10-Q 1 d93277d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2019

 

 

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Virginia   001-35402   20-0500300

(State or other jurisdiction of

incorporation or organization)

 

(Commission

file number)

 

(I.R.S. Employer

Identification No.)

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

(434) 846-2000

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

Emerging growth company

      

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, 2.14 per share par value   BOTJ   The NASDAQ Stock Market LLC

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,378,436 shares of Common Stock, par value $2.14 per share, were outstanding at August 13, 2019.

 

 

 


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      50  

Item 4.

  Controls and Procedures      50  

PART II – OTHER INFORMATION

     51  

Item 1.

  Legal Proceedings      51  

Item 1A.

  Risk Factors      51  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      51  

Item 3.

  Defaults Upon Senior Securities      51  

Item 4.

  Mine Safety Disclosures      51  

Item 5.

  Other Information      52  

Item 6.

  Exhibits      52  

SIGNATURES

     52  


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts) (2019 unaudited)

 

     June 30,
2019
    December 31,
2018
 

Assets

    

Cash and due from banks

   $  24,543     $  26,725  

Federal funds sold

     7,587       23,600  
  

 

 

   

 

 

 

Total cash and cash equivalents

     32,130       50,325  

Securities held-to-maturity (fair value of $3,774 in 2019 and $3,515 in 2018)

     3,694       3,700  

Securities available-for-sale, at fair value

     53,818       52,727  

Restricted stock, at cost

     1,506       1,462  

Loans, net of allowance for loan losses of $4,724 in 2019 and $4,581 in 2018

     551,974       530,016  

Loans held for sale

     4,443       1,670  

Premises and equipment, net

     15,876       13,426  

Interest receivable

     1,761       1,742  

Cash value—bank owned life insurance

     13,526       13,359  

Other real estate owned

     2,413       2,430  

Income taxes receivable

     454       1,102  

Deferred tax asset, net

     1,232       1,755  

Other assets

     7,268       1,183  
  

 

 

   

 

 

 

Total assets

   $  690,095     $  674,897  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest bearing demand

   $  88,897     $  91,356  

NOW, money market and savings

     342,384       331,298  

Time

     185,903       189,389  
  

 

 

   

 

 

 

Total deposits

     617,184       612,043  

Capital notes

     5,000       5,000  

Interest payable

     159       127  

Other liabilities

     8,503       2,584  
  

 

 

   

 

 

 

Total liabilities

   $  630,846     $  619,754  
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ equity

    

Preferred stock; authorized 1,000,000 shares; none issued and outstanding

   $ —       $ —    

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 4,378,436 as of June 30, 2019 and December 31, 2018

     9,370       9,370  

Additional paid-in-capital

     31,548       31,495  

Retained earnings

     18,606       16,521  

Accumulated other comprehensive (loss)

     (275     (2,243
  

 

 

   

 

 

 

Total stockholders’ equity

   $  59,249     $  55,143  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $  690,095     $  674,897  
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

1


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2019      2018      2019      2018  

Interest Income

           

Loans

   $  6,816      $  6,195      $  13,470      $  11,869  

Securities

           

US Government and agency obligations

     184        186        369        384  

Mortgage backed securities

     56        66        117        134  

Municipals—taxable

     81        82        160        162  

Municipals—tax exempt

     —          1        2        3  

Dividends

     33        23        51        31  

Other (Corporates)

     24        24        47        47  

Interest bearing deposits

     74        56        165        91  

Federal Funds sold

     122        92        243        159  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     7,390        6,725        14,624        12,880  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

           

NOW, money market savings

     362        231        668        423  

Time Deposits

     826        625        1,574        1,206  

FHLB borrowings

     —          16        —          17  

Capital notes

     50        50        100        100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,238        922        2,342        1,746  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     6,152        5,803        12,282        11,134  

Provision for loan losses

     116        315        326        337  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     6,036        5,488        11,956        10,797  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income

           

Gain on sales of loans held for sale

     1,075        873        1,766        1,493  

Service charges, fees and commissions

     461        465        900        929  

Increase in cash value of life insurance

     84        85        167        170  

Other

     39        18        45        35  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,659        1,441        2,878        2,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses

           

Salaries and employee benefits

     3,153        2,832        6,081        5,545  

Occupancy

     417        360        838        755  

Equipment

     536        398        994        777  

Supplies

     142        140        304        289  

Professional, data processing, and other outside expense

     859        837        1,674        1,652  

Marketing

     276        187        421        327  

Credit expense

     156        112        283        237  

Other real estate expenses

     1        86        140        126  

FDIC insurance expense

     94        99        188        200  

Other

     341        255        651        495  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     5,975        5,306        11,574        10,403  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,720        1,623        3,260        3,021  

Income tax expense

     343        323        649        598  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $  1,377      $  1,300      $  2,611      $  2,423  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—basic

     4,378,436        4,378,436        4,378,436        4,378,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     4,383,021        4,378,436        4,381,994        4,378,481  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—basic

   $  0.31      $  0.30      $  0.60      $  0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $  0.31      $  0.30      $  0.60      $  0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to these consolidated financial statements

 

2


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollar amounts in thousands) (unaudited)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2019     2018     2019     2018  

Net Income

   $  1,377   $  1,300   $  2,611   $  2,423
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

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

     1,180     (240     2,491     (1,316

Tax effect

     (248     51     (523     277
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     932     (189     1,968     (1,039
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $  2,309   $  1,111   $  4,579   $  1,384
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

3


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2019 and 2018

(dollar amounts in thousands) (unaudited)

 

     For the Six Months Ended June 30,  
     2019     2018  

Cash flows from operating activities

    

Net Income

   $  2,611   $  2,423

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

    

Depreciation and amortization

     690     434

Stock based compensation expense

     53     —    

Net amortization and accretion of premiums and discounts on securities

     199     205

(Gain) on sales of loans held for sale

     (1,766     (1,493

Proceeds from sales of loans held for sale

     66,292     56,811

Origination of loans held for sale

     (67,299     (58,507

Provision for loan losses

     326     337

Loss (gain) on sale of other real estate owned

     13     (5

Impairment of other real estate owned

     115     110

(Increase) in cash value of life insurance

     (167     (170

(Increase) in interest receivable

     (19     (42

Decrease (increase) in other assets

     47     (134

Decrease in income taxes receivable

     648     27

Increase (decrease) in interest payable

     32     (4

(Decrease) increase in other liabilities

     (454     95
  

 

 

   

 

 

 

Net cash provided by operating activities

   $  1,321   $  87
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from calls of securities held-to-maturity

   $ —       $  2,000

Purchases of securities available-for-sale

     —         (998

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

     1,207     1,108

(Purchase) redemption of Federal Home Loan Bank stock

     (44     43

Proceeds from sale of other real estate owned

     349     525

Origination of loans, net of principal collected

     (22,744     (33,610

Purchases of premises and equipment

     (2,899     (374
  

 

 

   

 

 

 

Net cash (used in) investing activities

   $ (24,131   $ (31,306
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

   $  5,141   $  28,575

Dividends paid to common stockholders

     (526     (525
  

 

 

   

 

 

 

Net cash provided by financing activities

   $  4,615   $  28,050
  

 

