10-Q 1 d70027d10q.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 June 30, 2015

 

 

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: 3,371,616 shares of Common Stock, par value $2.14 per share, were outstanding at August 7, 2015.

 

 

 


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

     33   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     51   

Item 4.

 

Controls and Procedures

     51   

PART II – OTHER INFORMATION

     51   

Item 1.

 

Legal Proceedings

     51   

Item 1A.

 

Risk Factors

     52   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     52   

Item 3.

 

Defaults Upon Senior Securities

     52   

Item 4.

 

Mine Safety Disclosures

     52   

Item 5.

 

Other Information

     52   

Item 6.

 

Exhibits

     53   

SIGNATURES

     54   


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) (2015 unaudited)

 

     6/30/2015     12/31/2014  

Assets

    

Cash and due from banks

   $ 16,498      $ 12,743   

Federal funds sold

     2,339        —     
  

 

 

   

 

 

 

Total cash and cash equivalents

     18,837        12,743   

Securities held-to-maturity (fair value of $2,684 in 2015 and $2,699 in 2014)

     2,524        2,528   

Securities available-for-sale, at fair value

     29,448        24,395   

Restricted stock, at cost

     1,313        1,739   

Loans, net of allowance for loan losses of $4,586 in 2015 and $4,790 in 2014

     412,425        394,573   

Loans held for sale

     2,972        1,030   

Premises and equipment, net

     9,186        9,262   

Interest receivable

     1,216        1,246   

Cash value - bank owned life insurance

     9,648        9,512   

Other real estate owned, net of valuation allowance

     2,065        956   

Income taxes receivable

     1,006        945   

Deferred tax assets, net

     1,384        1,221   

Other assets

     812        715   
  

 

 

   

 

 

 

Total assets

   $ 492,836      $ 460,865   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities

    

Deposits

    

Noninterest bearing demand

   $ 83,828      $ 74,682   

NOW, money market and savings

     220,092        227,761   

Time

     141,466        97,054   
  

 

 

   

 

 

 

Total deposits

     445,386        399,497   

Federal funds purchased

     —          3,189   

FHLB borrowings

     —          12,000   

Capital notes

     10,000        10,000   

Interest payable

     74        58   

Dividends payable

     202        —     

Other liabilities

     1,368        1,345   
  

 

 

   

 

 

 

Total liabilities

   $ 457,030      $ 426,089   
  

 

 

   

 

 

 

Stockholders’ equity

    

Preferred stock; authorized 1,000,000 shares; none issued and outstanding as of June 30, 2015 and December 31, 2014

   $  —        $  —     

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 3,371,616 as of June 30, 2015 and December 31, 2014

     7,215        7,215   

Additional paid-in-capital

     22,919        22,919   

Retained earnings

     6,376        5,031   

Accumulated other comprehensive (loss)

     (704     (389
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 35,806      $ 34,776   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 492,836      $ 460,865   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

1


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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

 

     For the Three Months      For the Six Months  
     Ended June 30,      Ended June 30,  
     2015      2014      2015      2014  

Interest Income

           

Loans

   $ 4,758       $ 4,268       $ 9,386       $ 8,456   

Securities

           

US Government and agency obligations

     143         174         283         354   

Mortgage backed securities

     18         25         28         58   

Municipals - taxable

     22         64         47         137   

Municipals - tax exempt

     11         36         21         83   

Dividends

     29         26         34         32   

Other (Corporates)

     2         11         3         26   

Interest bearing deposits

     4         —           6         —     

Federal Funds sold

     4         6         9         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     4,991         4,610         9,817         9,155   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

           

NOW, money market savings

     123         121         245         239   

Time Deposits

     391         297         723         598   

Federal Funds purchased

     —           —           1         2   

FHLB borrowings

     3         19         28         38   

Reverse repurchase agreements

     —           —           —           1   

Capital notes

     150         150         300         300   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     667         587         1,297         1,178   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     4,324         4,023         8,520         7,977   

Provision for loan losses

     57         —           157         55   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,267         4,023         8,363         7,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income

           

Mortgage income

     613         407         1,136         696   

Service charges, fees and commissions

     348         364         666         714   

Increase in cash value of life insurance

     68         72         136         143   

Other

     45         28         54         41   

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

     4         86         33         80   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     1,078         957         2,025         1,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to these consolidated financial statements

 

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Table of Contents
     2015      2014      2015      2014  

Non-interest expenses

           

Salaries and employee benefits

     2,128         1,904         4,211         3,789   

Occupancy

     312         312         601         625   

Equipment

     304         328         603         615   

Supplies

     108         97         204         202   

Professional, data processing, and other outside expense

     560         562         1,046         1,175   

Marketing

     148         132         224         229   

Credit expense

     63         50         136         87   

Other real estate expenses

     32         100         37         157   

FDIC insurance expense

     79         77         153         107   

Other

     201         195         400         380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expenses

     3,935         3,757         7,615         7,366   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,410         1,223         2,773         2,230   

Income tax expense

     453         380         889         682   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 957       $ 843       $ 1,884       $ 1,548   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding - basic

     3,371,616         3,364,874         3,371,616         3,364,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding - diluted

     3,371,616         3,364,874         3,371,616         3,364,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share - basic

   $ 0.28       $ 0.25       $ 0.56       $ 0.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share - diluted

   $ 0.28       $ 0.25       $ 0.56       $ 0.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to these consolidated financial statements

 

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Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2015 and 2014

(dollar amounts in thousands) (unaudited)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2015     2014     2015     2014  

Net Income

   $ 957     $ 843     $ 1,884     $ 1,548  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

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

     (783     1,049       (445     2,322  

Tax effect

     267       (357     152       (788

Reclassification adjustment for gains included in net income (1)

     (4     (86     (33     (80

Tax effect (2)

     1       29       11       27  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (519     635       (315     1,481  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 438     $ 1,478     $ 1,569     $ 3,029  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

See accompanying notes to these consolidated financial statements

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2015 and 2014

(dollar amounts in thousands) (unaudited)

 

     June 30,  
     2015     2014  

Cash flows from operating activities

    

Net Income

   $ 1,884     $ 1,548  

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

    

Depreciation and amortization

     381       352  

Net amortization and accretion of premiums and discounts on securities

     34       155  

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

     (33     (80

Provision for loan losses

     157       55  

Loss (gain) on sale of other real estate owned

     1       (2

Impairment of other real estate owned

     15       143  

(Increase) in loans held-for-sale

     (1,942     (1,259

(Increase) in cash value of life insurance

     (136     (143

Decrease in interest receivable

     30       133  

Decrease (increase) in other assets

     (97     (38

(Increase) in income taxes receivable

     (61     (41

Increase (decrease) in interest payable

     16       (4

Increase in other liabilities

     23       70  
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 272     $ 889  
  

 

 

   

 

 

 

Cash flows from investing activities

    

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

   $  —       $ 1,000  

Purchases of securities available-for-sale

     (12,414     (1,553

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

     30       103  

Proceeds from sale of securities available-for-sale

     6,856       13,199  

Redemption of Federal Home Loan Bank stock

     426       139  

Proceeds from sale of other real estate owned

     25       287  

Improvements to other real estate owned

     (25     —     

Origination of loans, net of principal collected

     (19,134     (18,818

Purchases of premises and equipment

     (305     (297
  

 

