2011

                              
2011    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 473      $ 2,897      $ 1,207      $ 890      $ 5,467   

Charge-offs

     (702     (2,738     (817     (459     (4,716

Recoveries

     16        3        31        4        54   

Provision

     1,105        2,515        1,065        122        4,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 892      $ 2,677      $ 1,486      $ 557      $ 5,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 440      $ 1,058      $ 357      $ 128      $ 1,983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     452        1,619        1,129        429        3,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 892      $ 2,677      $ 1,486      $ 557      $ 5,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     6,325        15,000        1,235        2,784        25,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     53,298        135,622        71,253        38,849        299,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 59,623      $ 150,622      $ 72,488      $ 41,633      $ 324,366   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

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

 

     Age Analysis of Past Due Financing Receivables as of
September 30, 2012
(dollars in thousands)
 
2012    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than
90 Days
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 40       $ —         $ 1,986       $ 2,026       $ 54,165       $ 56,191       $ —     

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     993         869         173         2,035         59,774         61,809         —     

Commercial Mortgages-Non-Owner Occupied

     291         —           1,396         1,687         80,390         82,077         —     

Commercial Construction

     —           —           320         320         8,192         8,512         —     

Consumer:

                    

Consumer Unsecured

     16         1         —           17         3,451         3,468         —     

Consumer Secured

     261         365         172         798         66,797         67,595         —     

Residential:

                    

Residential Mortgages

     548         298         810         1,656         38,815         40,471         —     

Residential Consumer Construction

     —           —           —           —           4,282         4,282         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,149       $ 1,533       $ 4,857       $ 8,539       $ 315,866       $ 324,405       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Age Analysis of Past Due Financing Receivables as of
December 31, 2011
(dollars in thousands)
 
2011    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than
90 Days
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 532       $ 26       $ 3,570       $ 4,128       $ 55,495       $ 59,623       $ —     

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     2,614         130         1,610         4,354         56,400         60,754         —     

Commercial Mortgages-Non-Owner Occupied

     504         72         2,793         3,369         74,520         77,889         —     

Commercial Construction

     782         —           424         1,206         10,773         11,979         —     

Consumer:

                    

Consumer Unsecured

     6         —           —           6         3,231         3,237         —     

Consumer Secured

     202         277         415         894         68,357         69,251         —     

Residential:

                    

Residential Mortgages

     523         162         863         1,548         37,450         38,998         —     

Residential Consumer Construction

     —           —           —           —           2,635         2,635         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,163       $ 667       $ 9,675       $ 15,505       $ 308,861       $ 324,366       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

29


Table of Contents

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

 

Credit Loss Disclosures Credit Quality Information - by Class                                          
September 30, 2012                                          

(dollars in thousands)

                                         
2012    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 49,387       $ 1,629       $ 2,019       $ 3,156       $ —         $ 56,191   

Commercial Real Estate:

                 

Commercial Mortgages-Owner Occupied

     53,012         1,490         2,999         4,176         132         61,809   

Commercial Mortgages-Non-Owner Occupied

     69,622         2,178         4,262         6,015         —           82,077   

Commercial Construction

     6,289         —           —           2,223         —           8,512   

Consumer

                 

Consumer Unsecured

     3,467         —           —           1         —           3,468   

Consumer Secured

     64,219         1,349         833         1,194         —           67,595   

Residential:

                 

Residential Mortgages

     36,680         —           486         3,305         —           40,471   

Residential Consumer Construction

     4,282         —           —           —           —           4,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 286,958       $ 6,646       $ 10,599       $ 20,070       $ 132       $ 324,405   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Credit Loss Disclosures Credit Quality Information - by Class                                          
December 31, 2011                                          

(dollars in thousands)

                                         
2011    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 47,021       $ 3,978       $ 2,901       $ 5,723       $ —         $ 59,623   

Commercial Real Estate:

                 