 

   

 

 

 

(Decrease) in cash and cash equivalents

     (18,195     (3,169

Cash and cash equivalents at beginning of period

   $  50,325   $  37,018
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $  32,130   $  33,849
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to other real estate owned

   $  460   $  565

Fair value adjustment for securities available-for-sale

     2,491     (1,316

Lease liabilities arising from right-of-use assets

     6,373     —    

Cash transactions

    

Cash paid for interest

   $  2,310   $  1,750

Cash paid for income taxes

     —         650

See accompanying notes to these consolidated financial statements

 

4


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Six Months Ended June 30, 2019 and 2018

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

 

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

Balance at December 31, 2017

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          1,123       —         1,123  

Dividends paid on common stock ($0.06 per share)

     —          —          —          (263     —         (263

Other comprehensive loss

     —          —          —          —         (850     (850
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          1,300       —         1,300  

Dividends paid on common stock ($0.06 per share)

     —          —          —          (262     —         (262

Other comprehensive loss

     —          —          —          —         (189     (189
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

     4,378,436      $  9,370      $  31,495      $  14,167     $ (2,508   $  52,524  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          1,234       —         1,234  

Dividends paid on common stock ($0.06 per share)

     —          —          —          (263     —         (263

Stock-based compensation expense

     —          —          27        —         —         27  

Other comprehensive income

     —          —          —          —         1,036       1,036  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          1,377       —         1,377  

Dividends paid on common stock ($0.06 per share)

     —          —          —          (263     —         (263

Stock-based compensation expense

     —          —          26        —         —         26  

Other comprehensive income

     —          —          —          —         932       932  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2019

     4,378,436      $  9,370      $  31,548      $  18,606     $ (275   $  59,249  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements

 

5


Table of Contents

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information is contained in Financial’s Annual Report on Form 10-K for the year ended December 31, 2018. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2018 included in Financial’s Annual Report on Form 10-K. Results for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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

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

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

Financial also considers valuation of other real estate owned (OREO) a critical accounting policy. OREO consists of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at fair value less estimated costs to sell at the date of foreclosure. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged against expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale. Operating costs after acquisition are expensed.

 

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Table of Contents

Note 2 – Use of Estimates

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

Note 3 – Earnings Per Common Share (EPS)

The following is a summary of the earnings per share calculation for the three and six months ended June 30, 2019 and 2018.

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 
     2019      2018      2019      2018  

Net income

   $  1,377,000      $  1,300,000      $  2,611,000      $  2,423,000  

Weighted average number of shares

     4,378,436        4,378,436        4,378,436        4,378,436  

Restricted stock units/stock options affect of incremental shares

     4,585        —          3,558        45  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted shares

     4,383,021        4,378,436        4,381,994        4,378,481  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS (weighted avg shares)

   $  0.31      $  0.30      $  0.60      $  0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS (Including incremental shares)

   $  0.31      $  0.30      $  0.60      $  0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Note 4 – Stock Based Compensation

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

 

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Note 4 – Stock Based Compensation (continued)

 

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

At the annual meeting of shareholders held on May 15, 2018, the shareholders approved the Bank of the James Financial Group, Inc. 2018 Equity Incentive Plan (the “2018 Incentive Plan”). The 2018 Incentive Plan permits the issuance of up to 250,000 shares of common stock for awards to key employees of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock awards and performance units.

On January 2, 2019, the Company granted its first block of equity compensation under the 2018 Incentive Plan consisting of 24,500 restricted stock units. The recipients of restricted stock units do not receive shares of the Company’s stock immediately, but instead receive shares upon satisfying the requisite service period specified by the terms and conditions of the grant. Additionally, the recipients of restricted stock units do not enjoy the rights of holder of the Company’s common stock until the units have vested and as such, they do not have voting rights or rights to nonforfeitable dividends. The related compensation expense is based on the grant date fair value of the Company’s stock of $13.00 per share. Shares vest over 3 years in thirds with the first one-third vesting one year from the grant date. The total expense recognized for the three and six months ended June 30, 2019, in connection with the restricted stock unit awards was approximately $26,000 and $53,000, respectively. There were no forfeitures during the three and six month periods ending June 30, 2019.

At June 30, 2019, the unrecognized stock-based compensation expense related to unvested restricted stock awards amounted to approximately $266,000. The unrecognized expense will be recognized ratably over the remaining vesting period of 2.50 years. The Company accounts for forfeitures as they occur.

Note 5 – Fair Value Measurements

Determination of Fair Value

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

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume

 

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Note 5 – Fair Value Measurements (continued)

 

and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

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

 

   

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

 

   

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

 

   

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

Fair Value on a Recurring Basis

Securities Available-for-Sale

Fair values of securities available-for sale are based on quoted prices available in an active market. If quoted prices are available, these securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.

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

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

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

 

            Carrying Value at June 30, 2019 (in thousands)  

Description

   Balance as of
June 30,
2019
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

   $ 1,942      $  —        $ 1,942      $  —    

US agency obligations

     24,536        —          24,536        —    

Mortgage-backed securities

     11,197        —          11,197        —    

Municipals

     12,127        —          12,127        —    

Corporates

     4,016        —          4,016        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $  53,818      $ —        $  53,818      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
            Carrying Value at December 31, 2018 (in thousands)  

Description

   Balance as of
December 31,
2018
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

   $ 1,845      $        $ 1,845      $    

US agency obligations

     23,267        —          23,267        —    

Mortgage-backed securities

     11,876        —          11,876        —    

Municipals

     12,009        —          12,009        —    

Corporates

     3,730        —          3,730        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

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

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value on a Non-recurring Basis

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, in situations where the collateral is a house or building in the process of construction, the appraisal is more than 12 months old, management has determined the fair value of the collateral is further impaired below the appraised value, or the appraisal is not based solely on market comparables adjusted for observable inputs, the value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

 

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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, 2019. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale, net on the Consolidated Statements of Income.

Other real estate owned

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

Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO property is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2).

Any fair value adjustments are recorded in the period incurred and expensed against current earnings. However, in situations where the collateral is a house or building in the process of construction, the appraisal is more than 12 months old, management has determined the fair value of the collateral is further impaired below the appraised value, or the appraisal is not based solely on market comparables adjusted for observable inputs, the value is considered Level 3.

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

 

            Carrying Value at June 30, 2019  

Description

   Balance as of
June 30, 2019
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Impaired loans*

   $  1,928      $  —        $  —        $  1,928  

Other real estate owned

     2,413        —          —          2,413  

 

*

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

 

            Carrying Value at December 31, 2018  

Description

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

Impaired loans*

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

Other real estate owned

     2,430        —          —          2,430  

 

*

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

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

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

 

    Quantitative information about Level 3 Fair Value Measurements for June 30, 2019
(dollars in thousands)
    Fair Value    

Valuation Technique(s)

 

Unobservable Input

 

Range (Weighted
Average)

Assets

       

Impaired loans

  $  1,928     Discounted appraised value   Selling cost   0% - 10% (8%)
      Discount for lack of marketability and age of appraisal   0% - 20% (6%)

OREO

    2,413     Discounted appraised value   Selling cost   0% - 10% (6%)
      Discount for lack of marketability and age of appraisal   0% - 25% (15%)
    Quantitative information about Level 3 Fair Value Measurements for December 31, 2018
(dollars in thousands)
    Fair Value    

Valuation Technique(s)

 

Unobservable Input

 

Range (Weighted
Average)

Assets

       

Impaired loans

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

OREO

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

Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following tables whether or not recognized on the Consolidated Balance Sheets at fair value.

