BANK OF THE JAMES FINANCIAL GROUP INC
BANK OF THE JAMES FINANCIAL GROUP INC details
Ticker:BOJF
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Form 10-Q
______________________
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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 (Commission file number) (I.R.S. Employer
incorporation or organization) 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
Trading Name of each exchange
Title of each class Symbol(s) 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 ☒
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,628,657 shares of Common Stock, par value $2.14 per share, were outstanding at Novmber 10, 2022.
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TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
Item 4. Controls and Procedures 47
PART II – OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 1A. Risk Factors 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 3. Defaults Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 49
SIGNATURES 49
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PART I – FINANCIAL INFORMAT ION
Item 1. Consolidated Financial Statem ents
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollar amounts in thousands, except per share amounts) (2022 unaudited)
September 30, December 31,
Assets 2022 2021
Cash and due from banks $ 38,622 $ 29,337
Federal funds sold 42,398 153,816
Total cash and cash equivalents 81,020 183,153
Securities held-to-maturity, at amortized cost (fair value of $ 3,192 in 2022 and $ 4,006 in 2021) 3,643 3,655
Securities available-for-sale, at fair value 191,131 161,267
Restricted stock, at cost 1,387 1,324
Loans, net of allowance for loan losses of $ 6,394 in 2022 and $ 6,915 in 2021 614,117 576,469
Loans held for sale 3,239 1,628
Premises and equipment, net 18,250 18,351
Interest receivable 2,382 2,064
Cash value - bank owned life insurance 19,123 18,785
Other real estate owned 566 761
Customer relationship intangibles, net 7,986 8,406
Goodwill 3,819 3,001
Other assets 15,907 8,770
Total assets $ 962,570 $ 987,634
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing demand $ 155,984 $ 162,286
NOW, money market and savings 598,964 582,000
Time deposits 128,121 142,770
Total deposits 883,069 887,056
Capital notes, net 10,037 10,031
Other borrowings 10,596 10,985
Interest payable 37 46
Other liabilities 10,492 10,087
Total liabilities $ 914,231 $ 918,205
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 4,628,657 and 4,740,657 as of September 30, 2022 and December 31, 2021 9,905 10,145
Additional paid-in-capital 36,068 37,230
Retained earnings 29,450 23,440
Accumulated other comprehensive (loss) ( 27,084 ) ( 1,386 )
Total stockholders’ equity $ 48,339 $ 69,429
Total liabilities and stockholders’ equity $ 962,570 $ 987,634
1
See accompanying notes to these consolidated financial statements
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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 For the Nine Months Ended
September 30, September 30,
Interest Income 2022 2021 2022 2021
Loans $ 6,830 $ 6,605 $ 18,909 $ 20,089
Securities
US Government and agency obligations 331 230 911 640
Mortgage backed securities 437 138 1,196 299
Municipals - taxable 257 234 812 572
Municipals - tax exempt 32 9 55 27
Dividends 5 4 36 39
Corporates 144 55 395 155
Interest bearing deposits 101 7 135 26
Federal Funds sold 262 33 463 67
Total interest income 8,399 7,315 22,912 21,914
Interest Expense
Deposits
NOW, money market savings 133 146 374 419
Time deposits 143 239 467 890
Finance leases 24 26 73 80
Other borrowings 117 - 339 -
Capital notes 82 82 245 245
Total interest expense 499 493 1,498 1,634
Net interest income 7,900 6,822 21,414 20,280
Recovery of loan losses ( 300 ) - ( 900 ) -
Net interest income after recovery of loan losses 8,200 6,822 22,314 20,280
Noninterest income
Gain on sales of loans held for sale 1,472 2,091 4,675 6,175
Service charges, fees and commissions 1,313 612 2,563 1,803
Wealth management fees 959 - 2,935 -
Life insurance income 113 117 338 315
Other income (loss) ( 3 ) 2 8 12
Total noninterest income 3,854 2,822 10,519 8,305
Noninterest expenses
Salaries and employee benefits 4,529 4,093 13,051 11,901
Occupancy 445 437 1,348 1,270
Equipment 647 626 1,870 1,883
Supplies 116 120 380 354
Professional, data processing, and other outside expense 1,619 1,029 3,544 2,978
Marketing 222 209 661 720
Credit expense 244 309 765 869
Other real estate expenses 195 1 207 74
FDIC insurance expense 121 137 382 425
Amortization of intangibles 140 - 420 -
Other 601 337 1,491 950
Total noninterest expenses 8,879 7,298 24,119 21,424
Income before income taxes 3,175 2,346 8,714 7,161
Income tax expense 601 465 1,709 1,431
Net Income $ 2,574 $ 1,881 $ 7,005 $ 5,730
Weighted average shares outstanding - basic and diluted 4,683,581 4,740,657 4,721,423 4,750,235
Earnings per common share - basic and diluted $ 0.55 $ 0.40 $ 1.48 $ 1.21
2
See accompanying notes to these consolidated financial statements
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Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(dollar amounts in thousands) (unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
Net Income $ 2,574 $ 1,881 $ 7,005 $ 5,730
Other comprehensive (loss):
Unrealized (loss) on securities available-for-sale ( 7,368 ) ( 914 ) ( 32,530 ) ( 2,757 )
Tax effect 1,548 192 6,832 579
Other comprehensive (loss) income, net of tax ( 5,820 ) ( 722 ) ( 25,698 ) ( 2,178 )
Comprehensive (loss) income $ ( 3,246 ) $ 1,159 $ ( 18,693 ) $ 3,552
3
See accompanying notes to these consolidated financial statements