 

   

 

 

 

Net cash (used in) investing activities

   $ (24,541   $ (5,940
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

   $ 45,889     $ 12,863  

Net (decrease) in federal funds purchased

     (3,189     (2,941

Net (decrease) in Federal Home Loan Bank advances

     (12,000     —     

Dividends paid to common stockholders

     (337     (168
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 30,363     $ 9,754  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     6,094       4,703  

Cash and cash equivalents at beginning of period

   $  12,743     $  16,671  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 18,837     $ 21,374  
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to other real estate owned

   $ 1,125     $ 384  

Loans made to finance the sale of other real estate owned

     —          78  

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

     (478     2,242  

Common stock dividends declared, not paid

     202       —     

Cash transactions

    

Cash paid for interest

   $ 1,281     $ 1,182  

Cash paid for taxes

     1,109       723  

See accompanying notes to these consolidated financial statements

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2015 and 2014

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

 

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

Balance at December 31, 2013

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           1,548        —          1,548   

Dividends declared on common stock ($0.05 per share)

     —           —           —           (168     —          (168

Other Comprehensive Income

     —           —           —           —          1,481        1,481   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     3,364,874       $ 7,201       $ 22,868       $ 3,504      $ (940   $ 32,633   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —           —           —           1,884        —          1,884   

Dividends declared on common stock ($0.16 per share)

     —           —           —           (539     —          (539

Other Comprehensive Loss

     —           —           —           —          (315     (315
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

     3,371,616       $ 7,215       $ 22,919       $ 6,376      $ (704   $ 35,806   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

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Table of Contents

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of and for the three and six months ended June 30, 2015 and 2014 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, 2014. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2014 included in Financial’s Annual Report on Form 10-K. Results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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

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

Note 2 – Use of Estimates

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

Note 3 – Earnings Per Common Share (EPS)

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of 1999 Financial (the “1999 Plan”) are considered in calculating dilutive earnings per share. The following is a summary of the earnings per share calculation for the three and six months ended June 30, 2015 and 2014.

 

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Note 3 – Earnings Per Share (continued)

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 
     2015      2014      2015      2014  

Net income

   $ 957,000       $ 843,000       $ 1,884,000       $ 1,548,000   

Basic EPS weighted average shares outstanding

     3,371,616         3,364,874         3,371,616         3,364,874   

Incremental shares attributable to stock options

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS weighted average shares outstanding

     3,371,616         3,364,874         3,371,616         3,364,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.28       $ 0.25       $ 0.56       $ 0.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.28       $ 0.25       $ 0.56       $ 0.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

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
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

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

     66,576         110,147         66,576         110,147   

Note 4 – Stock Based Compensation

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

 

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Note 4 – Stock Based Compensation (continued)

 

Stock option plan activity for the six months ended June 30, 2015 is summarized below:

 

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

Options outstanding, January 1, 2015

     69,372      $ 11.44        

Exercised

     —           —           

Forfeited

     (2,796      10.88        
  

 

 

          

Options outstanding, June 30, 2015

     66,576        11.46        0.50      $  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable, June 30, 2015

     66,576      $ 11.46        0.50      $  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Intrinsic value is calculated by subtracting the exercise price of option shares from the market price of underlying shares as of June 30, 2015 and multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is greater than the market price on a given date.

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

Note 5 – Fair Value Measurements

Determination of Fair Value

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

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

 

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Note 5 – Fair Value Measurements (continued)

 

Fair Value Hierarchy

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

 

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

 

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

 

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

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

Fair Value on a Recurring Basis

Securities Available-for-Sale

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

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

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

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

 

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Note 5 – Fair Value Measurements (continued)

 

            Carrying Value at June 30, 2015 (in thousands)  

Description

   Balance as of
June 30,
2015
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US agency obligations

   $ 21,360       $ —         $ 21,360       $ —     

Mortgage-backed securities

     4,048         —           4,048         —     

Municipals

     3,553         —           3,553         —     

Corporates

     487            487      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 29,448       $ —         $ 29,448       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Carrying Value at December 31, 2014 (in thousands)  

Description

   Balance as of
December 31,
2014
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US agency obligations

   $ 13,498       $ —         $ 13,498       $ —     

Mortgage-backed securities

     1,982         —           1,982         —     

Municipals

     7,899         —           7,899         —     

Corporates

     1,016         —           1,016         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 24,395       $ —         $ 24,395       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value on a Non-recurring Basis

Impaired loans

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

 

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Note 5 – Fair Value Measurements (continued)

 

Loans held for sale

Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended June 30, 2015. Gains and losses on the sale of loans are recorded within mortgage fee income on the Consolidated Statements of Income.

Other real estate owned

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

Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data.

Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The carrying values of all OREO properties are considered to be Level 3.

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

 

            Carrying Value at June 30, 2015  

Description

   Balance as of
June 30,
2015
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Impaired loans*

   $ 4,115       $ —         $ —         $ 4,115   

Loans held for sale

     2,972         —           2,972         —     

Other real estate owned

     2,065         —           —           2,065   

 

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

 

            Carrying Value at December 31, 2014  

Description

   Balance as of
December 31,
2014
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Impaired loans*

   $ 3,045       $ —         $ —         $ 3,045   

Loans held for sale

     1,030         —           1,030         —     

Other real estate owned

     956         —           —           956   

 

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

 

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Note 5 – Fair Value Measurements (continued)

 

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

 

     Quantitative information about Level 3 Fair Value Measurements for June 30, 2015
(dollars in thousands)
     Fair
Value
     Valuation Technique(s)   

Unobservable Input

   Range (Weighted
Average)

Assets

           

Impaired loans

   $ 4,115       Discounted
appraised
value
   Selling cost    5% - 10% (6%)
         Discount for lack of marketability and age of appraisal    0% - 25% (15%)

OREO

     2,065       Discounted
appraised
value
   Selling cost    5% - 10% (6%)
         Discount for lack of marketability and age of appraisal    0% - 25% (15%)

Financial Instruments

Cash, cash equivalents and Federal Funds sold

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

Loans

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

Bank Owned Life Insurance (BOLI)

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

 

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Note 5 – Fair Value Measurements (continued)

 

Deposits

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

FHLB borrowings

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

Short-term borrowings

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

Capital notes

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

Accrued interest

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

Off-balance sheet credit-related instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Fair value of off-balance sheet credit-related instruments were deemed to be immaterial at June 30, 2015 and December 31, 2014 and therefore are not included in the table below.