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments and their placement in the fair value hierarchy at June 30, 2019 and December 31, 2018 was as follows (in thousands):

 

       Fair Value Measurements at June 30, 2019 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

   $ 24,543      $ 24,543      $ —        $ —        $ 24,543  

Fed funds sold

     7,587        7,587        —          —          7,587  

Securities

              

Available-for-sale

     53,818        —          53,818        —          53,818  

Held-to-maturity

     3,694        —          3,774        —          3,774  

Restricted stock

     1,506           1,506        —          1,506  

Loans, net (1)

     551,974        —          —          550,733        550,733  

Loans held for sale

     4,443        —          4,443        —          4,443  

Interest receivable

     1,761        —          1,761        —          1,761  

BOLI

     13,526        —          13,526        —          13,526  

Liabilities

              

Deposits

   $ 617,184      $ —        $ 618,379      $ —        $ 618,379  

Capital notes

     5,000        —          4,752        —          4,752  

Interest payable

     159        —          159        —          159  
            Fair Value Measurements at December 31, 2018 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

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

Fed funds sold

     23,600        23,600              23,600  

Securities

              

Available-for-sale

     52,727        —          52,727        —          52,727  

Held-to-maturity

     3,700        —          3,515        —          3,515  

Restricted stock

     1,462        —          1,462           1,462  

Loans, net (1)

     530,016        —          —          522,782        522,782  

Loans held for sale

     1,670        —          1,670        —          1,670  

Interest receivable

     1,742        —          1,742        —          1,742  

BOLI

     13,359        —          13,359        —          13,359  

Liabilities

              

Deposits

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

Capital notes

     5,000        —          4,710           4,710  

Interest payable

     127        —          127        —          127  

 

(1)

Carrying amount is net of unearned income and the Allowance.

 

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Table of Contents

Note 6 – Leases

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

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

The Company leases six of its operating locations under long-term leases (greater than 12 months). Leases for four of these locations are classified as operating leases. One new lease which commenced near the end of the current period was classified as a finance lease upon management’s assessment of the lease. Also near the end of the current period, another lease which was classified as operating upon adoption of ASU 2016-02 was modified, and upon reassessment of the modified lease, was transitioned to the finance lease classification. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

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

 

(Dollars in thousands)    June 30, 2019  

Lease liabilities

   $ 1,588  

Right-of-use assets

   $ 1,580  

Weighted average remaining lease term

     15.1 years  

Weighted average discount rate

     3.39

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

 

(Dollars in thousands)    June 30, 2019  

Lease liabilities

   $ 4,552  

Right-of-use assets

   $ 4,552  

Weighted average remaining lease term

     11.6 years  

Weighted average discount rate

     2.70

 

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Table of Contents

Note 6 – Leases (continued)

 

Lease cost (in thousands)    For the Three
Months Ended
June 30, 2019
 

Operating lease cost

   $ 125  

Financing lease cost

     —    
  

 

 

 

Total lease cost

   $ 125  
  

 

 

 

Cash paid for amounts included in the measurement of operating lease liabilities

   $ 122  
Lease cost (in thousands)    For the Six
Months Ended
June 30, 2019
 

Operating lease cost

   $ 286  

Financing lease cost

     —    
  

 

 

 

Total lease cost

   $ 286  
  

 

 

 

Cash paid for amounts included in the measurement of operating lease liabilities

   $ 278  

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

 

     Operating Lease
Liabilities
     Finance Lease
Liabilities
 
Lease payments due (in thousands)    As of
June 30, 2019
     As of
June 30, 2019
 

Six months ending December 31, 2019

   $ 91      $ 187  

Twelve months ending December 31, 2020

     184        445  

Twelve months ending December 31, 2021

     111        454  

Twelve months ending December 31, 2022

     110        454  

Twelve months ending December 31, 2023

     110        454  

Twelve months ending December 31, 2024

     110        479  

Thereafter

     1,352        2,881  
  

 

 

    

 

 

 

Total undiscounted cash flows

   $  2,068      $  5,354  
  

 

 

    

 

 

 

Discount

     (480      (802
  

 

 

    

 

 

 

Lease liabilities

   $ 1,588      $ 4,552  
  

 

 

    

 

 

 

 

15


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, 2019 and December 31, 2018 (amounts in thousands):

 

     June 30, 2019  
            Gross Unrealized         
     Amortized
Costs
     Gains      (Losses)      Fair Value  

Held-to-Maturity

           

US agency obligations

   $ 3,694      $ 80      $ —        $ 3,774  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US Treasuries

     1,964        —          (22      1,942  

US agency obligations

     24,611        223        (298      24,536  

Mortgage-backed securities

     11,407        24        (234      11,197  

Municipals

     12,090        71        (34      12,127  

Corporates

     4,094        2        (80      4,016  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 54,166      $ 320      $ (668    $ 53,818  
  

 

 

    

 

 

    

 

 

    

 

 

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

Held-to-Maturity

           

US agency obligations

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

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US Treasuries

     1,961        —          (116      1,845  

US agency obligations

     24,701        —          (1,434      23,267  

Mortgage-backed securities

     12,390        —          (514      11,876  

Municipals

     12,412        3        (406      12,009  

Corporates

     4,102        —          (372      3,730  
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

Note 7 – Securities (continued)

 

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2019 and December 31, 2018 (amounts in thousands):

 

     Less than 12 months      More than 12 months      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

June 30, 2019

   Value      Losses      Value      Losses      Value      Losses  

Description of securities

                 

Held-to-maturity

                 

US agency obligations

   $ —        $ —        $ —        $ —        $ —        $ —    

Available-for-sale

                 

US Treasuries

     —          —          1,942        22        1,942        22  

US agency obligations

     —          —          12,719        298        12,719        298  

Mortgage-backed securities

     —          —          10,194        234        10,194        234  

Municipals

     —          —          6,610        34        6,610        34  

Corporates

     —          —          3,494        80        3,494        80  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 34,959      $ 668      $ 34,959      $ 668  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      More than 12 months      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

December 31, 2018

   Value      Losses      Value      Losses      Value      Losses  

Description of securities

                 

Held-to-maturity

                 

US agency obligations

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

Available-for-sale

                 

US Treasuries

     —          —          1,845        116        1,845        116  

US agency obligations

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

Mortgage-backed securities

     966        20        10,910        494        11,876        514  

Municipals

     —          —          10,994        406        10,994        406  

Corporates

     —          —          3,730        372        3,730        372  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

17


Table of Contents

Note 7 – Securities (continued)

 

At June 30, 2019, 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, 2019, the Bank owned 33 securities in an unrealized loss position that were being evaluated for other than temporary impairment. Five of these securities were S&P rated AAA, 26 were rated AA, one was rated A, and one was rated BBB+. As of June 30, 2019, 21 of these securities were direct obligations of the U.S. government or government sponsored entities, eight were municipal issues, and four were investments in domestic corporate issued securities.

Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to change in interest rates and other market conditions, no declines currently are deemed to be other-than-temporary.

There were no gross gains or gross losses on sales of available-for-sale securities during the three and six month periods ended June 30, 2019 and 2018. There were no sales of held-to-maturity securities during the three and six month periods ended June 30, 2019 and 2018.

Note 8 – Business Segments

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

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

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2019 and 2018 was as follows (dollars in thousands):

 

18


Table of Contents

Note 8 – Business Segments (continued)

 

Business Segments

        
     Community
Banking
     Mortgage      Total  

Six months ended June 30, 2019

        

Net interest income

   $  12,282      $ —        $  12,282  

Provision for loan losses

     326        —          326  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     11,956        —          11,956  

Noninterest income

     1,112        1,766        2,878  

Noninterest expenses

     10,247        1,327        11,574  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,821        439        3,260  

Income tax expense

     557        92        649  
  

 

 

    

 

 

    

 

 

 

Net income

   $  2,264      $  347      $  2,611  
  

 

 

    

 

 

    

 

 

 

Total assets

   $  685,516      $  4,579      $  690,095  
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2018

        

Net interest income

   $  11,134      $ —        $  11,134  

Provision for loan losses

     337        —          337  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     10,797        —          10,797  

Noninterest income

     1,132        1,495        2,627  

Noninterest expenses

     9,207        1,196        10,403  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,722        299        3,021  

Income tax expense

     546        52        598  
  

 

 

    

 

 

    

 

 

 

Net income

   $  2,176      $  247      $  2,423  
  

 

 

    

 

 

    

 

 

 

Total assets

   $  649,809      $  6,057      $  655,866  
  

 

 

    

 

 

    

 

 

 
     Community
Banking
     Mortgage      Total  

Three months ended June 30, 2019

        

Net interest income

   $  6,152      $ —        $  6,152  

Provision for loan losses

     116        —          116  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     6,036        —          6,036  

Noninterest income

     584        1,075        1,659  

Noninterest expenses

     5,222        753        5,975  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,398        322        1,720  

Income tax expense

     276        67        343  
  

 

 

    

 

 

    

 

 

 

Net income

   $  1,122      $  255      $  1,377  
  

 

 

    

 

 

    

 

 

 

Total assets

   $  685,516      $  4,579      $  690,095  
  

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2018

        

Net interest income

   $  5,803      $ —        $  5,803  

Provision for loan losses

     315        —          315  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,488        —          5,488  

Noninterest income

     566        875        1,441  

Noninterest expenses

     4,603        703        5,306  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,451        172        1,623  

Income tax expense

     298        25        323  
  

 

 

    

 

 

    

 

 

 

Net income

   $  1,153      $  147      $  1,300  
  

 

 

    

 

 

    

 

 

 

Total assets

   $  649,809      $  6,057      $  655,866  
  

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

Note 9 – Loans, allowance for loan losses and OREO

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

 

Loan

    

Segments:

 

Loan Classes:

  

Commercial

    

Commercial and industrial loans

Commercial real estate

    

Commercial mortgages – owner occupied

    

Commercial mortgages – non-owner occupied

    

Commercial construction

Consumer

    

Consumer unsecured

    

Consumer secured

Residential

    

Residential mortgages

    

Residential consumer construction

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

 

     As of:  
     June 30,
2019
     December 31,
2018
 

Commercial

   $  106,178      $ 92,877  

Commercial real estate

     298,163        289,171  

Consumer

     83,314        86,191  

Residential

     69,043        66,358  
  

 

 

    

 

 

 

Total loans (1)

     556,698        534,597  

Less allowance for loan losses

     4,724        4,581  
  

 

 

    

 

 

 

Net loans

   $ 551,974      $  530,016  
  

 

 

    

 

 

 

 

(1)

Includes net deferred costs and premiums of $409 and $457 as of June 30, 2019 and December 31, 2018, respectively.

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

 

20


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

 

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

 

RATING 1

 

Excellent

RATING 2

 

Above Average

RATING 3

 

Satisfactory

RATING 4

 

Acceptable / Low Satisfactory

RATING 5

 

Monitor

RATING 6

 

Special Mention

RATING 7

 

Substandard

RATING 8

 

Doubtful

RATING 9

 

Loss

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

 

   

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

 

   

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

 

   

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

 

   

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

 

21


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

 

   

“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.

 

22


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

 

Loans on Non-Accrual Status

(dollars in thousands)

 

     As of  
     June 30, 2019      December 31, 2018  

Commercial

   $ 957      $ 973  

Commercial Real Estate:

 

Commercial Mortgages-Owner Occupied

     421        317  

Commercial Mortgages-Non-Owner Occupied

     557        173  

Commercial Construction

     —          —    

Consumer

     

Consumer Unsecured

     —          —    

Consumer Secured

     54        84  

Residential:

 

  

Residential Mortgages

     1,496        1,391  

Residential Consumer Construction

     —          —    
  

 

 

    

 

 

 

Totals

   $  3,485      $ 2,939  
  

 

 

    

 

 

 

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank which was acquired through purchase at foreclosure or from the borrower through a deed in lieu of foreclosure. OREO decreased to $2,413 on June 30, 2019 from $2,430 on December 31, 2018. The following table represents the changes in OREO balance during the six months ended June 30, 2019 and year ended December 31, 2018.

OREO Changes

(dollars in thousands)

 

     Six months ended
June 30, 2019
     Year ended
December 31, 2018
 

Balance at the beginning of the year (net)

   $  2,430      $  2,650  

Transfers from loans

     460        850  

Capitalized costs

     —          —    

Valuation adjustments

     (115      (185

Sales proceeds

     (349      (846

Loss on disposition

     (13      (39
  

 

 

    

 

 

 

Balance at the end of the period (net)

   $ 2,413      $ 2,430  
  

 

 

    

 

 

 

At June 30, 2019 and December 31, 2018, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held two residential real estate properties carried on the books in other real estate owned at a value of $228 as of June 30, 2019 and four residential real estate properties carried on the books at a value of $156 in other real estate owned as of December 31, 2018.