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Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollar amounts in thousands) (unaudited)
For the Nine Months Ended September 30,
2022 2021
Cash flows from operating activities
Net Income $ 7,005 $ 5,730
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,022 1,423
Stock based compensation expense - 80
Net amortization and accretion of premiums and discounts on securities 338 284
Amortization of debt issuance costs 10 4
(Gain) on sales of loans held for sale ( 4,675 ) ( 6,175 )
Proceeds from sales of loans held for sale 176,736 254,369
Origination of loans held for sale ( 173,732 ) ( 247,554 )
Recovery of loan losses ( 900 ) -
Loss on sale and valuation adjustments of other real estate owned 195 66
Amortization of intangibles 420 -
Bank owned life insurance income ( 338 ) ( 315 )
(Increase) decrease in interest receivable ( 318 ) 244
(Increase) decrease in other assets ( 838 ) 388
(Decrease) in interest payable ( 9 ) ( 36 )
Increase in other liabilities 447 424
Net cash provided by operating activities $ 5,363 $ 8,932
Cash flows from investing activities
Purchases of securities available-for-sale $ ( 71,581 ) $ ( 71,319 )
Proceeds from maturities, calls and paydowns of securities available-for-sale 8,861 6,177
Purchases of bank owned life insurance - ( 2,000 )
(Purchase) redemption of Federal Home Loan Bank stock ( 63 ) 227
Proceeds from sale of other real estate owned - 344
Origination of loans, net of principal collected ( 36,748 ) 18,251
Purchases of premises and equipment ( 921 ) ( 1,423 )
Net cash (used in) investing activities $ ( 100,452 ) $ ( 49,743 )
Cash flows from financing activities
Net (decrease) increase in deposits $ ( 3,987 ) $ 88,862
Principal payments on finance lease obligations ( 267 ) ( 259 )
Principal payments on other borrowings ( 393 ) -
Repurchase of common stock ( 1,402 ) ( 427 )
Dividends paid to common stockholders ( 995 ) ( 939 )
Cash in lieu of fractional shares - ( 16 )
Net cash (used in) provided by financing activities $ ( 7,044 ) $ 87,221
(Decrease) increase in cash and cash equivalents ( 102,133 ) 46,410
Cash and cash equivalents at beginning of period $ 183,153 $ 100,886
Cash and cash equivalents at end of period $ 81,020 $ 147,296
Supplemental schedule of noncash investing and financing activities
Noncash transactions
Transfer of loans to other real estate owned $ - $ 111
Fair value adjustment for securities available-for-sale ( 32,530 ) ( 2,757 )
Supplemental disclosures of cash flow information
Cash transactions
Cash paid for interest $ 1,507 $ 1,670
Cash paid for income taxes 1,430 2,050
4
See accompanying notes to these consolidated financial statements
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Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Nine Months Ended September 30, 2022 and 2021
(dollars in thousands, except per share amounts) (unaudited)
Accumulated
Additional Other
Shares Common Paid-in Retained Comprehensive
Outstanding Stock Capital Earnings Income (Loss) Total
Balance at December 31, 2020 4,339,436 $ 9,286 $ 30,989 $ 24,665 $ 1,792 $ 66,732
Net Income - - - 1,835 - 1,835
Dividends paid on common stock ($ 0.07 per share) - - - ( 304 ) - ( 304 )
Repurchase of common stock ( 14,600 ) ( 31 ) ( 181 ) - - ( 212 )
Other comprehensive (loss) - - - - ( 2,717 ) ( 2,717 )
Balance at March 31, 2021 4,324,836 $ 9,255 $ 30,808 $ 26,196 $ ( 925 ) $ 65,334
Net Income - - - 2,014 - 2,014
Dividends paid on common stock ($ 0.07 per share) - - - ( 303 ) - ( 303 )
Repurchase of common stock ( 14,300 ) ( 31 ) ( 184 ) - - ( 215 )
10% Stock dividend 430,121 923 6,620 ( 7,543 ) - -
Other comprehensive income - - - - 1,261 1,261
Balance at June 30, 2021 4,740,657 $ 10,147 $ 37,244 $ 20,364 $ 336 $ 68,091
Net Income - - - 1,881 - 1,881
Dividends paid on common stock ($ 0.07 per share) - - - ( 332 ) - ( 332 )
Cash in lieu of fractional shares - - - ( 16 ) - ( 16 )
Other comprehensive (loss) - - - - ( 722 ) ( 722 )
Balance at September 30, 2021 4,740,657 $ 10,147 $ 37,244 $ 21,897 $ ( 386 ) $ 68,902
Balance at December 31, 2021 4,740,657 $ 10,145 $ 37,230 $ 23,440 $ ( 1,386 ) $ 69,429
Net Income - - - 2,139 - 2,139
Dividends paid on common stock ($ 0.07 per share) - - - ( 332 ) - ( 332 )
Other comprehensive (loss) - - - - ( 10,657 ) ( 10,657 )
Balance at March 31, 2022 4,740,657 $ 10,145 $ 37,230 $ 25,247 $ ( 12,043 ) $ 60,579
Net Income - - - 2,292 - 2,292
Dividends paid on common stock ($ 0.07 per share) - - - ( 332 ) - ( 332 )
Other comprehensive (loss) - - - - ( 9,221 ) ( 9,221 )
Balance at June 30, 2022 4,740,657 $ 10,145 $ 37,230 $ 27,207 $ ( 21,264 ) $ 53,318
Net Income - - - 2,574 - 2,574
Dividends paid on common stock ($ 0.07 per share) - - - ( 331 ) - ( 331 )
Repurchase of common stock ( 112,000 ) ( 240 ) ( 1,162 ) - - ( 1,402 )
Other comprehensive (loss) - - - - ( 5,820 ) ( 5,820 )
Balance at September 30, 2022 4,628,657 $ 9,905 $ 36,068 $ 29,450 $ ( 27,084 ) $ 48,339
5
See accompanying notes to these consolidated financial statements
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Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation
The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 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, 2021. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2021 included in Financial’s Annual Report on Form 10-K. Results for the three and nine month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Certain immaterial reclassifications have been made to prior period balances to conform to the current period presentation.