Commercial Mortgages-Owner Occupied

     48,622         3,003         4,696         4,283         150         60,754   

Commercial Mortgages-Non Owner Occupied

     63,934         3,326         3,159         7,470         —           77,889   

Commercial Construction

     9,000         176         —           2,803         —           11,979   

Consumer

                 

Consumer Unsecured

     3,237         —           —           —           —           3,237   

Consumer Secured

     67,295         488         304         1,164         —           69,251   

Residential:

                 

Residential Mortgages

     35,109         557         548         2,784         —           38,998   

Residential Consumer Construction

     2,635         —           —           —           —           2,635   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 276,853       $ 11,528       $ 11,608       $ 24,227       $ 150       $ 324,366   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

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

 

Troubled Debt Restructurings

There were no loan modifications classified as TDRs during the three and nine months ended September 30, 2012.

There were no loan modifications classified as TDRs during the three months ended September 30, 2011. The following table describes the loan modifications classified as TDRs during the nine months ended September 30, 2011:

For the Nine Months Ended September 30, 2011

(dollars in thousands)

 

Troubled Debt Restructurings That Subsequently Defaulted

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

Commercial

     5       $ 3,345,376       $ 3,345,376   

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended September 30, 2012 and 2011.

The following table describes Troubled Debt Restructurings made within the last twelve months that defaulted during the nine months ended September 30, 2012 and 2011, respectively.

For the Nine Months Ended September 30, 2012

(dollars in thousands)

 

Troubled Debt Restructurings That Subsequently Defaulted

   Number of Contracts      Recorded Investment  

Commercial

     4       $ 798   

For the Nine Months Ended September 30, 2011

(dollars in thousands)

 

Troubled Debt Restructurings That Subsequently Defaulted

   Number of Contracts      Recorded Investment  

Commercial

     1       $ 183   

Consumer

     1         30   

Residential

     2         482   
  

 

 

    

 

 

 

Total

     4         695   

Note 10 – Subsequent Events

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

Note 11 – Recent accounting pronouncements

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

31


Table of Contents

Note 11 – Recent accounting pronouncements (continued)

 

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

 

32


Table of Contents

Note 11 – Recent accounting pronouncements (continued)

 

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of ASU 2012-02 to have a material impact on its consolidated financial statements.

In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” The amendments in this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. In addition, the amendments should resolve current diversity in practice on the subsequent measurement of these types of indemnification assets. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The Company does not expect the adoption of ASU 2012-06 to have a material impact on its consolidated financial statements.

 

33


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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

GENERAL

Critical Accounting Policies

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

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

 

34


Table of Contents

Overview

Financial is a bank holding company headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to as the “Bank”). We conduct three other business activities, mortgage banking through the Bank’s Mortgage division (which we refer to as “Mortgage”), investment services through the Bank’s Investment division (which we refer to as “Investment”), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance”).

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

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

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

35


Table of Contents
   

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

 

   

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

 

   

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

 

   

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

The Bank also has opened a limited-service branch located in the Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia 24503.

In addition, the Bank, through its Mortgage division, originates residential mortgage loans through two offices – one located at the Forest Branch and the other located at 1152 Hendricks Store Road, Moneta, Virginia.

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

The Bank continuously evaluates areas located within Region 2000 to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.

Subject to regulatory approval, the Bank anticipates opening additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the following discussion provides a general overview of the additional branch location that the Bank currently is considering.

Timberlake Road Area, Campbell County (Lynchburg), Virginia. As previously disclosed, the Bank has purchased certain real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank does not anticipate opening a branch at this location prior to 2013. The Bank has determined that the existing structure is not suitable for use as a bank branch.

Rustburg, Virginia. In March, 2011 the Bank purchased certain real property near the intersection of Routes 501 and 24 in Rustburg, Virginia. The structure on the property is being demolished and removed. The Bank does not anticipate opening a branch at this location prior to the third quarter of 2013. The Bank has installed an ATM in a local municipal building in order to establish a presence in this market until the branch has been established.