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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

 

            Fair Value Measurements at June 30, 2015 using  
     Carrying
Amounts
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Assets

              

Cash and due from banks

   $ 16,498       $ 16,498       $ —         $ —         $ 16,498   

Fed funds sold

     2,339         2,339         —           —           2,339   

Securities

              

Available-for-sale

     29,448         —           29,448         —           29,448   

Held-to-maturity

     2,524         —           2,684         —           2,684   

Restricted stock

     1,313            1,313            1,313   

Loans, net

     412,425         —           —           419,189         419,189   

Loans held for sale

     2,972         —           2,972         —           2,972   

Interest receivable

     1,216         —           1,216         —           1,216   

BOLI

     9,648         —           9,648         —           9,648   

Liabilities

              

Deposits

   $ 445,386       $ —         $ 446,532       $ —         $ 446,532   

Capital notes

     10,000         —           9,989         —           9,989   

Interest payable

     74         —           74         —           74   

 

            Fair Value Measurements at December 31, 2014 using  
     Carrying
Amounts
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Assets

              

Cash and due from banks

   $ 12,743       $ 12,743       $ —         $ —         $ 12,743   

Securities

              

Available-for-sale

     24,395         —           24,395         —           24,395   

Held-to-maturity

     2,528         —           2,699         —           2,699   

Restricted stock

     1,739         —           1,739            1,739   

Loans, net

     394,573         —           —           401,281         401,281   

Loans held for sale

     1,030         —           1,030         —           1,030   

Interest receivable

     1,246         —           1,246         —           1,246   

BOLI

     9,512         —           9,512         —           9,512   

Liabilities

              

Deposits

   $ 399,497       $ —         $ 400,351       $ —         $ 400,351   

FHLB borrowings

     12,000         10,000         2,005         —           12,005   

Federal funds purchased

     3,189         3,189         —           —           3,189   

Capital notes

     10,000         —           10,023         —           10,023   

Interest payable

     58         —           58         —           58   

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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

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

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

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

Note 6 – Capital Notes

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

 

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Table of Contents

Note 7 - Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of June 30, 2015 and December 31, 2014 (amounts in thousands):

 

    

Amortized

     June 30, 2015
Gross Unrealized
     Fair Value  
     Costs      Gains      (Losses)     

 

 

Held-to-Maturity

           

US agency obligations

   $ 2,524       $ 160       $ —         $ 2,684   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US agency obligations

     22,355         —           (995      21,360   

Mortgage-backed securities

     4,137         —           (89      4,048   

Municipals

     3,510         79         (36      3,553   

Corporates

     513         —           (26      487   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,515       $ 79       $ (1,146    $ 29,448   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    

Amortized

     December 31, 2014
Gross Unrealized
     Fair Value  
     Costs      Gains      (Losses)     

 

 

Held-to-Maturity

           

US agency obligations

   $ 2,528       $ 171       $ —         $ 2,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US agency obligations

     14,090         —           (592      13,498   

Mortgage-backed securities

     2,042         —           (60      1,982   

Municipals

     7,832         114         (47      7,899   

Corporates

     1,020         —           (4      1,016   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 24,984       $ 114       $ (703    $ 24,395   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 7 – Securities (continued)

 

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2015 and December 31, 2014 (amounts in thousands):

 

     Less than 12 months      More than 12 months      Total  

June 30, 2015

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

Description of securities

                 

U.S. agency obligations

   $ 9,890       $ 370       $ 11,470       $ 625       $ 21,360       $ 995   

Mortgage-backed securities

     2,065         33         1,983         56         4,048         89   

Municipals

     1,141         15         760         21         1,901         36   

Corporates

     487         26         —           —           487         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,583       $ 444       $ 14,213       $ 702       $ 27,796       $ 1,146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 months      More than 12 months      Total  

December 31, 2014

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

Description of securities

                 

U.S. agency obligations

   $ 999       $ 1       $ 11,502       $ 591       $ 12,501       $ 592   

Mortgage-backed securities

     —           —           1,982         60         1,982         60   

Municipals

     771         9         3,192         38         3,963         47   

Corporates

     —           —           1,016         4         1,016         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,770       $ 10       $ 17,692       $ 693       $ 19,462       $ 703   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

At June 30, 2015, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of June 30, 2015, the Bank owned 27 securities that were being evaluated for other than temporary impairment. Four of these securities were S&P rated AAA and 23 were S&P rated AA. As of June 30, 2015, 21 of these securities were direct obligations of the U.S. government or government sponsored entities, 5 were municipal issues, and one was an investment in a domestic corporate issued security.

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

 

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Table of Contents

Note 8 – Business Segments

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

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

 

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Table of Contents

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2015 and 2014 was as follows (dollars in thousands):

Business Segments

 

     Community
Banking
     Mortgage      Total  

For the six months ended June 30, 2015

        

Net interest income

   $ 8,520       $  —         $ 8,520   

Provision for loan losses

     157         —           157   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     8,363         —           8,363   

Noninterest income

     867         1,158         2,025   

Noninterest expenses

     6,777         838         7,615   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,453         320         2,773   

Income tax expense

     780         109         889   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,673       $ 211       $ 1,884   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 489,821       $ 3,015       $ 492,836   
  

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2014

        

Net interest income

   $ 7,977       $  —         $ 7,977   

Provision for loan losses

     55         —           55   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     7,922         —           7,922   

Noninterest income

     978         696         1,674   

Noninterest expenses

     6,847         519         7,366   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,053         177         2,230   

Income tax expense

     635         47         682   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,418       $ 130       $ 1,548   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 444,081       $ 3,279       $ 447,360   
  

 

 

    

 

 

    

 

 

 
     Community
Banking
     Mortgage      Total  

For the three months ended June 30, 2015

        

Net interest income

   $ 4,324       $  —         $ 4,324   

Provision for loan losses

     57         —           57   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,267         —           4,267   

Noninterest income

     454         624         1,078   

Noninterest expenses

     3,484         451         3,935   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,237         173         1,410   

Income tax expense

     394         59         453   
  

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 843       $ 114       $ 957   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 489,821       $ 3,015       $ 492,836   
  

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2014

        

Net interest income

   $ 4,023       $  —         $ 4,023   

Provision for loan losses

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,023         —           4,023   

Noninterest income

     550         407         957   

Noninterest expenses

     3,497         260         3,757   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,076         147         1,223   

Income tax expense

     343         37         380   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 733       $ 110       $ 843   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 444,081       $ 3,279       $ 447,360   
  

 

 

    

 

 

    

 

 

 

 

20


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Note 9 – Loans, allowance for loan losses and OREO

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

 

    Loan Segments:       Loan Classes:   
   Commercial       Commercial and industrial loans
   Commercial real estate       Commercial mortgages – owner occupied
         Commercial mortgages – non-owner occupied
         Commercial construction
   Consumer       Consumer unsecured
         Consumer secured
   Residential       Residential mortgages
         Residential consumer construction

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

 

     As of:  
     June 30,
2015
     December 31,
2014
 

Commercial

   $ 68,427       $ 63,259   

Commercial real estate

     215,755         207,262   

Consumer

     78,675         76,380   

Residential

     54,154         52,462   
  

 

 

    

 

 

 

Total loans

     417,011         399,363   

Less allowance for loan losses

     4,586         4,790   
  

 

 

    

 

 

 

Net loans

   $ 412,425       $ 394,573   
  

 

 

    

 

 

 

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.

 

21


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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

22


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

 

    “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.