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, Harrisonburg, Lexington, Rustburg, and Wytheville .
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 high 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.
Goodwill is subject to at least an annual assessment for impairment. Additionally, acquired intangible assets (such as customer relationship intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The cost of customer relationships, based on independent valuation, are being amortized over their estimated lives of fifteen years .
The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. The Company will review the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists.
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 acquisition. 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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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 nine months ended September 30, 2022 and 2021.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income $ 2,574,000 $ 1,881,000 $ 7,005,000 $ 5,730,000
Weighted average number of shares outstanding - basic and diluted 4,683,581 4,740,657 4,721,423 4,750,235
Earnings per common share - basic and diluted $ 0.55 $ 0.40 $ 1.48 $ 1.21
In 2022 and 2021, all restricted stock units (RSUs) were excluded from calculating diluted earnings per share as the Company elected to settle units vesting in 2022 and 2021 wholly in cash. There are currently no outstanding RSUs as of September 30, 2022. There were no potentially dilutive shares outstanding in 2022 and 2021. Consequently, the weighted average shares and weighted average diluted shares were identical. Weighted average and per share amounts for all periods have been adjusted to reflect a 10 % stock dividend declared on May 18, 2021.
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 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 may receive shares, cash in lieu of shares, or a combination thereof 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 fair value of the Company’s stock. The RSUs granted in 2019 vested over 3 years in thirds. The first one -third vested on January 2, 2020, the second one -third vested on January 2, 2021 and the final one -third vested January 2, 2022. The value of all of the vested portions of the grant were settled with cash payments and no shares were issued.
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Note 4 – Stock Based Compensation (continued)
The total expense recognized for the three and nine months ended September 30, 2021 in connection with the restricted stock unit awards was approximately $ 27,000 and $ 88,000 , respectively. As of January 2, 2022 there was no additional unrecognized expense related to the 24,500 restricted stock units granted on January 2, 2019. There were no forfeitures during the nine-month periods ending September 30, 2021 or September 30, 2022.
At September 30, 2022, there is no further unrecognized stock-based compensation expense related to the restricted stock units granted on January 2, 2019 as all units have vested and have been settled.
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 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.
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Note 5 – Fair Value Measurements (continued)
Derivatives Assets/Liabilities – Interest Rate Lock Commitments (IRLCs) and Forward Sales Commitments
The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 3.
Beginning with the first quarter of 2022, the Company elected to begin using fair value accounting for its forward sales commitments related to IRLCs. Best efforts sales commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment. All the Company’s forward sale commitments are classified Level 3.
The below tables summarize the Company’s financial assets that were measured at fair value on a recurring basis during the period.
Carrying Value at September 30, 2022 (in thousands)
Quoted Prices Significant Significant
in Active Other Unobservable
Balance as of Markets for Observable Inputs
September 30, Identical Assets Inputs (Level 3)
Description 2022 (Level 1) (Level 2)
US Treasuries $ 4,721 $ — $ 4,721 $ —
US agency obligations 62,139 — 62,139 —
Mortgage-backed securities 70,394 — 70,394 —
Municipals 37,799 — 37,799 —
Corporates 16,078 — 16,078 —
Total available-for-sale securities $ 191,131 $ — $ 191,131 $ —
Forward sales commitments - asset 429 — — 429
Total assets at fair value $ 191,560 $ — $ 191,131 $ 429
IRLCs - liability ( 225 ) — — ( 225 )
Carrying Value at December 31, 2021 (in thousands)
Quoted Prices Significant Significant
in Active Other Unobservable
Balance as of Markets for Observable Inputs
December 31, Identical Assets Inputs (Level 3)
Description 2021 (Level 1) (Level 2)
US Treasuries $ 2,002 $ — $ 2,002 $ —
US agency obligations 58,470 — 58,470 —
Mortgage-backed securities 37,438 — 37,438 —
Municipals 50,204 — 50,204 —
Corporates 13,153 — 13,153 —
Total available-for-sale securities $ 161,267 $ — $ 161,267 $ —
IRLCs – asset 144 — — 144
Total assets at fair value $ 161,411 $ — $ 161,267 $ 144
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Note 5 – Fair Value Measurements (continued)
The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:
Quantitative information about Level 3 Fair Value Measurements for September 30, 2022
(dollars in thousands)
Fair Value Valuation Technique(s) Unobservable Input Range (Weighted Average) (1)
Assets
IRLCs – liability $ ( 225 ) Market approach Range of pull through rate 70 % - 100 % ( 85 %)
Forward Sales Commitments – asset 429 Market approach Range of pull through rate 70 % - 100 % ( 85 %)
(1) Weighted based on the relative value of the instruments
Quantitative information about Level 3 Fair Value Measurements for December 31, 2021
(dollars in thousands)
Fair Value Valuation Technique(s) Unobservable Input Range (Weighted Average) (1)
Assets
IRLCs - asset $ 144 Market approach Range of pull through rate 70 % - 100 % ( 85 %)
(1) Weighted based on the relative value of the instruments
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.
Loans held for sale
Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended September 30, 2022. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale 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.
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Note 5 – Fair Value Measurements (continued)
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 September 30, 2022
Description Balance as of September 30, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Impaired loans* $ 1,364 $ — $ — $ 1,364
Other real estate owned 566 — — 566
* Includes loans charged down to the net realizable value of the collateral.
Carrying Value at December 31, 2021
Description Balance as of December 31, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Impaired loans* $ 1,802 $ — $ — $ 1,802
Other real estate owned 761 — — 761
* Includes loans charged down to the net realizable value of the collateral.