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

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

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

 

36


Table of Contents

OFF-BALANCE SHEET ARRANGEMENTS

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

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

 

     September 30,
2012

(in  thousands)
 

Commitments to extend credit

   $ 57,045   

Letters of Credit

     1,694   
  

 

 

 

Total

   $ 58,739   
  

 

 

 

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

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances that the Bank deems necessary.

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of September 30, 2012 and December 31, 2011 and the results of operations of Financial for the three month and nine month periods ended September 30, 2012 and 2011. 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.

 

37


Table of Contents

Financial Condition Summary

September 30, 2012 as Compared to December 31, 2011

Total assets were $426,077,000 on September 30, 2012 compared with $427,436,000 at December 31, 2011, a decrease of 0.32%. The decrease in total assets is due primarily to a decrease in Federal funds sold and a slight decrease in the Bank’s securities portfolio, both of which funded a pay-down in Federal Home Loan Bank borrowings.

Total deposits increased from $374,234,000 as of December 31, 2011 to $384,349,000 on September 30, 2012, an increase of 2.70%. This increase occurred because of the Bank’s increased efforts to obtain lower cost demand deposits and the Bank’s increased presence in the market. In addition, the Dodd-Frank Act repealed the federal prohibition on the payment of interest on commercial demand deposits. As a result, the Bank discontinued offering sweep accounts (repurchase agreements) to its commercial customers and these accounts were reclassified as interest-bearing checking accounts.

Total loans increased to $324,405,000 on September 30, 2012 from $324,366,000 on December 31, 2011. Loans, net of unearned income and allowance, decreased slightly to $318,712,000 on September 30, 2012 from $318,754,000 on December 31, 2011, a decrease of 0.01%. 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, 2012     December 31, 2011  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 56,191         17.33   $ 59,623         18.39

Commercial Real Estate

     152,398         46.98     150,622         46.43

Consumer

     71,063         21.91     72,488         22.34

Residential

     44,753         13.78     41,633         12.84
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 324,405         100.00   $ 324,366         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 $8,020,000 on September 30, 2012 from $13,628,000 on December 31, 2011. This decrease was primarily due to a decrease in non-accrual (or nonperforming) loans. Non-accrual loans decreased 44.55% to $5,753,000 on September 30, 2012 from $10,375,000 on December 31, 2011. The decrease primarily resulted from the liquidation of real estate collateral associated with several relationships, including one large commercial relationship, and the payment in full of certain non-accrual loans. The proceeds from the liquidations were used to curtail principal on a non-accrual loan. As discussed in more detail below under “Results of Operations – Allowance for Loan Losses”, management has provided for the anticipated losses on these loans in the loan loss reserve. If interest on non-accrual loans had been accrued, such interest on a cumulative basis would have approximated $485,000 and $1,233,000, as of September 30, 2012 and December 31, 2011, respectively. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings. These loans were included in the non-performing loan totals listed above.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure, deeds in lieu of foreclosure or repossession. On December 31, 2011, the Bank was carrying 18 OREO properties on its books at a value of $3,253,000. During the Nine Months ended September 30, 2012, the Bank acquired 22 additional OREO properties and disposed of 22 OREO

 

38


Table of Contents

properties, and as of September 30, 2012 the Bank is carrying 18 OREO properties at a value of $2,267,000. 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 $187,000 at September 30, 2012 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $783,000 at December 31, 2011. This decrease was due entirely to the liquidation of collateral associated with one commercial relationship with the proceeds from the liquidation being used to pay off the TDR loans. None of these TDRs were included in non-accrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year.

Cash and cash equivalents decreased to $21,018,000 on September 30, 2012 from $23,340,000 on December 31, 2011. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease is in large part due to the Bank’s use of cash to repay Federal Home Loan Bank advances. The decrease was offset in part by an increase in deposits. Cash and cash equivalents can vary due to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations.