 

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, 2019  
2019    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

   $ 1,409      $  1,938      $  —        $  1,420      $ 20  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,492        2,681        —          2,453        92  

Commercial Mortgage Non-Owner Occupied

     557        570        —          344        15  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          —          —    

Consumer Secured

     84        84        —          86        3  

Residential

              

Residential Mortgages

     1,928        2,004        —          1,902        39  

Residential Consumer Construction

     —          —          —          —          —    

With An Allowance Recorded:

              

Commercial

   $ 9      $ 9      $ 9      $ 20      $ —    

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     19        19        19        29        1  

Commercial Mortgage Non-Owner Occupied

     16        16        9        53        1  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          1        —    

Consumer Secured

     —          —          —          53        —    

Residential

              

Residential Mortgages

     302        319        48        339        7  

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              

Commercial

   $ 1,418      $ 1,947      $ 9      $ 1,440      $ 20  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,511        2,700        19        2,482        93  

Commercial Mortgage Non-Owner Occupied

     573        586        9        397        16  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          1        —    

Consumer Secured

     84        84        —          139        3  

Residential

              

Residential Mortgages

     2,230        2,323        48        2,241        46  

Residential Consumer Construction

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,816      $ 7,640      $ 85      $ 6,700      $ 178  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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, 2018  
2018    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Commercial

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

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,414        2,511        —          2,421        167  

Commercial Mortgage Non-Owner Occupied

     131        132        —          403        8  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          —          —    

Consumer Secured

     88        88        —          184        6  

Residential

              

Residential Mortgages

     1,876        1,953        —          1,728        89  

Residential Consumer Construction

     —          —          —          —          —    

With An Allowance Recorded:

              

Commercial

   $ 31      $ 31      $ 15      $ 174      $ 3  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     39        132        36        352        3  

Commercial Mortgage Non-Owner Occupied

     90        90        20        82        6  

Commercial Construction

     —          —          —          85        —    

Consumer

              

Consumer Unsecured

     1        1        1        2        —    

Consumer Secured

     105        105        105        266        7  

Residential

              

Residential Mortgages

     375        390        61        263        11  

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              

Commercial

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

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,453        2,643        36        2,773        170  

Commercial Mortgage Non-Owner Occupied

     221        222        20        485        14  

Commercial Construction

     —          —          —          85        —    

Consumer

              

Consumer Unsecured

     1        1        1        2        —    

Consumer Secured

     193        193        105        450        13  

Residential

              

Residential Mortgages

     2,251        2,343        61        1,991        100  

Residential Consumer Construction

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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, 2019
 
2019    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (24     (6     (168     (21     (219

Recoveries

     2       5       26       3       36  

Provision

     280       (2     21       27       326  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,394     $ 1,828     $ 835     $ 667     $ 4,724  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 9     $ 28     $ —       $ 48     $ 85  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,385       1,800       835       619       4,639  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,394     $ 1,828     $ 835     $ 667     $ 4,724  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,418     $ 3,084     $ 84     $ 2,230     $ 6,816  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     104,760       295,079       83,230       66,813       549,882  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $  106,178     $  298,163     $  83,314     $  69,043     $  556,698  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2018
 
2018    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

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

Recoveries

     113       4       60       —         177  

Provision

     154       319       129       114       716  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 15     $ 56     $ 106     $ 61     $ 238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,121       1,775       850       597       4,343  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

Commercial

   $ 87      $ 78      $ 214      $ 379      $ 105,799      $ 106,178      $  —    

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     503        125        289        917        100,339        101,256        —    

Commercial Mortgages-Non-Owner Occupied

     143        —          431        574        177,122        177,696        —    

Commercial Construction

     —          —          —          —          19,211        19,211        —    

Consumer:

                    

Consumer Unsecured

     80        1        —          81        8,593        8,674        —    

Consumer Secured

     307        47        —          354        74,286        74,640        —    

Residential:

                    

Residential Mortgages

     1,721        244        419        2,384        55,209        57,593        —    

Residential Consumer Construction

     —          —          —          —          11,450        11,450        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,841      $  495      $ 1,353      $ 4,689      $ 552,009      $ 556,698      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Commercial

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

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     209        —          307        516        97,910        98,426        —    

Commercial Mortgages-Non-Owner Occupied

     149        468        —          617        174,657        175,274        —    

Commercial Construction

     —          —          —          —          15,471        15,471        —    

Consumer:

                    

Consumer Unsecured

     8        1        —          9        8,745        8,754        —    

Consumer Secured

     369        44        —          413        77,024        77,437        —    

Residential:

                    

Residential Mortgages

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

Residential Consumer Construction

     —          —          —          —          8,186        8,186        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Credit Quality Information - by Class  
     June 30, 2019  
     (dollars in thousands)  
2019    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 99,842      $ 270      $ 4,603      $ 1,463      $  —        $ 106,178  

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

     89,994        458        8,292        2,512        —          101,256  

Commercial Mortgages-Non-Owner Occupied

     174,461        2,158        415        662        —          177,696  

Commercial Construction

     18,921        290        —          —          —          19,211  

Consumer

                 

Consumer Unsecured

     8,674        —          —          —          —          8,674  

Consumer Secured

     74,391        53        —          196        —          74,640  

Residential:

                 

Residential Mortgages

     54,298        893        —          2,402        —          57,593  

Residential Consumer Construction

     11,309        141        —          —          —          11,450  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 531,890      $ 4,263      $ 13,310      $ 7,235      $ —        $ 556,698  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Commercial

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

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

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

Commercial Mortgages-Non -Owner Occupied

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

Commercial Construction

     14,892        579        —          —          —          15,471  

Consumer

                 

Consumer Unsecured

     8,747        —          6        1        —          8,754  

Consumer Secured

     77,092        —          88        257        —          77,437  

Residential:

                 

Residential Mortgages

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

Residential Consumer Construction

     8,186        —          —          —          —          8,186  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

Troubled Debt Restructurings (TDR)

There were no loan modifications that would have been classified as TDRs during the three and six months ended June 30, 2019 and 2018.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and six months ended June 30, 2019 and 2018.

At June 30, 2019 and December 31, 2018, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

Note 10 – Revenue Recognition

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

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, treasury services income and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Treasury services income primarily represents fees charged to customers for sweep, positive pay and lockbox services. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or at the end of the month.

 

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Table of Contents

Note 10 – Revenue Recognition (continued)

 

Other

Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Note 11 – Recent accounting pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Based on FASB’s July 17, 2019 meeting, an exposure draft is expected that, once finalized, could change implementation dates for many companies. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has been in discussions with its core processor to coordinate its plans for implementation and has contracted with an additional vendor to begin implementation.

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

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various TRG Meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

 

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Note 11 – Recent accounting pronouncements (continued)

 

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

 

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

GENERAL

Critical Accounting Policies

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

Financial’s critical accounting policies include the evaluation of the allowance for loan losses which is based on management’s estimate of an amount that is adequate to absorb probable losses inherent in the loan portfolio of the Bank. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses, specific impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Bank’s allowance for loan losses could result in material changes in Financial’s financial condition and results of operations.

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

 

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Table of Contents

The Bank’s policy with respect to the methodology for determining the allowance for loan losses involves a higher degree of complexity and requires management to make subjective judgments that often require assumptions or estimates about uncertain matters. This critical policy and its assumptions are periodically reviewed with the Board of Directors.

See “Management Discussion and Analysis Results of Operations – Allowance for Loan Losses and Loan Loss Reserve” below for further discussion of the allowance for loan losses.

Financial also considers valuation of other real estate owned (OREO) a critical accounting policy. OREO consists of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at fair value less estimated costs to sell at the date of foreclosure. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged against expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale. Operating costs after acquisition are expensed.

Overview

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

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

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

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

 

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

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

Full-Service Branches

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

A branch located at 3562 Electric Road, Roanoke, VA (the “Roanoke Branch”).