The following table sets forth information regarding the quantitative inputs used to value assets classified as Level 3:
Quantitative information about Level 3 Fair Value Measurements for September 30, 2022
(dollars in thousands)
Fair Value Valuation Technique(s) Unobservable Input Range (Weighted Average) (1)
Assets
Impaired loans $ 1,364 Discounted appraised value Selling cost 0 % - 10 % ( 8 %)
Discount for lack of marketability and age of appraisal 0 % - 20 % ( 6 %)
OREO 566 Discounted appraised value Selling cost 10 %
Discount for lack of marketability and age of appraisal 0 % - 25 % ( 15 %)
(1)Weighted based on the relative value of the instruments.
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Note 5 – Fair Value Measurements (continued)
Quantitative information about Level 3 Fair Value Measurements for December 31, 2021
(dollars in thousands)
Fair Value Valuation Technique(s) Unobservable Input Range (Weighted Average) (1)
Assets
Impaired loans $ 1,802 Discounted appraised value Selling cost 0 % - 10 % ( 8 %)
Discount for lack of marketability and age of appraisal 0 % - 20 % ( 6 %)
OREO 761 Discounted appraised value Selling cost 10 %
Discount for lack of marketability and age of appraisal 0 % - 27 % ( 26 %)
(1)Weighted based on the relative value of the instruments.
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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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 September 30, 2022 and December 31, 2021 was as follows (in thousands):
Fair Value Measurements at September 30, 2022 using
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Carrying Identical Assets Inputs Inputs
Assets Amounts (Level 1) (Level 2) (Level 3) Balance
Cash and due from banks $ 38,622 $ 38,622 $ - $ - $ 38,622
Federal funds sold 42,398 42,398 - - 42,398
Securities
Available-for-sale 191,131 - 191,131 - 191,131
Held-to-maturity 3,643 - 3,192 - 3,192
Restricted stock 1,387 - 1,387 - 1,387
Loans, net (1) 614,117 - - 576,085 576,085
Loans held for sale 3,239 - 3,239 - 3,239
Interest receivable 2,382 - 2,382 - 2,382
BOLI 19,123 - 19,123 - 19,123
Derivatives – Forward Sales Commitments 429 - - 429 429
Liabilities
Deposits $ 883,069 $ - $ 883,188 $ - $ 883,188
Capital notes 10,037 - - 9,228 9,228
Other borrowings 10,596 - - 10,077 10,077
Interest payable 37 - 37 - 37
Derivatives - IRLCs 225 - - 225 225
Fair Value Measurements at December 31, 2021 using
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Carrying Identical Assets Inputs Inputs
Assets Amounts (Level 1) (Level 2) (Level 3) Balance
Cash and due from banks $ 29,337 $ 29,337 $ - $ - $ 29,337
Federal funds sold 153,816 153,816 - - 153,816
Securities
Available-for-sale 161,267 - 161,267 - 161,267
Held-to-maturity 3,655 - 4,006 - 4,006
Restricted stock 1,324 - 1,324 - 1,324
Loans, net (1) 576,469 - - 565,543 565,543
Loans held for sale 1,628 - 1,628 - 1,628
Interest receivable 2,064 - 2,064 - 2,064
BOLI 18,785 - 18,785 - 18,785
Derivatives - IRLCs 144 - - 144 144
Liabilities
Deposits $ 887,056 $ - $ 887,955 $ - $ 887,955
Capital notes 10,031 - - 10,712 10,712
Other borrowings 10,985 - - 11,467 11,467
Interest payable 46 - 46 - 46
(1) Carrying amount is net of unearned income and the Allowance.
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Note 6 – Securities
The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of September 30, 2022 and December 31, 2021 (amounts in thousands):
September 30, 2022
Amortized Gross Unrealized
Costs Gains (Losses) Fair Value
Held-to-Maturity
US agency obligations $ 3,643 $ - $ ( 451 ) $ 3,192
Available-for-Sale
US Treasuries 4,894 - ( 173 ) 4,721
US agency obligations 71,713 - ( 9,574 ) 62,139
Mortgage-backed securities 81,782 - ( 11,388 ) 70,394
Municipals 49,984 - ( 12,185 ) 37,799
Corporates 17,041 - ( 963 ) 16,078
$ 225,414 $ - $ ( 34,283 ) $ 191,131
December 31, 2021
Amortized Gross Unrealized
Costs Gains (Losses) Fair Value
Held-to-Maturity
US agency obligations $ 3,655 $ 351 $ — $ 4,006
Available-for-Sale
US Treasuries 2,000 2 — 2,002
US agency obligations 59,144 575 ( 1,249 ) 58,470
Mortgage-backed securities 38,017 75 ( 654 ) 37,438
Municipals 50,806 368 ( 970 ) 50,204
Corporates 13,053 169 ( 69 ) 13,153
$ 163,020 $ 1,189 $ ( 2,942 ) $ 161,267
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Note 6 – Securities (continued)
The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2022 and December 31, 2021 (amounts in thousands):
September 30, 2022 Less than 12 months More than 12 months Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Held-to-maturity
U.S. agency obligations $ 3,192 $ 451 $ — $ — $ 3,192 $ 451
Available-for-sale
U.S. Treasuries 4,721 173 — — 4,721 173
U.S. agency obligations 31,238 3,149 30,901 6,425 62,139 9,574
Mortgage-backed securities 48,384 6,405 22,010 4,983 70,394 11,388
Municipals 13,642 3,226 24,157 8,959 37,799 12,185
Corporates 6,600 441 1,478 522 8,078 963
Total temporarily impaired securities $ 107,777 $ 13,845 $ 78,546 $ 20,889 $ 186,323 $ 34,734
December 31, 2021 Less than 12 months More than 12 months Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Held-to-maturity
U.S. agency obligations $ — $ — $ — $ — $ — $ —
Available-for-sale
U.S. Treasuries — — — — — —
U.S. agency obligations 21,893 379 15,233 870 37,126 1,249
Mortgage-backed securities 28,019 402 6,382 252 34,401 654
Municipals 28,028 635 7,952 335 35,980 970
Corporates 1,931 69 — — 1,931 69
Total temporarily impaired securities $ 79,871 $ 1,485 $ 29,567 $ 1,457 $ 109,438 $ 2,942
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent of Financial, if any, to sell the security; (4) whether Financial more likely than not will be required to sell the security before recovering its cost; and (5) whether Financial does not expect to recover the security’s entire amortized cost basis (even if Financial does not intend to sell the security).