Securities held-to-maturity decreased to $3,081,000 on September 30, 2012 from $8,133,000 on December 31, 2011. During the nine months ended September 30, 2012, the Bank received $5,000,000 in proceeds from maturities and calls of securities-held-to-maturity. Securities available-for-sale increased to $52,260,000 on September 30, 2012, from $48,338,000 December 31, 2011. During the nine months ended September 30, 2012 the Bank received $16,696,000 in proceeds from maturities and/or calls of securities available-for-sale and $15,585,000 in proceeds from the sale of securities available-for-sale. The Bank purchased $34,930,000 in securities available-for sale during the same period. The increase from December 31, 2011 in securities available-for-sale was primarily due to the investment of funds received from an increase in deposit accounts and the reinvestment of the proceeds from the call of held-to-maturity securities in securities available-for-sale.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $1,092,000 at September 30, 2012 and $1,170,000 at December 31, 2011, a decrease of $78,000. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Liquidity and Capital

At September 30, 2012, Financial, on a consolidated basis, had liquid assets of $73,278,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold and available-for-sale investments. Management believes that liquid assets were adequate at September 30, 2012. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary.

During the third quarter, Financial closed the private placement of unregistered debt securities (the “2012 Offering”) pursuant to which Financial issued $10,000,000 in principal ($373,000 of which was received in the third quarter) of notes (the “2012 Notes”). The 2012 Notes have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first interest payment of $133,000 was due on July 1, 2012 and paid on or about June 29, 2012. The notes mature on April 1, 2017, but are

 

39


Table of Contents

subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders. Financial used $7,000,000 of the proceeds from the 2012 Offering in April to pay on maturity the principal due on notes issued in 2009.

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.

At September 30, 2012, the Bank had a leverage ratio of 8.17%, a Tier 1 risk-based capital ratio of 10.97% and a total risk-based capital ratio of 12.23%. As of September 30, 2012 and December 31, 2011 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, 2012 and December 31, 2011:

Bank Level Only Capital Ratios

 

     September 30,      December 31,  
Analysis of Capital (in 000’s)    2012      2011  

Tier 1 capital

     

Common Stock

   $ 3,742       $ 3,742   

Surplus

     19,325         19,325   

Retained earnings

     12,097         10,394   
  

 

 

    

 

 

 

Total Tier 1 capital

   $ 35,164       $ 33,461   
  

 

 

    

 

 

 

Tier 2 capital

     

Allowance for loan losses

   $ 4,031       $ 3,991   

Total Tier 2 capital:

   $ 4,031       $ 3,991   
  

 

 

    

 

 

 

Total risk-based capital

   $ 39,195       $ 37,452   
  

 

 

    

 

 

 

Risk weighted assets

   $ 320,595       $ 317,684   

Average total assets

   $ 430,582       $ 427,680   

 

     Actual     Regulatory Benchmarks  
     September 30,
2012
    December 31,
2011
    For Capital
Adequacy
Purposes
    For Well
Capitalized
Purposes
 

Capital Ratios:

        

Tier 1 capital to average total assets

     8.17     7.82     4.00     5.00

Tier 1 risk-based capital ratio

     10.97     10.53     4.00     6.00

Total risk-based capital ratio

     12.23     11.79     8.00     10.00

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $500,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis would no longer be comparable to the capital ratios of the Bank because the proceeds from the private placement of the 6% capital notes due on April 1, 2017 do not qualify as equity capital on a consolidated basis.

 

40


Table of Contents

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2012 and 2011

Earnings Summary

Financial had net income including all operating segments of $539,000 and $1,385,000 for the three and nine months ended September 30, 2012 compared to $64,000 and $818,000 for the for the comparable periods in 2011. The basic and diluted earnings per common share for the three and nine months ended September 30, 2012 were $0.16 and $0.41, compared to basic and diluted earnings per share of $0.02 and $0.25 for the three and nine months ended September 30, 2011.