Loans on Non-Accrual Status

(dollars in thousands)

 

     As of  
     June 30, 2015      December 31, 2014  

Commercial

   $ 678       $ 1,965   

Commercial Real Estate:

     

Commercial Mortgages-Owner Occupied

     —           212   

Commercial Mortgages-Non-Owner Occupied

     314         70   

Commercial Construction

     367         460   

Consumer

     

Consumer Unsecured

     —           —     

Consumer Secured

     258         20   

Residential:

     

Residential Mortgages

     205         689   

Residential Consumer Construction

     87         90   
  

 

 

    

 

 

 

Totals

   $ 1,909       $ 3,506   
  

 

 

    

 

 

 

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO increased to $2,065,000 on June 30, 2015 from $956,000 on December 31, 2014. The following table represents the changes in OREO balance during the six months ended June 30, 2015 and year end December 31, 2014.

OREO Changes

(dollars in thousands)

 

     Six Months ended
June 30, 2015
     Year ended
December 31, 2014
 

Balance at the beginning of the year (net)

   $ 956       $ 1,451   

Transfers from loans

     1,125         473   

Capitalized costs

     25         —     

Writedowns

     (15      (167

Sales proceeds

     (25      (780

(Loss) on disposition

     (1      (21
  

 

 

    

 

 

 

Balance at the end of the period (net)

   $ 2,065       $ 956   
  

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held $50,000 and $65,000 of residential real estate in other real estate owned as of June 30, 2015 and December 31, 2014, respectively.

 

23


Table of Contents

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

 

     Impaired Loans
(dollars in thousands)
As of and For the Six Months Ended June 30, 2015
 
2015    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 50       $ 53       $ —         $ 1,034       $ —     

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     3,960         3,960         —           3,398         116   

Commercial Mortgage Non-Owner Occupied

     1,021         1,021         —           1,050         27   

Commercial Construction

     27         499         —           244         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     20         20         —           21         1   

Residential

              

Residential Mortgages

     1,588         1,668         —           1,261         62   

Residential Consumer Construction

     —           —           —           —           —     

With An Allowance Recorded:

              

Commercial

   $ 1,197       $ 1,270       $ 499       $ 1,302       $ 16   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     1,227         1,227         61         1,040         30   

Commercial Mortgage Non-Owner Occupied

     497         550         81         312         14   

Commercial Construction

     340         677         78         170         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     444         501         233         282         8   

Residential

              

Residential Mortgages

     812         956         114         821         24   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 1,247       $ 1,323       $ 499       $ 2,336       $ 16   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     5,187         5,187         61         4,438         146   

Commercial Mortgage Non-Owner Occupied

     1,518         1,571         81         1,362         41   

Commercial Construction

     367         1,176         78         414         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     464         521         233         303         9   

Residential

              

Residential Mortgages

     2,400         2,624         114         2,082         86   

Residential Consumer Construction

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,183       $ 12,402       $ 1,066       $ 10,935       $ 298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

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

 

     Impaired Loans
(dollars in thousands)
As of and For the Year Ended December 31, 2014
 
2014    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 2,017       $ 2,280       $ —         $ 2,641       $ 63   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,835         2,835         —           1,687         152   

Commercial Mortgage Non-Owner Occupied

     1,078         1,128         —           1,041         75   

Commercial Construction

     460         1,194         —           606         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     21         21         —           21         1   

Residential

              

Residential Mortgages

     934         1,058         —           702         58   

Residential Consumer Construction

     —           —           —           —           —     

With An Allowance Recorded:

              

Commercial

   $ 1,406       $ 1,861       $ 713       $ 990       $ 29   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     852         1,029         63         1,636         36   

Commercial Mortgage Non-Owner Occupied

     126         126         32         173         7   

Commercial Construction

     —           —           —           —           —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     119         119         119         80         7   

Residential

              

Residential Mortgages

     829         968         131         1,257         52   

Residential Consumer Construction

     —           —           —           —           —     

Totals:

              

Commercial

   $ 3,423       $ 4,141       $ 713       $ 3,631       $ 92   

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     3,687         3,864         63         3,323         188   

Commercial Mortgage Non-Owner Occupied

     1,204         1,254         32         1,214         82   

Commercial Construction

     460         1,194         —           606         —     

Consumer

              

Consumer Unsecured

     —           —           —           —           —     

Consumer Secured

     140         140         119         101         8   

Residential

              

Residential Mortgages

     1,763         2,026         131         1,959         110   

Residential Consumer Construction

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,677       $ 12,619       $ 1,058       $ 10,834       $ 480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Six Months Ended June 30, 2015
 
2015    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (256     (49     (155     —          (460

Recoveries

     4        71        24        —          99   

Provision

     70        (73     182        (22     157   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,053      $ 2,413      $ 863      $ 527      $ 4,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 499      $ 220      $ 233      $ 114      $ 1,066   
  

 

 

   

 

 

   

 

 

   

 

 

   

Ending Balance: Collectively evaluated for impairment

     554        1,923        630        413        3,520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,053      $ 2,143      $ 863      $ 527      $ 4,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,247      $ 7,072      $ 464      $ 2,400      $ 11,183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     67,180        208,683        78,211        51,754        405,828   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 68,427      $ 215,755      $ 78,675      $ 54,154      $ 417,011   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Year Ended December 31, 2014
 
2014    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (165     (187     (79     (120     (551

Recoveries

     51        10        39        —          100   

Provision

     334        (260     (83     64        55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 713      $ 95      $ 119      $ 131      $ 1,058   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     522        2,099        693        418        3,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 3,423      $ 5,351      $ 140      $ 1,763      $ 10,677   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     59,836        201,911        76,240        50,699        388,686   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 63,259      $ 207,262      $ 76,380      $ 52,462      $ 399,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

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

 

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

Commercial

   $ 230       $ 10       $ 678       $ 918       $ 67,509       $ 68,427       $ —     

Commercial Real Estate:

                    

Commercial Mortgages- Owner Occupied

     776         846         —           1,622         76,726         78,348         —     

Commercial Mortgages-Non-Owner Occupied

     196         80         135         411         123,129         123,540         —     

Commercial Construction

     —           —           367         367         13,500         13,867         —     

Consumer:

                    

Consumer Unsecured

     3         4         —           7         5,415         5,422         —     

Consumer Secured

     364         130         230         724         72,529         73,253         —     

Residential:

                    

Residential Mortgages

     240         —           205         445         45,981         46,426         —     

Residential Consumer Construction

     231         —           —           231         7,497         7,728         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,040       $ 1,070       $ 1,615       $ 4,725       $ 412,286       $ 417,011       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Age Analysis of Past Due Loans as of
December 31, 2014
(dollars in thousands)
 
2014    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
than
90 Days
     Total Past
Due
     Current      Total
Loans
     Recorded Investment
> 90 Days &
Accruing
 

Commercial

   $ 21       $ 80       $ 1,965       $ 2,066       $ 61,193       $ 63,259       $ —     

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     192         —           212         404         77,304         77,708         —     

Commercial Mortgages-Non-Owner Occupied

     86         —           70         156         119,019         119,175         —     

Commercial Construction

     —           —           460         460         9,919         10,379         —     

Consumer:

                    

Consumer Unsecured

     11         —           —           11         5,749         5,760         —     

Consumer Secured

     15         —           —           15         70,605         70,620         —     

Residential:

                    

Residential Mortgages

     626         48         525         1,199         43,745         44,944         —     

Residential Consumer Construction

     29         —           —           29         7,489         7,518         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 980       $ 128       $ 3,232       $ 4,340       $ 395,023       $ 399,363       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

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

 

     Credit Quality Information - by Class
June 30, 2015
(dollars in thousands)
 
2015    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 65,676       $ 130       $ 1,357       $ 1,264       $ —         $ 68,427   

Commercial Real Estate:

                 

Commercial Mortgages-Owner Occupied

     69,293         1,378         2,406         5,271         —           78,348   

Commercial Mortgages-Non Owner Occupied

     116,099         1,984         4,023         1,434         —           123,540   

Commercial Construction

     13,500         —           —           367         —           13,867   

Consumer

                 

Consumer Unsecured

     5,422         —           —           —           —           5,422   

Consumer Secured

     72,080         297         127         749         —           73,253   

Residential:

                 

Residential Mortgages

     43,790         —           92         2,544         —           46,426   

Residential Consumer Construction

     7,641         —           —           87         —           7,728   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 393,501       $ 3,789       $ 8,005       $ 11,716       $ —         $ 417,011   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Information - by Class
December 31, 2014
(dollars in thousands)
 
2014    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 58,745       $ 725       $ 224       $ 3,565       $ —         $ 63,259   

Commercial Real Estate:

                 

Commercial Mortgages-Owner Occupied

     71,087         1,718         1,216         3,687         —           77,708   

Commercial Mortgages-Non Owner Occupied

     112,560         1,586         3,971         1,058         —           119,175   

Commercial Construction

     9,919         —           —           460         —           10,379   

Consumer

                 

Consumer Unsecured

     5,673         —           —           87         —           5,760   

Consumer Secured

     69,527         554         136         403         —           70,620   

Residential:

                 

Residential Mortgages

     41,578         1,258         120         1,988         —           44,944   

Residential Consumer Construction

     7,428         —           —           90         —           7,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 376,517       $ 5,841       $ 5,667       $ 11,338       $ —         $ 399,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

The following tables describe the loan modifications classified as TDRs during the three and six months ended June 30, 2015:

 

For the Three Months Ended June 30, 2015

(dollars in thousands)

 

Troubled Debt Restructurings During the Period

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

Commercial Real Estate

   2    $ 454       $ 454   

For the Six Months Ended June 30, 2015

(dollars in thousands)

 

Troubled Debt Restructurings During the Period

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

Commercial

   1    $ 20       $ 20   

Commercial Real Estate

   2    $ 454       $ 454   

There were no loan modifications that would have been classified as TDRs during the three and six months ended June 30, 2014.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and six months ended June 30, 2015 and 2014.

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

At June 30, 2015 and December 31, 2014, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

Note 10 – Recent accounting pronouncements

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

 

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Note 10 – Recent accounting pronouncements (continued)

 

In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718),” should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

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

In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of

 

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Note 10 – Recent accounting pronouncements (continued)

 

extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15,

 

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Note 10 – Recent accounting pronouncements (continued)

 

2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on our consolidated financial statements.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking 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.

 

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

Overview

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

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. 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.

 

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The Bank services its banking customers through the following locations in Region 2000 and surrounding areas:

Full Service Branches

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Limited Service Branches

 

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

 

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

 

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

Loan Production Offices

 

    Residential mortgage loan production office located at the Forest Branch,

 

    Residential mortgage loan production office located at 2404 Electric Road, Suite B, Roanoke, Virginia,

 

    Residential mortgage loan production office located at 133 Salem Avenue, NW, in Roanoke, Virginia,

 

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

The Bank anticipates opening the following branch in 2015:

 

    A full service branch located at 1391 South High Street, Harrisonburg, VA in the fourth quarter of 2015.

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

 

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

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

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

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

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

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

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

 

     June 30, 2015
(in thousands)
 

Commitments to extend credit

   $ 88,886   

Letters of Credit

     4,133   
  

 

 

 

Total

   $ 93,019   
  

 

 

 

 

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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 June 30, 2015 and December 31, 2014 and the results of operations of Financial for the three and six month periods ended June 30, 2015 and 2014. This discussion should be read in conjunction with the financial statements included elsewhere herein.

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

Financial Condition Summary

June 30, 2015 as Compared to December 31, 2014

Total assets were $492,836,000 on June 30, 2015 compared with $460,865,000 at December 31, 2014, an increase of 6.94%. This increase in total assets as of June 30, 2015 was funded largely from an increase in total deposits.

Total deposits increased from $399,497,000 as of December 31, 2014 to $445,386,000 on June 30, 2015, an increase of 11.49%. The increase largely resulted from an increase in time deposits from $97,054,000 on December 31, 2014 to $141,466,000 on June 30, 2015. A total of $10,000,000 of this increase in time deposits, resulted from management’s decision to lock in attractive rates by accepting a brokered certificate of deposit. The balance of the increase in time deposits was raised through a local offering of certificates of deposit. Specifically, the Bank offered an 18-month certificate of deposit at 1.16% APY. The total raised with this offer was approximately $34,000,000. The cash provided from the increase in time deposits has and will be used to fund loan growth and provide additional on-balance sheet liquidity through the purchase of additional available-for-sale securities.

Total loans, excluding loans held for sale, increased to $417,011,000 on June 30, 2015 from $399,363,000 on December 31, 2014. Loans, excluding loans held for sale and net of unearned income and allowance, increased to $412,425,000 on June 30, 2015 from $394,573,000 on December 31, 2014, an increase of 4.52%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):

 

     June 30, 2015     December 31, 2014  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 68,427         16.41   $ 63,259         15.84

Commercial Real Estate

     215,755         51.74     207,262         51.89

Consumer

     78,675         18.87     76,380         19.13

Residential

     54,154         12.98     52,462         13.14
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 417,011         100.00   $ 399,363         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (“OREO”) decreased to $3,974,000 on June 30, 2015 from $4,462,000 on December 31, 2014. Although OREO increased to $2,065,000 on June 30, 2015 from $956,000 on December 31, 2014, the increase was due to the Bank’s foreclosure in the first quarter on real estate that secured a loan that had been categorized as a non-performing loan. Following the foreclosure and subsequent re-categorization, non-performing loans decreased from $3,506,000 at December 31, 2014 to $1,909,000 at June 30, 2015. 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 cumulatively would have approximated $388,000 and $915,000 as of June 30, 2015 and December 31, 2014, 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, 2014, the Bank was carrying 4 OREO properties on its books at a value of $956,000. During the six months ended June 30, 2015, the Bank acquired 1 additional OREO property and disposed of 1 OREO property, and as of June 30, 2015 the Bank is carrying 4 OREO properties at a value of $2,065,000. 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 $847,000 at June 30, 2015 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $376,000 at December 31, 2014. 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 increased to $18,837,000 on June 30, 2015 from $12,743,000 on December 31, 2014. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase is in large part due to the increase in time deposits and non-interest bearing demand deposits which was partially offset by a decrease in NOW, money market and savings accounts. The increase in time deposits will be used to fund loans and investments. Cash and cash equivalents also vary due to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations.