At September 30, 2022 the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of September 30, 2022, the Bank owned 120 securities in an unrealized loss position that were being evaluated for other than temporary impairment. Of the securities, 48 were S&P rated AAA, 64 were rated AA, six were rated A, one was rated BBB, and one was non-rated. As of September 30, 2022, 52 of these securities were municipal issues, 58 were backed by the US government, and 10 were issues of publicly traded domestic corporations.
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 sales of available-for-sale securities during the three and nine months ended September 30, 2022 and 2021.
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Note 6 – Securities (continued)
The amortized costs and fair values of securities at September 30, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 2022
Amortized
Costs Fair Value
Available-for-sale:
Due in one year or less $ 2,372 $ 2,335
Due after one year through five years 42,150 38,817
Due after five years through ten years 76,278 65,888
Due after ten years 104,614 84,091
Total securities Available-for-sale $ 225,414 $ 191,131
Amortized
Costs Fair Value
Held-to-maturity:
Due in one year or less $ - $ -
Due after one year through five years - -
Due after five years through ten years 2,425 2,166
Due after ten years 1,218 1,026
Total securities Held-to-maturity $ 3,643 $ 3,192
Note 7 – Business Segments
The Company has three reportable business segments: (i) a traditional full-service community banking segment, (ii) a mortgage loan origination business, and (iii) a registered investment advisory business (sometimes referred to as the wealth management 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. The investment advisory business offers investment advisory services through Financial’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc.
All of the Company’s reportable segments are service based. The mortgage business is a gain on sale business and the investment advisory business is fee for service based, while the Bank’s primary source of revenue is net interest income. The Bank also provides a referral network for the mortgage origination business and the investment advisory 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 nine months ended September 30, 2022 and 2021 was as follows (dollars in thousands):
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Note 7 – Business Segments (continued)
Business Segments
Investment
Community Advisory
Banking Mortgage Services Total
For the three months ended September 30, 2022
Net interest income $ 7,900 $ - $ - $ 7,900
Recovery of loan losses ( 300 ) - - ( 300 )
Net interest income after recovery of loan losses 8,200 - - 8,200
Noninterest income 1,423 1,472 959 3,854
Noninterest expenses 7,095 1,280 504 8,879
Income before income taxes 2,528 192 455 3,175
Income tax expense 505 40 56 601
Net income $ 2,023 $ 152 $ 399 $ 2,574
Total assets $ 944,890 $ 4,081 $ 13,599 $ 962,570
For the three months ended September 30, 2021
Net interest income $ 6,822 $ - $ - $ 6,822
Provision for loan losses - - - -
Net interest income after provision for loan losses 6,822 - - 6,822
Noninterest income 731 2,091 - 2,822
Noninterest expenses 5,776 1,522 - 7,298
Income before income taxes 1,777 569 - 2,346
Income tax expense 345 120 - 465
Net income $ 1,432 $ 449 $ - $ 1,881
Total assets $ 935,482 $ 7,149 $ - $ 942,631
Investment
Community Advisory
Banking Mortgage Services Total
For the nine months ended September 30, 2022
Net interest income $ 21,414 $ - $ - $ 21,414
Recovery of loan losses ( 900 ) - - ( 900 )
Net interest income after recovery of loan losses 22,314 - - 22,314
Noninterest income 2,909 4,675 2,935 10,519
Noninterest expenses 18,596 3,889 1,634 24,119
Income before income taxes 6,627 786 1,301 8,714
Income tax expense 1,310 165 234 1,709
Net income $ 5,317 $ 621 $ 1,067 $ 7,005
Total assets $ 944,890 $ 4,081 $ 13,599 $ 962,570
For the nine months ended September 30, 2021
Net interest income $ 20,280 $ - $ - $ 20,280
Provision for loan losses - - - -
Net interest income after provision for loan losses 20,280 - - 20,280
Noninterest income 2,130 6,175 - 8,305
Noninterest expenses 16,985 4,439 - 21,424
Income before income taxes 5,425 1,736 - 7,161
Income tax expense 1,066 365 - 1,431
Net income $ 4,359 $ 1,371 $ - $ 5,730
Total assets $ 935,482 $ 7,149 $ - $ 942,631
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Note 8 – Loans, allowance for loan losses and OREO
Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio into classes, based on the associated risks. The classifications set forth below do not correspond directly to the classifications set forth in the call report (Form FFIEC 041). Management has determined that the classifications set forth below are more appropriate for use in identifying and managing risk in the loan portfolio.
Loan Segments: Loan Classes:
Commercial Commercial and industrial loans
Commercial real estate Commercial mortgages – owner occupied
Commercial mortgages – non-owner occupied
Commercial construction
Consumer Consumer unsecured
Consumer secured
Residential Residential mortgages
Residential consumer construction
A summary of loans, net is as follows (dollars in thousands):
As of:
September 30, December 31,
2022 2021
Commercial $ 101,225 $ 105,067
Commercial real estate 357,304 338,149
Consumer 98,507 89,102
Residential 63,475 51,066
Total loans (1) 620,511 583,384
Less allowance for loan losses 6,394 6,915
Net loans $ 614,117 $ 576,469
(1) Includes net deferred costs of $ 1,156 and $ 372 as of September 30, 2022 and December 31, 2021, 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.