The increase in net income was due in large part to a decreased provision to the allowance for loan loss reserve as discussed in more detail below (See “Allowance for Loan Losses”) and a decrease in interest expense. The increase was partially offset by an increase in non-interest expense and a slight decrease in non-interest income.

These operating results represent an annualized return on stockholders’ equity of 7.73% and 6.78% for the three and nine months ended September 30, 2012, compared with 0.94% and 4.12% for the same periods in 2011. The Company had an annualized return on average assets for the three and nine months ended September 30, 2012 of 0.49% and 0.43%, compared with 0.06% and 0.26% for three and nine months ended September 30, 2011.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income decreased to $4,763,000 and $14,094,000 for the three and nine months ended September 30, 2012 from $4,836,000 and $14,674,000 for the same periods in 2011, a decrease of 1.51% and 3.95%, respectively. Interest income decreased primarily because the average rate received on earning assets decreased to 4.80% and 4.79% for the three and nine months ended September 30, 2012 as compared with 4.84% and 4.97% for the comparable periods in 2011. The rate on total average earning assets decreased largely because of a decrease in market rates of interest. Although management cannot be certain, management expects that interest rates will remain near historic lows for the remainder of 2012 and may continue to negatively impact our interest income.

Interest expense decreased to $736,000 and $2,365,000 for the three and nine months ended September 30, 2012 from $990,000 and $3,315,000 for the same periods in 2011, a decrease of 25.66% and 28.66%, respectively. This significant decrease in interest expense resulted in large part from a decrease in the rate paid on balances on deposits. The Bank’s average rate paid on deposits was 0.65% and 0.73% during the three and nine month periods ended September 30, 2012 as compared to 0.96% and 1.12% for the same periods in 2011. This resulted from management’s efforts to minimize the Bank’s interest expense and maximize its net interest margin.

The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2012 was $4,027,000 and $11,729,000 compared with $3,846,000 and $11,359,000 for the same periods in 2011. The increase in net interest income for the three and nine months ended September 30, 2012 as compared with the comparable periods in 2011 was due the fact that the rate paid on deposit accounts has decreased from the comparable periods in 2011. The net interest margin was 4.06% and 3.98% for the three and nine months ended September 30, 2012, up from 3.85% and 3.84% for the same periods a year ago.

 

41


Table of Contents

Financial’s net interest margin analysis and average balance sheets are shown in Schedule I on page 49.

Non-Interest Income

Non-interest income is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income exclusive of gains on sales of securities increased to $811,000 and $2,155,000 for the three and nine months ended September 30, 2012 from $634,000 and $1,864,000 for the three and nine months ended September 30, 2011. This increase for the three and nine months ended September 30, 2012 as compared to the same periods last year was due primarily to increases in mortgage origination fees and the cash value of life insurance. Gain on sales of securities decreased to $241,000 and $411,000 for the three and nine months ended September 30, 2012 as compared to $566,000 and $766,000 for the comparable periods in 2011.

The Bank, through the Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the Region 2000 area. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage division are presold to major national mortgage banking or financial institutions. The Mortgage division assumes no credit or interest rate risk on these mortgages.

Management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2012. Management expects that low rates and government-assisted programs such as Home Affordable Refinance Program (HARP) coupled with the Mortgage division’s reputation in Region 2000 will allow us to maintain revenue at the Mortgage division. Revenue from mortgage origination fees increased in the three and nine month periods ended September 30, 2012 as compared to the same periods for 2011. 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.

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 2012.

In the third quarter of 2008, we began providing insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has one full-time and one part-time employee that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2012.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2012 increased to $3,783,000 and $10,626,000, or 2.08% and 5.42%, respectively, from $3,706,000 and $10,080,000 for the comparable periods in 2011. This increase in non-interest expense from the comparable period in 2011 can be attributed in large part to an increase in compensation expense, discussed in more detail in the following paragraph, and other real estate expenses. Other real estate expenses consist primarily of insurance, maintenance, real estate taxes, and other expenses related to property ownership.