 

   

A branch located at 45 South Main St., Lexington, VA (the “Lexington Branch”)

 

   

A branch located at 550 Water St., Charlottesville, VA (the “Water Street Branch”)

 

   

A branch located at 2101 Electric Rd, Roanoke, VA (the “Oak Grove 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,

 

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Table of Contents

Loan Production Offices

 

   

Residential mortgage loan production office located at the Forest Branch,

 

   

Residential mortgage loan production office located at 2001 South Main Street, Blacksburg, Virginia,

 

   

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

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

The Bank recently closed its location formerly located at 615 Church Street, Lynchburg, Virginia and is consolidating its operations into an expanded Main Street Office.

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

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

 

   

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

 

   

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

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

 

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

 

     June 30, 2019
(in thousands)
 

Commitments to extend credit

   $ 126,776  

Letters of Credit

     2,924  
  

 

 

 

Total

   $ 129,700  
  

 

 

 

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

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

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

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of June 30, 2019 and December 31, 2018 and the results of operations of Financial for the three and six-month periods ended June 30, 2019 and 2018. This discussion should be read in conjunction with the financial statements included elsewhere herein.

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

Financial Condition Summary

June 30, 2019 as Compared to December 31, 2018

Total assets were $690,095,000 on June 30, 2019 compared with $674,897,000 at December 31, 2018, an increase of 2.25%. The increase in total assets was funded from the growth in deposits. In addition, total assets increased because of an increase in right of use assets pursuant to ASC 842, which is discussed in the Note 6 to the Financial Statements filed herewith.

 

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Total deposits increased slightly from $612,043,000 as of December 31, 2018 to $617,184,000 on June 30, 2019, an increase of 0.84%. The increase resulted in large part from increases in NOW, money market, and savings accounts, and was partially offset by a decreases in non-interest-bearing demand deposits and time deposits. Noninterest bearing demand deposits decreased slightly from $91,356,000 on December 31, 2018 to $88,897,000 on June 30, 2019. Time deposits decreased slightly from $189,389,000 on December 31, 2018 to $185,903,000 on June 30, 2019. This decrease in time deposits was primarily due to management’s decision to use surplus cash to pay back a $10,044,000 brokered certificate of deposit.

Total loans, excluding loans held for sale, increased to $556,698,000 on June 30, 2019 from $534,597,000 on December 31, 2018. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $551,974,000 on June 30, 2019 from $530,016,000 on December 31, 2018, an increase of 4.14%. 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, 2019     December 31, 2018  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 106,178        19.07   $ 92,877        17.37

Commercial Real Estate

     298,163        53.56     289,171        54.10

Consumer

     83,314        14.97     86,191        16.12

Residential

     69,043        12.40     66,358        12.41
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 556,698        100.00   $ 534,597        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (“OREO”) increased to $5,898,000 on June 30, 2019 from $5,369,000 on December 31, 2018. OREO decreased to $2,413,000 on June 30, 2019 from $2,430,000 on December 31, 2018. This slight decrease was due in large part to a downward adjustment of the carrying value of certain OREO resulting from a change in appraised value and the Bank’s ability to sell OREO properties during the six months ended June 30, 2019 and was offset in part by new foreclosures during the period. Non-performing loans increased from $2,939,000 at December 31, 2018 to $3,485,000 at June 30, 2019. As discussed in more detail below under “Results of Operations—Allowance for Loan Losses,” management has provided for the anticipated losses on these loans in the allowance for loan losses. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for loan losses charged against earnings.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2018, the Bank was carrying ten OREO properties on its books at a value of $2,430,000. During the six months ended June 30, 2019, the Bank acquired 4 additional OREO properties and disposed of 4 OREO properties, and as of June 30, 2019 the Bank is carrying 10 OREO properties at a value of $2,413,000. The OREO properties are available for sale and are being actively marketed.

The Bank had loans in the amount of $418,000 at June 30, 2019 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $424,000 at December 31, 2018. None of these TDRs were included in non-accrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year.

 

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Cash and cash equivalents decreased to $32,130,000 on June 30, 2019 from $50,325,000 on December 31, 2018. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). The decrease in cash and cash equivalents during the six months ended June 30, 2019 occurred primarily because a) the Bank funded loan growth with its cash and cash equivalents; and b) from the pay back of the $10,044,000 brokered certificate of deposit noted above. Cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

Securities held-to-maturity were flat, decreasing to $3,694,000 on , June 30, 2019 from $3,700,000 on December 31, 2018. This slight decrease is a result of normal amortization of premiums within the held-to-maturity portfolio.

Securities available-for-sale which are carried on the balance sheet at fair market value, increased to $53,818,000 on June 30, 2019, from $52,727,000 on December 31, 2018. The increase resulted from an increase in fair value related to a decrease in market interest rates. The increase in fair value was partially offset by a decrease from the normal amortization of premiums and principal payments on mortgage-backed securities in the available-for-sale portfolio. During the six months ended June 30, 2019 the Bank received $1,207,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale. No proceeds were received from the sale of securities available-for-sale in the six months ended June 30, 2019. The Bank did not purchase any additional available-for-sale securities in during the same period.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $608,000 at June 30, 2019 as compared to $564,000 at December 31, 2018. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Liquidity and Capital

At June 30, 2019, Financial, on a consolidated basis, had liquid assets of $85,948,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $20,224,000 (representing current book value) of the available-for-sale securities are pledged as collateral with $11,819,000 pledged as security for public deposits, and $8,405,000 pledged as security on a line of credit the Bank may draw on from time to time to meet liquidity needs. This line of credit currently has a zero balance. Management believes that liquid assets were adequate at June 30, 2019. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, if additional liquidity is needed, the Bank has the ability to purchase federal funds on the open market, borrow from the FHLBA using loans or investments within the Bank’s portfolio as collateral, and to borrow from the Federal Reserve Bank’s discount window.

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

At June 30, 2019, the Bank had a leverage ratio of approximately 9.29%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 10.87% and a total risk-based capital ratio of approximately 11.67%. As of June 30, 2019 and December 31, 2018 the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of June 30, 2019 and December 31, 2018:

 

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Bank Level Only Capital Ratios

 

     June 30,      December 31,  
Analysis of Capital (in 000’s)    2019      2018  

Tier 1 capital

     

Common Stock

   $  3,742      $  3,742  

Surplus

     22,325        22,325  

Retained earnings

     37,997        35,985  
  

 

 

    

 

 

 

Total Tier 1 capital

   $  64,064      $  62,052  
  

 

 

    

 

 

 

Tier 2 capital

     

Allowance for loan losses

   $  4,724      $  4,581  

Total Tier 2 capital:

   $  4,724      $  4,581  
  

 

 

    

 

 

 

Total risk-based capital

   $  68,788      $  66,633  
  

 

 

    

 

 

 

Risk weighted assets

   $  589,502      $  564,184  

Average total assets

   $  689,917      $  670,879  

 

     Actual     Regulatory Benchmarks  
                 For Capital     For Well  
     June 30,     December 31,     Adequacy     Capitalized  
     2019     2018     Purposes (1)     Purposes  

Capital Ratios:

        

Tier 1 capital to average total assets

     9.29     9.25     4.000     5.000

Common Equity Tier 1 capital

     10.87     11.00     7.000     6.500

Tier 1 risk-based capital ratio

     10.87     11.00     8.500     8.000

Total risk-based capital ratio

     11.67     11.81     10.500     10.000

 

(1)

Includes the capital conservation buffer of 2.50% for all ratios, excluding the Tier 1 capital to average total assets ratio.