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Note 8 – Loans, allowance for loan losses and OREO (continued)
Below is a summary and definition of the Bank’s risk rating categories:
RATING 1 Excellent
RATING 2 Above Average
RATING 3 Satisfactory
RATING 4 Acceptable / Low Satisfactory
RATING 5 Monitor
RATING 6 Special Mention
RATING 7 Substandard
RATING 8 Doubtful
RATING 9 Loss
We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:
“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.
“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events.
“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.
“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
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Note 8 – Loans, allowance for loan losses and OREO (continued)
Loans on Non-Accrual Status
(dollars in thousands)
As of
September 30, 2022 December 31, 2021
Commercial $ — $ 25
Commercial Real Estate:
Commercial Mortgages-Owner Occupied 502 501
Commercial Mortgages-Non-Owner Occupied 125 138
Commercial Construction — —
Consumer
Consumer Unsecured — —
Consumer Secured 8 127
Residential:
Residential Mortgages 153 163
Residential Consumer Construction — —
Totals $ 788 $ 954
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 $ 566 on September 30, 2022 from $ 761 on December 31, 2021 . The decrease was a result of the write-down of a property by $ 195 that subsequently went under contract to be sold. The sale is expected to close by April 30, 2023. The following table represents the changes in OREO balance during the nine months ended September 30, 2022 and year ended December 31, 2021.
OREO Changes
(dollars in thousands)
Nine Months Ended Year Ended
September 30, 2022 December 31, 2021
Balance at the beginning of the year (net) $ 761 $ 1,105
Transfers from loans — 111
Capitalized costs — —
Valuation adjustments ( 195 ) —
Sales proceeds — ( 368 )
Loss on disposition — ( 87 )
Balance at the end of the period (net) $ 566 $ 761
At September 30, 2022 and December 31, 2021, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held no residential real estate properties in other real estate owned as of September 30, 2022 and December 31, 2021.
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Note 8 – Loans, allowance for loan losses and OREO (continued)
Impaired loans by class as of and for the periods ended September 30, 2022 and December 31, 2021 were as follows:
Impaired Loans
(dollars in thousands)
As of and For the Nine Months Ended September 30, 2022
Unpaid Average Interest
Recorded Principal Related Recorded Income
Investment (1) Balance Allowance Investment Recognized
With No Related Allowance Recorded:
Commercial $ - $ - $ - $ 9 $ -
Commercial Real Estate
Commercial Mortgages-Owner Occupied 1,191 1,413 - 1,892 43
Commercial Mortgage Non-Owner Occupied 521 522 - 312 22
Commercial Construction - - - - -
Consumer
Consumer Unsecured - - - - -
Consumer Secured 253 253 - 156 8
Residential
Residential Mortgages 1,354 1,434 - 1,335 40
Residential Consumer Construction - - - - -
With an Allowance Recorded:
Commercial $ - $ - $ - $ - $ -
Commercial Real Estate
Commercial Mortgages-Owner Occupied - - - - -
Commercial Mortgage Non-Owner Occupied - - - - -
Commercial Construction - - - - -
Consumer
Consumer Unsecured - - - - -
Consumer Secured - - - - -
Residential
Residential Mortgages - - - - -
Residential Consumer Construction - - - - -
Totals:
Commercial $ - $ - $ - $ 9 $ -
Commercial Real Estate
Commercial Mortgages-Owner Occupied 1,191 1,413 - 1,892 43
Commercial Mortgage Non-Owner Occupied 521 522 - 312 22
Commercial Construction - - - - -
Consumer
Consumer Unsecured - - - - -
Consumer Secured 253 253 - 156 8
Residential
Residential Mortgages 1,354 1,434 - 1,335 40
Residential Consumer Construction - - - - -
$ 3,319 $ 3,622 $ - $ 3,704 $ 113
(1) Recorded Investment is net of charge-offs and interest paid while a loan is in nonaccrual status.
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Note 8 – Loans, allowance for loan losses and OREO (continued)
Impaired Loans
(dollars in thousands)
As of and For the Year Ended December 31, 2021
Unpaid Average Interest
Recorded Principal Related Recorded Income
Investment (1) Balance Allowance Investment Recognized
With No Related Allowance Recorded:
Commercial $ 17 $ 67 $ - $ 179 $ 5
Commercial Real Estate
Commercial Mortgages-Owner Occupied 2,592 2,971 - 2,368 154
Commercial Mortgage Non-Owner Occupied 102 102 - 371 13
Commercial Construction - - - - -
Consumer
Consumer Unsecured - - - - -
Consumer Secured 59 60 - 201 2
Residential
Residential Mortgages 1,316 1,390 - 1,332 47
Residential Consumer Construction - - - - -
With an Allowance Recorded:
Commercial $ - $ - $ - $ 2 $ -
Commercial Real Estate
Commercial Mortgages-Owner Occupied - - - - -
Commercial Mortgage Non-Owner Occupied - - - - -
Commercial Construction - - - - -
Consumer
Consumer Unsecured - - - - -
Consumer Secured - - - - -
Residential
Residential Mortgages - - - - -
Residential Consumer Construction - - - - -
Totals:
Commercial $ 17 $ 67 $ - $ 181 $ 5
Commercial Real Estate
Commercial Mortgages-Owner Occupied 2,592 2,971 - 2,368 154
Commercial Mortgage Non-Owner Occupied 102 102 - 371 13
Commercial Construction - - - - -
Consumer
Consumer Unsecured - - - - -
Consumer Secured 59 60 - 201 2
Residential
Residential Mortgages 1,316 1,390 - 1,332 47
Residential Consumer Construction - - - - -
$ 4,086 $ 4,590 $ - $ 4,453 $ 221
(1) Recorded Investment is net of charge-offs and interest paid while a loan is in nonaccrual status.