Securities held-to-maturity decreased slightly to $2,524,000 on June 30, 2015 from $2,528,000 on December 31, 2014. Securities available-for-sale increased to $29,448,000 on June 30, 2015, from $24,395,000 on December 31, 2014. The increase is a result of management’s desire to increase on-balance sheet liquidity. During the six months ended June 30, 2015 the Bank received no proceeds from

 

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calls of securities available-for-sale and $6,856,000 in proceeds from the sale of securities available-for-sale. The Bank purchased no securities held-to-maturity and $12,414,000 in securities available-for sale during the same period.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $505,000 at June 30, 2015 and $931,000 at December 31, 2014, a decrease of $426,000. This decrease is attributable to the Bank’s decision to payoff $10,000,000 and $2,000,000 in FHLBA advances during the first and second quarters, respectively, and the subsequent repurchase of stock necessary to support those advances by the FHLBA from the Bank. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Liquidity and Capital

At June 30, 2015, Financial, on a consolidated basis, had liquid assets of $48,285,000 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 June 30, 2015. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary.

Financial has $10,000,000 categorized as “Capital Notes” which as of June 30, 2015 is the result of the private placement of $10,000,000 unregistered debt securities as previously disclosed (the “2012 Notes”). The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The notes mature on April 1, 2017, but are subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders.

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

 

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At June 30, 2015, the Bank had a leverage ratio of approximately 9.40%, a Tier 1 risk-based capital ratio of approximately 10.80% and a total risk-based capital ratio of approximately 11.89%. As of June 30, 2015 and December 31, 2014 the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of June 30, 2015 and December 31, 2014:

Bank Level Only Capital Ratios

 

Analysis of Capital (in 000’s)    June 30,
2015
     December 31,
2014
 

Tier 1 capital

     

Common Stock

   $ 3,742       $ 3,742   

Surplus

     19,325         19,325   

Retained earnings

     22,631         20,479   
  

 

 

    

 

 

 

Total Tier 1 capital

   $ 45,698       $ 43,546   
  

 

 

    

 

 

 

Common Equity Tier 1 capital

   $ 45,698         N/A   

Tier 2 capital

     

Allowance for loan losses

   $ 4,586       $ 4,619   

Total Tier 2 capital:

   $ 4,586       $ 4,619   
  

 

 

    

 

 

 

Total risk-based capital

   $ 50,284       $ 48,165   
  

 

 

    

 

 

 

Risk weighted assets

   $ 423,057       $ 369,348   

Average total assets

   $ 486,301       $ 452,276   

 

     Actual     Regulatory Benchmarks  
     June 30,
2015
    December 31,
2014
    For Capital
Adequacy
Purposes
    For Well
Capitalized
Purposes
 

Capital Ratios:

        

Tier 1 capital to average total assets

     9.40     9.63     4.00     5.00

Common Equity Tier 1 capital

     9.40     N/A        4.50     6.50

Tier 1 risk-based capital ratio

     10.80     11.79     6.00     8.00

Total risk-based capital ratio

     11.89     13.04     8.00     10.00

The capital ratios and minimums for 2015 have been updated to conform with the Basel III requirements.

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $1,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis, while remaining “well capitalized,” would be lower than the comparable capital ratios of the Bank because the proceeds from the private placement of the 6% capital notes due on April 1, 2017 do not qualify as equity capital on a consolidated basis.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. The phase-in period for this rule began in January 2015.

 

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2015 and 2014

Earnings Summary

Financial had net income including all operating segments of $957,000 and $1,884,000 for the three and six months ended June 30, 2015, compared to $843,000 and $1,548,000 for the comparable periods in 2014. The basic and diluted earnings per common share for the three and six months ended June 30, 2015 were $0.28 and $0.56, compared to basic and diluted earnings per share of $0.25 and $0.46 for the three and six months ended June 30, 2014.

The increase in net income for the three and six months ended June 30, 2015 as compared to the prior year was due primarily to an increase in interest received due to an increase in interest earning assets, and was partially offset by an increase in non-interest expense, a slight increase in interest expense paid on deposits, and an increase in the provision for loan losses. Non-interest income increased for the three and six months ended June 30, 2015 due to an increase in fees related to an increase in mortgage origination volume from the same periods in 2014.

These operating results represent an annualized return on stockholders’ equity of 10.71% for both the three and six months ended June 30, 2015, compared with 10.30% and 9.61% for the same periods in 2014. The Company had an annualized return on average assets of 0.79% for both the three and six months ended June 30, 2015 compared with 0.75% and 0.70% for the same periods in 2014.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $4,991,000 and $9,817,000 for the three and six months ended June 30, 2015 from $4,610,000 and $9,155,000 for the same periods in 2014, an increase of 8.26% and 7.23%, respectively. Interest income increased primarily because of increased balances in the loan portfolio. The average rate received on earning assets decreased to 4.38% and 4.38% for the three and six months ended June 30, 2015 as compared with 4.53% and 4.56% for the comparable periods in 2014. The rate on total average earning assets decreased primarily because of a decrease in market rates of interest resulting from a competitive banking environment. Management expects that competition will continue to pressure the rates we receive on loans and therefore may negatively impact our interest income.

Interest expense increased to $667,000 and $1,297,000 for the three and six months ended June 30, 2015 from $587,000 and $1,178,000 for the same periods in 2014, an increase of 13.63% and 10.10%, respectively. These increases in interest expense resulted in large part from an increased balance in time deposits which typically pay depositors a higher rate of interest than do demand, money market, and savings accounts. The Bank’s average rate paid on interest earning deposits was 0.58% and 0.56% during the three and six month periods ended June 30, 2015 as compared to 0.51% and 0.52% for the same periods in 2014.

The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and six months ended June 30, 2015 was $4,324,000 and $8,520,000 compared to $4,023,000 and

 

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$7,977,000 for the same periods in 2014. The change in net interest income for the three and six months ended June 30, 2015 as compared with the comparable periods in 2014 primarily is attributable to the increase in loan balances previously discussed. The net interest margin was 3.79% and 3.80% for the three and six months ended June 30, 2015, as compared to 3.96% and 3.98% for the same periods a year ago.

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

Non-Interest Income

Non-interest income is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income exclusive of gains on sales of securities increased to $1,074,000 and $1,992,000 for the three and six months ended June 30, 2015 from $871,000 and $1,594,000 for the three and six months ended June 30, 2014. This increase for the three and six months ended June 30, 2015 as compared to the same periods last year was due primarily to an increase in mortgage fee income to $613,000 and $1,136,000 for the three and six months ended June 30, 2015 as compared to $407,000 and $696,000 for the comparable periods last year. The increase in mortgage fee income is directly attributable to the production in the Bank’s Roanoke mortgage office in 2015. For the three and six months ended June 30, 2015, service charges, fees, and commissions decreased by $16,000 and $48,000 as compared to the three and six months ended June 30, 2014.