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis at June 30, 2019 would be slightly lower than those of the Bank because proceeds from the sale of the capital notes were contributed to the Bank and counted as equity at the Bank level.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule was fully implemented on January 1, 2019 and implemented a capital conservation buffer of 2.5%. As result, the Bank is requited to have a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% (inclusive of the capital conservation buffer) and a Tier 1 capital ratio of 8.5% (inclusive of the capital conservation buffer). The capital conservation buffer will limit capital distributions, stock redemptions, and certain discretionary bonuses. Failure to maintain the capital conservation buffer will limit the ability of the Bank and Financial to pay dividends, repurchase shares or pay discretionary bonuses. The rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

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

 

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2019 and 2018

Earnings Summary

Financial had net income including all operating segments of $1,377,000 and $2,611,000 for the three and six months ended June 30, 2019, compared to $1,300,000 and $2,423,000 for the comparable periods in 2018. Basic and diluted earnings per common share for the three and six months ended June 30, 2019 was $0.31 and $0.60, compared to basic and diluted earnings per share of $0.30 and $0.55 for the three and six months ended June 30, 2018.

The increase in net income for the three and six months ended June 30, 2019, as compared to the prior year was due primarily to an increase in interest income and non-interest income and was partially offset by an increase in interest expense and non-interest expense. Non-interest expense increased in large part because of the Bank’s continued emphasis on growth in Charlottesville, Harrisonburg, Roanoke, and, most recently, Lexington. These efforts resulted primarily in increases in personnel, occupancy, equipment, marketing, credit expense, and other outside expenses.

These operating results represent an annualized return on average stockholders’ equity of 9.47% and 9.11% for the three and six months ended June 30, 2019, compared with 9.67% and 9.15% for the three and six months ended June 30, 2018. This decrease for the three and six months ended June 30, 2019 was due to an increase in total average equity resulting from an increase in the market value of the securities available-for-sale portfolio. The increase in the market value of the securities-available-for sale portfolio resulted from a decrease in market interest rates. The increase for the six months ended June 30, 2019 was direct result of the increase in net income as compared to the comparable period in 2018. The Company had an annualized return on average assets of 0.80% and 0.77% for the three and six months ended June 30, 2019 compared with 0.79% and 0.76% for the same periods in 2018. The increase for the three and six months ended June 30, 2019 largely resulted from an increase in net income.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $7,390,000 and $14,624,000 for the three and six months ended June 30, 2019 from $6,725,000 and $12,880,000 for the same periods in 2018, increases of 9.89% and 13.54%, respectively. Interest income increased because of increased balances in the loan portfolio and an increase in loan yields. The average rate received on loans increased from 4.72% and 4.66% to 4.97% and 4.98% for the three and six months ended June 30, 2019 from the comparable period in 2018. The rate on total average earning assets increased for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 primarily because an increase in the rates paid by borrowers on loans.

Interest expense increased to $1,238,000 and $2,342,000 for the three and six months ended June 30, 2019 from $922,000 and $1,746,000 for the same periods in 2018, increases of 34.27% and 34.14%, respectively. The increase in interest expense resulted primarily from increases in the rates paid on and balances of deposits. The Bank’s average rate paid on interest bearing deposits was 0.90% and 0.86% during the three and six months ended June 30, 2019 as compared to 0.69% and 0.70% for the same periods in 2018.

 

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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, 2019 was $6,152,000 and $12,282,000 as compared to $5,803,000 and $11,134,000 for the same periods in 2018, increases of 6.01% and 10.31%. The increases in net interest income for the three and six months ended June 30, 2019 as compared with the comparable period in 2018 primarily is attributable to the increase in interest income resulting from increased loan balances and increases in short term rates by the FOMC over the course of 2018. The net interest margin was 3.82% and 3.87% for the three and six months ended June 30, 2019 as compared with 3.74% and 3.69% for the same periods in 2018.

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

Non-Interest Income

Non-interest income is comprised primarily of fees and charges on transactional deposit accounts, gains on sales of mortgage loans held for sale, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income increased to $1,659,000 and $2,878,000 for the three and six months ended June 30, 2019 from $1,441,000 and $2,627,000 for the three and six months ended June 30, 2018.

This increase for the three and six months ended June 30, 2019 as compared to the same period last year was due primarily due to an increase in gains on sales of loans held for sale from $873,000 and $1,493,000 for the three and six months ended June 30, 2018 to $1,075,000 and $1,766,000 for the same periods ended June 30, 2019.

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

Purchase mortgage originations totaled $37,551,000 and $48,774,000, or 87.69% and 72.47%, respectively, of the total mortgage loans originated in the three and six months ended June 30, 2019 as compared to $25,400,000 and $41,485,000, or 76.14% and 70.91%, respectively of the total mortgage loans originated in the same periods in 2018. Management anticipates that in the short term purchase mortgage originations will continue to represent a majority of mortgage originations as they have in the recent past. However, management also believes that a recent further decrease in long term market interest rates could trigger increased refinancing activity.

Despite slight decreases in the first six months of 2019, Management anticipates that residential mortgage rates will remain flat or trend slightly upward during the remainder of 2019. Management expects that the Mortgage division’s reputation in Region 2000, steady residential real estate inventory and the recent hiring of additional mortgage loan originators in Roanoke, Harrisonburg and Charlottesville, and Blacksburg, will result in strong mortgage originations through the remainder of 2019. In addition, Management believes that regulatory pressure may result in a decreased number of competitors to the Mortgage division and this could result in an increase in market share. Management also believes that in the event that interest rates rise, revenue from the mortgage segment could be under pressure.

 

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Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by two dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s impact on noninterest income will remain immaterial in 2019.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three employees that are licensed to sell insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2019.

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2019 increased to $5,975,000 and $11,574,000 from $5,306,000 and $10,403,000, increases of 12.61% and 11.26% from the comparable periods in 2018. This increase resulted from increases for personnel expense primarily related to the expansion into Lexington and Roanoke, as well as increases in occupancy, equipment, marketing and credit expense. Total personnel expense was $3,153,000 and $6,081,000 for the three and six-month periods ended June 30, 2019 as compared to $2,832,000 and $5,545,000 for the same periods in 2018.

Allowance and Provision for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision for the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon two components – specific impairment and general reserves. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due as well as all TDRs, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the loan loss calculation, the Bank provided $116,000 and $326,000 to the allowance for loan losses for the three and six-month periods ended June 30, 2019. This compares to a provision of $315,000 and $337,000 for the comparable periods in 2018, representing decreases of 63.17% and 3.26%, respectively.

Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for loan losses and constitute a realized loss. Charged-off loans were $86,000 and $219,000 for the three and six months ended June 30, 2019 as compared to $315,000 and $555,000 for the comparable periods in 2018. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three and six months ended June 30, 2019, the Bank had recoveries of charged-off loans of $21,000 and $36,000 as compared with $17,000 and $154,000 for the comparable periods in 2018.

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. As set forth in the tables below, the Bank’s allowance arising from the specific impairment evaluation as of June 30, 2019 decreased as compared to December 31, 2018.