 

42


Table of Contents

Total personnel expense was $1,608,000 and $4,657,000 for the three and nine month periods ended September 30, 2012 as compared to $1,462,000 and $4,280,000 for the same periods in 2011. Compensation for some employees of the Mortgage division and the Investment division is commission-based and therefore subject to fluctuation.

During the three months ended September 30, 2012, the FDIC premium expense was unchanged at $145,000 from the three months ended September 30, 2011. During the Nine Months ended September 30, 2012, the FDIC premium expense decreased to $433,000 from $515,000 for the nine months ended September 30, 2011. FDIC assessment payments have decreased in large part because the FDIC changed the formula used to calculate the assessment in a way that favors banks whose liabilities consist primarily of deposits.

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision to the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $601,000 and $1,776,000 to the allowance for loan loss for the three and nine months ended September 30, 2012 compared to a provision of $1,272,000 and $2,757,000 for the comparable periods in 2011.

The decrease in the loan loss provision for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was due to the following factors:

 

   

The Bank’s asset quality has improved as problem assets, including certain commercial development loans and residential speculative housing construction loans have decreased as the collateral for those loans has been liquidated. Management’s evaluation of these asset classes resulted in the decreased provision in the quarter ended September 30, 2012.

 

   

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. The analysis resulted in a decrease in the provision for the quarter ended September 30, 2012 as compared to the same quarter in 2011.

 

   

General reserves related to consumer loans collectively evaluated for impairment have also decreased as a result of a decrease in historical charge-offs associated with this loan segment.

Management believes that the current allowance for loan loss of $5,693,000 (or 1.75% of total loans) at September 30, 2012, as compared to $5,612,000 (or 1.73% of total loans) as of December 31, 2011, remains adequate.

 

43


Table of Contents

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

 

     Allowance for Credit Losses and Recorded Investment in Financing  Receivables
(dollars in thousands)
For the Nine Months Ended September 30, 2012
 
2012    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 892      $ 2,677      $ 1,486      $ 557      $ 5,612   

Charge-offs

     (504     (816     (463     (67     (1,850

Recoveries

     18        112        18        7        155   

Provision

     592        785        218        181        1,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     998        2,758        1,259        678        5,693   

Ending Balance: Individually evaluated for impairment

   $ 421      $ 699      $ 427      $ 201      $ 1,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     577        2,059        832        477        3,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 998      $ 2,758      $ 1,259      $ 678      $ 5,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     3,655        12,546        1,217        3,305        20,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     52,536        139,852        69,846        41,448        303,682   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 56,191      $ 152,398      $ 71,063      $ 44,753      $ 324,405   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

44


Table of Contents
     Allowance for Credit Losses and Recorded Investment in Financing  Receivables
(dollars in thousands)
For the Year Ended December 31, 2011
 
2011    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 473      $ 2,897      $ 1,207      $ 890      $ 5,467   

Charge-offs

     (702     (2,738     (817     (459     (4,716

Recoveries

     16        3        31        4        54   

Provision

     1,105        2,515        1,065        122        4,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     892        2,677        1,486        557        5,612   

Ending Balance: Individually evaluated for impairment

   $ 440      $ 1,058      $ 357      $ 128      $ 1,983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     452        1,619        1,129        429        3,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 892      $ 2,677      $ 1,486      $ 557      $ 5,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     6,325        15,000        1,235        2,784        25,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     53,298        135,622        71,253        38,849        299,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 59,623      $ 150,622      $ 72,488      $ 41,633      $ 324,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    

Three months ended

Sept 30,

   

Nine Months ended

Sept 30,

 
     (in thousands)     (in thousands)  
     2012     2011     2012     2011  

Balance, beginning of period

   $ 5,693      $ 4,970      $ 5,612      $ 5,467   

Provision for loan losses

     601        1,272        1,776        2,757   

Loans charged off

     (619     (791     (1,850     (2,796

Recoveries of loans charged off

     18        10        155        33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Charge Offs

     (601     (781     (1,695     (2,763
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,693      $ 5,461      $ 5,693      $ 5,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

45


Table of Contents

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.