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Note 8 – Loans, allowance for loan losses and OREO (continued)
The following tables present the activity in the allowance for loan losses for the year-to-date periods ended and the distribution of the allowance by segment as of September 30, 2022 and December 31, 2021.
Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Nine Months Ended September 30, 2022
Commercial
Commercial Real Estate Consumer Residential Total
Allowance for Loan Losses:
Beginning Balance $ 1,471 $ 3,637 $ 860 $ 947 $ 6,915
Charge-Offs - - ( 10 ) - ( 10 )
Recoveries 96 207 15 71 389
Provision (Recovery of) ( 302 ) ( 861 ) ( 36 ) 299 ( 900 )
Ending Balance 1,265 2,983 829 1,317 6,394
Ending Balance: Individually evaluated for impairment - - - - -
Ending Balance: Collectively evaluated for impairment 1,265 2,983 829 1,317 6,394
Totals: $ 1,265 $ 2,983 $ 829 $ 1,317 $ 6,394
Financing Receivables:
Ending Balance: Individually evaluated for impairment - 1,712 253 1,354 3,319
Ending Balance: Collectively evaluated for impairment 101,225 355,592 98,254 62,121 617,192
Totals: $ 101,225 $ 357,304 $ 98,507 $ 63,475 $ 620,511
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Note 8 – 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, 2021
Commercial
Commercial Real Estate Consumer Residential Total
Allowance for Loan Losses:
Beginning Balance $ 2,001 $ 3,550 $ 868 $ 737 $ 7,156
Charge-Offs ( 53 ) - ( 38 ) - ( 91 )
Recoveries 112 72 29 137 350
Provision (Recovery of) ( 589 ) 15 1 73 ( 500 )
Ending Balance 1,471 3,637 860 947 6,915
Ending Balance: Individually evaluated for impairment - - - - -
Ending Balance: Collectively evaluated for impairment 1,471 3,637 860 947 6,915
Totals: $ 1,471 $ 3,637 $ 860 $ 947 $ 6,915
Financing Receivables:
Ending Balance: Individually evaluated for impairment 17 2,694 59 1,316 4,086
Ending Balance: Collectively evaluated for impairment 105,050 335,455 89,043 49,750 579,298
Totals: $ 105,067 $ 338,149 $ 89,102 $ 51,066 $ 583,384
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Note 8 – Loans, allowance for loan losses and OREO (continued)
The following tables present credit quality information by class of loans as of September 30, 2022 and December 31, 2021.
Credit Quality Information - by Class
September 30, 2022
Pass Monitor Special Substandard Doubtful Totals
Mention
Commercial $ 92,003 $ 4,336 $ 4,829 $ 57 $ - $ 101,225
Commercial Real Estate:
Commercial Mortgages-Owner Occupied 128,090 1,973 - 1,210 - 131,273
Commercial Mortgages-Non-Owner Occupied 203,267 500 1,197 717 - 205,681
Commercial Construction 20,350 - - - - 20,350
Consumer
Consumer Unsecured 3,911 - 20 1 - 3,932
Consumer Secured 94,225 - - 350 - 94,575
Residential:
Residential Mortgages 39,111 - - 1,468 - 40,579
Residential Consumer Construction 22,896 - - - - 22,896
Totals $ 603,853 $ 6,809 $ 6,046 $ 3,803 $ - $ 620,511
Credit Quality Information - by Class
December 31, 2021
Pass Monitor Special Substandard Doubtful Totals
Mention
Commercial $ 92,789 $ 7,965 $ 4,262 $ 51 $ - $ 105,067
Commercial Real Estate:
Commercial Mortgages-Owner Occupied 116,098 5,986 4,130 2,620 - 128,834
Commercial Mortgages-Non-Owner Occupied 176,291 2,506 - 316 - 179,113
Commercial Construction 30,202 - - - - 30,202
Consumer
Consumer Unsecured 2,581 - 23 1 - 2,605
Consumer Secured 86,265 - - 232 - 86,497
Residential:
Residential Mortgages 30,486 - - 1,439 - 31,925
Residential Consumer Construction 19,141 - - - - 19,141
Totals $ 553,853 $ 16,457 $ 8,415 $ 4,659 $ - $ 583,384
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Note 8 – Loans, allowance for loan losses and OREO (continued)
The following tables present an aging analysis of the loan portfolio by class and past due as of September 30, 2022 and December 31, 2021.
Age Analysis of Past Due Loans as of September 30, 2022
Recorded
Greater Investment
30-59 Days 60-89 Days than Total Past Total > 90 Days &
Past Due Past Due 90 Days Due Current Loans Accruing
Commercial $ - $ - $ - $ - $ 101,225 $ 101,225 $ -
Commercial Real Estate:
Commercial Mortgages-Owner Occupied - - 502 502 130,771 131,273 -
Commercial Mortgages-Non-Owner Occupied - 56 - 56 205,625 205,681 -
Commercial Construction - - - - 20,350 20,350 -
Consumer:
Consumer Unsecured - - - - 3,932 3,932 -
Consumer Secured 133 - - 133 94,442 94,575 -
Residential:
Residential Mortgages 519 - 96 615 39,964 40,579 -
Residential Consumer Construction - - - - 22,896 22,896 -
Total $ 652 $ 56 $ 598 $ 1,306 $ 619,205 $ 620,511 $ -
Age Analysis of Past Due Loans as of December 31, 2021
Recorded
Greater Investment
30-59 Days 60-89 Days than Total Past Total > 90 Days &
Past Due Past Due 90 Days Due Current Loans Accruing
Commercial $ - $ 1 $ 25 $ 26 $ 105,041 $ 105,067 $ -
Commercial Real Estate:
Commercial Mortgages-Owner Occupied 464 - 501 965 127,869 128,834 -
Commercial Mortgages-Non-Owner Occupied 1,310 - - 1,310 177,803 179,113 -
Commercial Construction - - - - 30,202 30,202 -
Consumer:
Consumer Unsecured 8 1 - 9 2,596 2,605 -
Consumer Secured 111 3 118 232 86,265 86,497 -
Residential:
Residential Mortgages 948 - 163 1,111 30,814 31,925 -
Residential Consumer Construction - - - - 19,141 19,141 -
Total $ 2,841 $ 5 $ 807 $ 3,653 $ 579,731 $ 583,384 $ -
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Note 8 – Loans, allowance for loan losses and OREO (continued)
Troubled Debt Restructurings (TDR)
There was one loan modification that was classified as a TDR during the three and nine months ended September 30, 2022. This loan has had its original terms modified to facilitate payment by the borrower. The loan has been classified as a TDR primarily due to the extension of the maturity date which lowered the borrower’s payment.