 

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As shown in the table below, the total balance in the allowance increased, from $4,581,000 as of December 31, 2018 to $4,724,000 on June 30, 2019. The allowance for loan losses as a percent of loans remained relatively flat at 0.85% as of June 30, 2019 and 0.86% as of December 31, 2018. Increased loan balances during the three months led to an increase in the balance of the general reserve as of June 30, 2019 as compared to December 31, 2018, but this increase was offset primarily by a decrease in specific reserves and the allocation of updated historical loss rates when comparing the same periods. The allowance for loan losses as a percent of unimpaired loans decreased slightly to 0.86% as of June 30, 2019 from 0.87% as of December 31, 2018 due to an overall increase in total loan balances. The general reserve as a percentage of unimpaired loan balances increased slightly to 0.84% as of June 30, 2019 as compared to 0.82% as of December 31, 2018. This increase was primarily due to a slight increase in the rate of qualitative factors assessed in the general reserve based on management’s evaluation of those factors at June 30, 2019. Management believes that the current allowance for loan losses is adequate.

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

 

    

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

 
     As of and For the Six Months Ended June 30, 2019  
2019    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (24     (6     (168     (21     (219

Recoveries

     2       5       26       3       36  

Provision

     280       (2     21       27       326  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,394     $ 1,828     $ 835     $ 667     $ 4,724  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 9     $ 28     $ —       $ 48     $ 85  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,385       1,800       835       619       4,639  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,394     $ 1,828     $ 835     $ 667     $ 4,724  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,418     $ 3,084     $ 84     $ 2,230     $ 6,816  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     104,760       295,079       83,230       66,813       549,882  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 106,178     $ 298,163     $ 83,314     $ 69,043     $ 556,698  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

 
     As of and For the Year Ended December 31, 2018  
2018    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

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

Recoveries

     113       4       60       —         177  

Provision

     154       319       129       114       716  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 15     $ 56     $ 106     $ 61     $ 238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,121       1,775       850       597       4,343  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     (in thousands)      (in thousands)  
     2019      2018      2019      2018  

Balance, beginning of period

   $  4,673      $  4,671      $  4,581      $  4,752  

Provision for loan losses

     116        315        326        337  

Loans charged off

     (86      (315      (219      (555

Recoveries of loans charged off

     21        17        36        154  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge offs)

     (65      (298      (183      (401
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $  4,724      $  4,688      $  4,724      $  4,688  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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No nonaccrual loans were excluded from the impaired loan disclosures at June 30, 2019 and December 31, 2018. If interest on these loans had been accrued, such income cumulatively would have approximated $253,000 and $198,000 on June 30, 2019 and December 31, 2018, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

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.

 

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

 

   

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

 

   

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

Income Taxes

For the three and six months ended June 30, 2019, Financial had an income tax expense of $343,000 and $649,000 as compared to $323,000 and $598,000 for the three and six months ended June 30, 2018. This represents an effective tax rate of 19.94% and 19.91% for the three and six months ended June 30, 2019 as compared with 19.90% and 19.79% for the three and six months ended June 30, 2018. Our effective rate was lower than the statutory corporate tax rate in all periods because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance and certain tax free municipal securities.

 

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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended June 30, 2019 and 2018

(dollars in thousands)

 

     2019     2018  
    

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates
Earned/

Paid

   

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates

Earned/

Paid

 

ASSETS

              

Loans, including fees (1) (2)

   $ 546,859     $ 6,780        4.97   $ 523,634     $ 6,158        4.72

Loans held for sale

     3,948       36        3.66     3,706       37        4.00

Fed funds sold

     20,263       122        2.41     20,432       92        1.81

Interest bearing bank balances

     14,626       74        2.03     12,595       56        1.78

Securities (3)

     58,214       345        2.38     60,959       359        2.36

Federal agency equities

     1,386       33        9.55     1,514       23        6.09

CBB equity

     116       —          —         116       —          —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     645,406       7,390        4.59     622,956       6,725        4.33
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,691          (4,662     

Non-earning assets

     49,922            42,284       
  

 

 

        

 

 

      

Total assets

   $ 690,637          $ 660,578       
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 246,051     $ 307        0.50   $ 210,539     $ 189        0.36

Savings

     93,274       55        0.24     103,065       42        0.16

Time deposits

     191,039       826        1.73     182,790       625        1.37
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     530,364       1,188        0.90     496,394       856        0.69

Other borrowed funds

              

FHLB borrowings

     —         —          —         3,187       16        2.01

Capital Notes

     5,000       50        4.00     5,000       50        4.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     535,364       1,238        0.93     504,581       922        0.73
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     92,026            100,985       

Other liabilities

     4,952            1,099       
  

 

 

        

 

 

      

Total liabilities

     632,342            606,665       

Stockholders’ equity

     58,295            53,913       
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 690,637          $ 660,578       
  

 

 

        

 

 

      

Net interest income

     $ 6,152          $ 5,803     
    

 

 

        

 

 

    

Net interest margin

          3.82          3.74
       

 

 

        

 

 

 

Interest spread

          3.66          3.60
       

 

 

        

 

 

 

 

(1)

Net accretion or amortization of deferred loan fees and costs are included in interest income.

(2)

Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with non-accrual loans.

(3)

The interest income and yields calculated on securities have been tax affected to reflect any tax exempt interest on municipal securities. Assumed income tax rates of 21% were used for the second quarter of 2019 and 2018.

 

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Net Interest Margin Analysis

Average Balance Sheets

For the Six Months Ended June 30, 2019 and 2018

(dollars in thousands)

 

     2019     2018  
    

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates
Earned/

Paid

   

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates

Earned/

Paid

 

ASSETS

              

Loans, including fees (1) (2)

   $ 542,420     $ 13,402        4.98   $ 510,479     $ 11,807        4.66

Loans held for sale

     2,981       68        4.60     3,076       62        4.06

Federal funds sold

     20,444       243        2.40     19,474       159        1.65

Interest bearing bank balances

     14,411       165        2.31     12,071       91        1.52

Securities (3)

     58,624       695        2.39     61,811       730        2.38

Federal agency equities

     1,366       51        7.53     1,458       31        4.29

CBB equity

     116       —          —         116       —          —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     640,362       14,624        4.61     608,485       12,880        4.27
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,657          (4,685     

Non-earning assets

     48,714            41,490       
  

 

 

        

 

 

      

Total assets

   $ 684,419          $ 645,290       
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 239,583     $ 560        0.47   $ 183,802     $ 326        0.36

Savings

     95,776       108        0.23     103,274       97        0.19

Time deposits

     190,594       1,574        1.67     182,780       1,206        1.33
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     525,953       2,242        0.86     469,856       1,629        0.70

Other borrowed funds

              

FHLB borrowings

     —         —          —         1,713       17        2.00

Capital Notes

     5,000       100        4.00     5,000       100        4.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     530,953       2,342        0.89     476,569       1,746        0.74
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     92,287            114,248       

Other liabilities

     3,370            1,090       
  

 

 

        

 

 

      

Total liabilities

     626,610            591,907       

Stockholders’ equity

     57,809            53,383       
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 684,419          $ 645,290       
  

 

 

        

 

 

      

Net interest income

&