 

46


Table of Contents

The increase in the balance in the allowance for loan loss reserve as of September 30, 2012 as compared to December 31, 2011 resulted from provisions being higher than the net charge-offs during the first Nine Months of 2012. The loan loss reserve is determined as discussed above.

Net charge offs decreased to $601,000 and $1,695,000 for the three and nine months ended September 30, 2012 from $781,000 and $2,763,000 for the same periods in 2011. Charged off loans, which are loans that management deems uncollectible, are written against the loan loss reserve and constitute a realized loss. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time.

Income Taxes

For the three and nine months ended September 30, 2012, Financial had an income tax expense of $156,000 and $508,000, respectively. This represents an effective tax rate of 22.45% and 26.84% for the respective periods.

Legislation

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Reform Act”) was signed into law. The Dodd-Frank Reform Act represents a significant overhaul of many aspects of the regulation of the financial services industry, although many of its provisions (e.g., the interchange and trust preferred capital limitations) apply to companies that are significantly larger than Financial. The Dodd-Frank Reform Act directs applicable regulatory authorities to promulgate regulations implementing its provisions, and its effect on Financial and on the financial services industry as a whole will be clarified as those regulations are issued. Major elements of the Dodd-Frank Reform Act include:

 

   

A permanent increase in deposit insurance coverage to $250,000 per account, permanent unlimited deposit insurance on noninterest-bearing transaction accounts, and an increase in the minimum Deposit Insurance Fund reserve requirement for banks having consolidated assets in excess of $10 billion from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits.

 

   

New disclosure and other requirements relating to executive compensation and corporate governance.

 

   

Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.

 

   

The establishment of the Financial Stability Oversight Council, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices.

 

   

The development of regulations to limit debit card interchange fees.

 

   

The future elimination of trust preferred securities as a permitted element of Tier 1 capital.

 

47


Table of Contents
   

The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund.

 

   

The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants.

 

   

Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the SEC.

 

   

Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities.

 

   

The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body.

 

   

On February 7, 2011, the FDIC issued a final rule redefining the assessment base as required by Dodd-Frank. The final rule adopted a separate risk-based assessment system for large insured depository institutions (institutions with greater than $10 billion in assets). The final rule applies to all insured depository institutions and is effective on April 1, 2011.

Financial continues to evaluate the potential impact of the Dodd-Frank Reform Act.

 

48


Table of Contents

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended September 30, 2012 and 2011

 

     2012     2011  
    

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)

   $ 323,871      $ 4,318         5.29   $ 322,524      $ 4,349         5.35

Loans held for sale

     1,663        14         1.69     476        6         5.00

Federal funds sold

     8,804        7         0.32     9,467        5         0.21

Securities (3)

     57,489        451         3.11     61,937        473         3.03

Federal agency equities

     1,792        4         0.89     1,947        3         0.61

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     393,735        4,794         4.83     396,467        4,836         4.84
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (5,766          (4,718     

Non-earning assets

     44,363             38,336        
  

 

 

        

 

 

      

Total assets

   $ 432,332           $ 430,085        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 85,186      $ 56         0.26   $ 65,466      $ 86         0.52

Savings

     147,880        108         0.29     172,748        266         0.61

Time deposits

     93,766        373         1.58     86,888        437         2.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     326,832        537         0.65     325,102        789         0.96

Other borrowed funds

              