Purchase mortgage originations totaled $10,941,000 and $26,310,000, or 63.05% and 60.92% respectively, of the total mortgage loans originated in the three and six months ended June 30, 2015 as compared to $12,733,000 and $18,898,000, or 76.95% and 70.36%, respectively, of the total mortgage loans originated in the same periods in 2014. The increase in amount of purchase mortgage originations resulted from an increased market presence in Roanoke as well as an increase in home purchase activity. Refinancing activity also increased because rates remained at historically low levels. Despite the increase in refinancing, management anticipates that purchase mortgage originations will continue to represent a majority of mortgage originations. Management expects revenue from the mortgage segment will be under pressure during the rising interest rate environment. In addition, Management believes that regulatory pressure may result in a decreased number of competitors to the Mortgage division and this could result in an increase in market share.

Net gain on sales of securities available-for-sale decreased to $4,000 and $33,000 for the three and six months ended June 30, 2015 from $86,000 and $80,000 for the same periods in 2014.

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

Despite the recent increase in rates, management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2015. Management expects that attractive rates coupled with the Mortgage division’s reputation in Region 2000 will allow us to maintain or increase revenue at the Mortgage division. Because many people able to refinance mortgages have already done so, management expects refinancing activity to continue to decrease. As a result of the rising interest rates, management expects that loans for home purchases (as opposed to refinances) will constitute the majority of mortgage originations.

Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third party broker-dealer operates a service center

 

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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 2015.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has two full-time and one part-time employee that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2015.

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2015 increased to $3,935,000 and $7,615,000 from $3,757,000 and $7,366,000, an increase of 4.74% and 3.38% for the comparable periods in 2014. This resulted from increases for compensation and employee benefit expense and credit expense, primarily related to the expansion into Charlottesville. Commissions paid on mortgages originated through the Roanoke mortgage production office also increased. These increases were offset in part by a slight decrease in data processing fees resulting from a renegotiated contract with a core processing provider and other outside expense from $562,000 and $1,175,000 for the three and six months ended June 30, 2014 to $560,000 and $1,046,000 for the same periods in 2015. The increase was also offset by a decrease in OREO expense from $100,000 and $157,000 for the three and six months ended June 30, 2014 to $32,000 and $37,000 for the same periods in 2015. Total personnel expense was $2,128,000 and $4,211,000 for the three and six month periods ended June 30, 2015 as compared to $1,904,000 and $3,789,000 for the same periods in 2014.

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision to the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon two components – specific impairment and general reserves. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, loan performance measures. Based on the application of the loan loss calculation, the Bank provided $57,000 and $157,000 to the allowance for loan losses for the three and six month periods ended June 30, 2015. This compares to a provision of $0 and $55,000 for the comparable periods in 2014. This results in a year-to-date increase in the amount provided of 185.45% during the six month periods ended June 30, 2014 to June 30, 2015.

General reserves have trended downward for several quarters. This downward trend is directly attributable to the Bank’s charge-off history through the most recent negative credit cycle. A significant part of the general reserve calculation incorporates how a particular loan class performs over a period of time (that is, its charge-off history). Following the financial crisis in 2008 and beyond that disrupted the banking and financial systems, the Bank’s asset quality deteriorated. This deterioration resulted in a significant increase in charge-offs against the Bank’s loan portfolio. The elevated charge-offs continued through 2011. During this period, the Bank’s loan loss methodology, which is based in part on the Bank’s charge-off history, dictated an increase in the amount allocated to the general reserve component of the loan loss reserve. Beginning in 2011, asset quality began to rapidly improve. Because the Bank used a three year charge-off history in calculating general reserves, the general reserves remained elevated (relative to our historical norms) through 2013.

 

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Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for loan losses and constitute a realized loss. Charged-off loans increased to $259,000 and $460,000 for the three and six months ended June 30, 2015 from $97,000 and $101,000 for the comparable periods in 2014. A total of $175,000 of this amount arose from one borrowing relationship. Management does not believe that this increase represents an ongoing negative trend. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three and six months ended June 30, 2015, the Bank had recoveries of charged off loans of $42,000 and $99,000 as compared with $13,000 and $37,000 for the comparable period in 2014.

In 2014, general reserves would have decreased significantly because, based on the three year charge off history, 2011 charge-off experience would no longer be reflected in the calculation. Management was concerned that this decrease would not accurately reflect the increased risk related to expansion in Charlottesville and Harrisonburg and the related loan growth, as well as continuing economic conditions. Throughout the fourth quarter of 2014, management and the Bank’s board of directors had numerous discussions to address this concern regarding the adequacy of the allowance for loan losses going forward. To ensure that the general reserves accurately incorporated the additional risks noted above, management recommended to the board that the historical loss history be expanded from 3 years to 4 years within the ALLL calculation. We believe the expanded four year charge-off history more closely reflects the ongoing economic cycle and the Bank’s current operations in the new markets. This recommendation to replace the three year history with the four year history was approved by the board.

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. As set forth in the tables below, the Bank’s allowance arising from the specific impairment evaluation as of June 30, 2015 decreased as compared to June 30, 2014 but increased slightly as compared to December 31, 2014. General reserves as of June 30, 2015 were down as compared to both December 31, 2014 and June 30, 2014 primarily due to the improved charge-off history over the recently expanded four year look back period referenced above.

The decrease in the percentage of the allowance for loan losses to total loans as of June 30, 2015 to 1.10% and from and 1.20% as of December 31, 2014 resulted from improved asset quality. As a result, the Bank was not required to replenish charged-off balances within the reserve. The overall balance in the allowance for loan losses decreased from $4,790,000 as of December 31, 2014 to $4,586,000 as of June 30, 2015. Management believes that the current allowance for loan losses is adequate.

 

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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Six months Ended June 30, 2015
 
2015    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (256     (49     (155     —          (460

Recoveries

     4        71        24        —          99   

Provision

     70        (73 )(1)      182        (22 )(1)      157   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,053      $ 2,143      $ 863      $ 527      $ 4,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 499      $ 220      $ 233      $ 114      $ 1,0661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     554        1,923        630        413        3,520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,053      $ 2,143      $ 863      $ 527      $ 4,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,247      $ 7,072      $ 464      $ 2,400      $ 11,183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     67,180        208,683        78,211        51,754        405,828   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 68,427      $ 215,755      $ 78,675      $ 54,154      $ 417,011   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Year Ended December 31, 2014
 
2014    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (165     (187     (79     (120     (551

Recoveries

     51        10        39        —          100   

Provision

     334        (260 )(1)      (83 )(1)      64        55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 713      $ 95      $ 119      $ 131      $ 1,058   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     522        2,099        693        418        3,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 3,423      $ 5,351      $ 140      $ 1,763      $ 10,677   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     59,836        201,911        76,240        50,699        388,686   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 63,259      $ 207,262      $ 76,380      $ 52,462      $ 399,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

    

Three months ended
June 30,

(in thousands)

    

Six Months ended
June 30,

(in thousands)

 
     2015      2014      2015      2014  

Balance, beginning of period

   $ 4,746       $ 5,261       $ 4,790       $ 5,186   

Provision for loan losses

     57         —           157         55   

Loans charged off

     (259      (97      (460      (101

Recoveries of loans charged off

     42         13         99         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge offs) recoveries

     (217      (84      (361      (64
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 4,586       $ 5,177       $ 4,586       $ 5,177   
  

 

 

    

 

 

    

 

 

    

 

 

 

No nonaccrual loans were excluded from impaired loan disclosure under current accounting rules at June 30, 2015 and December 31, 2014. If interest on these loans had been accrued, such income cumulatively would have approximated $388,000 and $915,000 on June 30, 2015 and December 31,

 

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2014, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

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

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

 

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definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

 

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

 

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

Income Taxes

For the three and six months ended June 30, 2015, Financial had an income tax expense of $453,000 and $889,000 as compared to $380,000 and $682,000 for the same periods in in 2014. This represents an effective tax rate of 32.13% and 32.06% for the three and six months ended June 30, 2015 as compared with 31.10% and 30.60% for the three and six months ended June 30, 2014.