Repurchase agreements

     —          —           —          9,063        21         0.92

Other borrowings

     6,207        50         3.20     10,000        75         2.98

Capital Notes

     9,848        149         6.00     7,000        105         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     342,887        736         0.85     351,165        990         1.12
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     61,703             51,796        

Other liabilities

     86             212        
  

 

 

        

 

 

      

Total liabilities

     404,676             403,173        

Stockholders’ equity

     27,656             26,912        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 432,332           $ 430,085        
  

 

 

        

 

 

      

Net interest income

     $ 4,058           $ 3,846      
    

 

 

        

 

 

    

Net interest margin

          4.09          3.85
       

 

 

        

 

 

 

Interest spread

          3.98          3.72
       

 

 

        

 

 

 

 

49


Table of Contents
(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.

 

50


Table of Contents

Net Interest Margin Analysis

Average Balance Sheets

For the Nine Months Ended September 30, 2012 and 2011

 

     2012     2011  
    

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)

   $ 322,160      $ 12,706         5.27   $ 324,667      $ 13,205         5.44

Loans held for sale

     1,109        28         3.38     228        7         4.10

Federal funds sold

     8,908        18         0.27     9,785        18         0.25

Securities (3)

     59,409        1,388         3.12     58,281        1,415         3.25

Federal agency equities

     1,827        33         2.41     2,006        29         1.93

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     393,529        14,173         4.82     395,083        14,674         4.97
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (5,805          (5,156     

Non-earning assets

     41,932             37,631        
  

 

 

        

 

 

      

Total assets

   $ 429,656           $ 427,558        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 79,113      $ 181         0.31   $ 63,757      $ 287         0.60

Savings

     153,485        397         0.35     178,748        1,142         0.85

Time deposits

     92,293        1,186         1.72     83,682        1,294         2.07
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     324,891        1,764         0.73     326,187        2,723         1.12

Other borrowed funds

              

Fed funds purchased

     —          —           —          13        —           —     

Repurchase agreements

     2,188        15         0.92     8,149        55         0.90

Other borrowings

     8,726        199         3.05     10,000        222         2.97

Capital Notes

     8,002        387         6.00     7,000        315         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     343,807        2,365         0.92     351,349        3,315         1.26
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     58,051             49,390        

Other liabilities

     575             260        
  

 

 

        

 

 

      

Total liabilities

     402,433             400,999        

Stockholders’ equity

     27,223             26,559        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 429,656           $ 427,558        
  

 

 

        

 

 

      

Net interest income

     $ 11,808           $ 11,359      
    

 

 

        

 

 

    

Net interest margin

          4.01          3.84
       

 

 

        

 

 

 

Interest spread

          3.90          3.71
       

 

 

        

 

 

 

 

51


Table of Contents
(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.

 

52


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 quarter ended September 30, 2012, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those controls subsequent to the date of our most recent evaluation of internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 20, 2012.

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

 

53


Table of Contents

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 9, 2012
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2012
  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 9, 2012
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, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Income (unaudited) for the Three and nine Months ended September 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three and nine Months ended September 30, 2012 and 2011 (iv) Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 2012 and 2011 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2012 and the Nine Months Ended September 30, 2011; (vi) Notes to Unaudited Consolidated Financial Statements.*

 

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

 

54


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 9, 2012     By  

/S/ Robert R. Chapman III

      Robert R. Chapman III, President
      (Principal Executive Officer)
Date: November 9, 2012     By  

/S/ J. Todd Scruggs

      J. Todd Scruggs, Secretary and Treasurer
      (Principal Financial Officer and Principal Accounting Officer)

 

55


Table of Contents

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 9, 2012
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2012
  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 9, 2012
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, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Income (unaudited) for the Three and nine Months ended September 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three and nine Months ended September 30, 2012 and 2011 (iv) Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 2012 and 2011 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2012 and the Nine Months Ended September 30, 2011; (vi) Notes to Unaudited Consolidated Financial Statements.*

 

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

 

56