 

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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended June 30, 2015 and 2014

(dollars in thousands)

 

     2015     2014  
    

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)

   $ 411,723      $ 4,739         4.62   $ 357,583      $ 4,256         4.77

Loans held for sale

     2,199        19         3.47     1,539        12         3.13

Fed funds sold

     6,606        4         0.24     4,141        6         0.58

Interest bearing bank balances

     5,000        4         0.24     —          —           —     

Securities (3)

     30,728        202         2.63     45,089        330         2.94

Federal agency equities

     1,197        29         9.72     1,173        26         8.89

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     457,569        4,997         4.38     409,641        4,630         4.53
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,729          (5,250     

Non-earning assets

     34,234             43,972        
  

 

 

        

 

 

      

Total assets

   $ 487,074           $ 448,363        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 105,462      $ 59         0.22   $ 101,775      $ 53         0.21

Savings

     114,052        64         0.23     127,724        68         0.21

Time deposits

     138,562        391         1.13     98,102        297         1.21
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     358,076        514         0.58     327,601        418         0.51

Other borrowed funds

              

Fed funds purchased

     57        —           —          65        —           —     

Other borrowings

     308        3         3.91     2,000        19         4.01

Capital Notes

     10,000        150         6.00     10,000        150         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     368,441        667         0.73     339,666        587         0.69
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     82,178             75,122        

Other liabilities

     621             743        
  

 

 

        

 

 

      

Total liabilities

     451,240             415,531        

Stockholders’ equity

     35,834             32,832        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 487,074           $ 448,363        
  

 

 

        

 

 

      

Net interest income

     $ 4,330           $ 4,043      
    

 

 

        

 

 

    

Net interest margin

          3.79          3.96
       

 

 

        

 

 

 

Interest spread

          3.65          3.84
       

 

 

        

 

 

 

 

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

 

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Net Interest Margin Analysis

Average Balance Sheets

For the Six Months Ended June 30, 2015 and 2014

(dollars in thousands)

 

     2015     2014  
    

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)

   $ 406,880      $ 9,352         4.64   $ 353,122      $ 8,436         4.82

Loans held for sale

     1,884        34         3.64     1,089        20         3.70

Federal funds sold

     8,323        9         0.22     2,541        9         0.71

Interest bearing bank balances

     5,000        6         0.24     —          —        

Securities (3)

     28,897        393         2.74     48,216        702         2.94

Federal agency equities

     1,341        34         5.11     1,234        32         5.23

CBB equity

     116        —           —          116        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     452,441        9,828         4.38     406,318        9,199         4.56
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,746          (5,235     

Non-earning assets

     33,621             43,045        
  

 

 

        

 

 

      

Total assets

   $ 481,316           $ 444,128        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 104,656      $ 115         0.22   $ 99,209      $ 105         0.21

Savings

     116,220        130         0.23     128,819        134         0.21

Time deposits

     129,464        723         1.13     98,134        598         1.23
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     350,340        968         0.56     326,162        837         0.52

Other borrowed funds

              

Fed funds purchased

     245        1         0.82     411        2         0.98

Repurchase agreements

     —          —           —          448        1         0.45

Other borrowings

     4,575        28         1.23     2,000        38         3.83

Capital Notes

     10,000        300         6.00     10,000        300         6.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     365,160        1,297         0.72     339,021        1,178         0.70
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     80,053             71,813        

Other liabilities

     622             795        
  

 

 

        

 

 

      

Total liabilities

     445,835             411,629        

Stockholders’ equity

     35,481             32,499        
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 481,316           $ 444,128        
  

 

 

        

 

 

      

Net interest income

     $ 8,531           $ 8,021      
    

 

 

        

 

 

    

Net interest margin

          3.80          3.98
       

 

 

        

 

 

 

Interest spread

          3.66          3.86
       

 

 

        

 

 

 

 

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

 

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

There have been no significant changes during the three and six months ended June 30, 2015, 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.

 

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Table of Contents
Item 1A. Risk Factors

Not applicable

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

Stock Repurchases

In October, 2014, Financial’s board of directors authorized a share repurchase program. The plan, which expires in October, 2015, authorizes Financial to buy back up to 100,000 shares of its common stock. The shares reported in the table as shares that may be repurchased under the plan represent shares eligible through the term of the plan. The repurchases are to be made from time to time in the open market as conditions allow and will be structured to comply with Commission Rule 10b-18. Management reports monthly to the Board of Directors on the status of the repurchase program. The Board of Directors has reserved the right to suspend, terminate, modify or cancel this repurchase program at any time for any reason. The following table lists shares repurchased during the quarter ended June 30, 2015 and the maximum amount available to repurchase under the repurchase plan.

 

Period

   Total
Number of
Shares
Purchased
     Average Price Paid
Per Share ($)
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares That
May Yet Be
Purchased Under
the Plans or
Programs
 

Month # 1

April 1 through April 30, 2015

     0         N/A         0         100,000   

Month # 2

May 1 through May 31, 2015

     0         N/A         0         100,000   

Month # 3

June 1 through June 30, 2015

     0         N/A         0         100,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0         N/A         0         100,000   

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

 

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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 August 7, 2015
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 7, 2015
  32.1    Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 7, 2015
101    The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of June 30, 2015 and December 31, 2014; (ii) Consolidated Statements of Income (unaudited) for the Three and Six months Ended June 30, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six months Ended June 30, 2015 and 2014 (iv) Consolidated Statements of Cash Flows (unaudited) for the Six months Ended June 30, 2015 and 2014 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Six months Ended June 30, 2015 and 2014; (vi) Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    BANK OF THE JAMES FINANCIAL GROUP, INC.
Date: August 7, 2015     By  

/S/ Robert R. Chapman III

      Robert R. Chapman III, President
      (Principal Executive Officer)
Date: August 7, 2015     By  

/S/ J. Todd Scruggs

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

 

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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 August 7, 2015
  31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 7, 2015
  32.1    Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 7, 2015
101    The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of June 30, 2015 and December 31, 2014; (ii) Consolidated Statements of Income (unaudited) for the Three and Six months Ended June 30, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six months Ended June 30, 2015 and 2014 (iv) Consolidated Statements of Cash Flows (unaudited) for the Six months Ended June 30, 2015 and 2014 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Six months Ended June 30, 2015 and 2014; (vi) Notes to Unaudited Consolidated Financial Statements.

 

55