There were no loan modifications that would have been classified as TDRs during the three and nine months ended September 30, 2021.
There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and nine months Ended September 30, 2022 and 2021.
At September 30, 2022 and December 31, 2021, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.
At the outset of the COVID-19 pandemic in the spring of 2020, we developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that are insignificant. The Bank modified a total of 191 loans. As of September 30, 2022 and December 31, 2021, none of the 191 previously modified loans remained in deferment and all such previously deferred loans are current.
Note 9 – Revenue Recognition
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. 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.
Investment Advisory Fees
The Company earns fees from its contracts with its investment advisory clients to manage client assets and for the provision of miscellaneous services. These fees are primarily earned over time as the Company charges its clients on a quarterly (which may not be a calendar quarter) basis in accordance with its investment advisory agreements. Fees are generally assessed based on a tiered scale of the market value of the client’s assets under management at quarter end.
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Note 9 – 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 10 - Economic Conditions
Management will continue to evaluate current economic conditions to determine the impact of economic conditions including rising interest rates, supply chain disruption, inflation, and Federal Reserve Board of Governors monetary policy and the resulting impact on the ability of our customers to fulfill their financial obligations to the Company, as well as the values of our financial and nonfinancial assets. Accordingly, significant estimates used in the preparation of our financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods.
Note 11 – Capital Notes and Other Borrowings
On April 13, 2020, the Company commenced a private placement of unregistered debt securities (the “2020 Offering”). In the 2020 Offering, the Company sold and closed $ 10,050,000 in principal of notes (the “2020 Notes”) during the 2 nd and 3 rd quarters of 2020. The 2020 Offering officially ended on July 8, 2020. The 2020 Notes bear interest at the rate of 3.25 % per year with interest payable quarterly in arrears. The 2020 Notes will mature on June 30, 2025 and are currently subject to full or partial call by the Company. The balance of the 2020 Notes on the Consolidated Balance Sheets is presented net of unamortized issuance costs.
On September 24, 2020 the Bank used $ 5,000,000 of the proceeds for the payment of principal of the Company’s previously outstanding 4.00 % notes that were issued in 2017. The Company intends to use the balance of the proceeds from the 2020 Offering for general corporate purposes at the discretion of Company’s management such as payment of interest on the 2020 Notes and as a contribution of additional capital to the Bank.
On December 29, 2021 Financial borrowed $ 11,000,000 from National Bank of Blacksburg (NBB) pursuant to a secured promissory note (the “NBB Note”). Prior to the modification discussed below, the NBB Note bore interest at the rate of 4.00 %, and was being amortized over a fifteen year period with a balloon payment of approximately $ 9,375,000 due on December 31, 2024 . The note is secured by a first priority lien on approximately 4.95 % of the Bank’s common stock. The balance of the NBB Note is presented on the Consolidated Balance Sheets under “other borrowings” and is net of unamortized issuance costs. A portion of the proceeds were used to purchase 100 % of the capital stock of PWW.
On June 30, 2022, NBB agreed to modify the terms of the NBB Note effective July 1, 2022. Pursuant to the modification, the balloon payment date was extended to December 31, 2026 from December 31, 2024 and the interest rate was lowered to 3.90 % from 4.00 %. The approximate amount of the balloon payment on December 31, 2026 will be $ 8,104,000 .
Note 12 – Acquisitions
Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the nets assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected September 1 of each year as the date to perform the annual impairment test. The Company performed a qualitative assessment of goodwill at September 1, 2022, and concluded that no impairment existed. Intangible assets with definite useful lives are amortized over estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
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Note 12 – Acquisitions (continued)
On December 31, 2021, Financial completed its acquisition of PWW, a Lynchburg, Virginia-based investment advisory firm with approximately $ 650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. The acquisition date fair value of consideration transferred totaled $ 10.5 million, which was paid in cash.
In connection with this transaction, the Company recorded $ 3.0 million in goodwill and $ 8.4 million of amortizable intangible assets, which primarily relate to the value of customer relationships. The goodwill is not deductible for tax purposes. The Company is amortizing these intangible assets over a 15 -year period using the straight line method. The transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The fair values are subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other.
It was necessary to increase goodwill related to PWW during the nine months ended September 30, 2022 as a result of a contractual net working capital adjustment payment to the previous owners of PWW in the amount of approximately $ 818,000 . This net working capital adjustment payment was related to fees generated by PWW that were not collected until 2022. This adjustment to goodwill was within the one-year measurement period allowed per GAAP.
Note 13 – Recent accounting pronouncements and other authoritative guidance
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has contracted with an additional vendor in addition to its core processer and the implementation process has begun. The Company is running the CECL methodology side by side with the current allowance methodology through the end of 2022 before full implementation.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses The areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Resu lts 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. Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Financial and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Financial’s control, include, but are not necessarily limited to the following:
the effects of a potential COVID-19 resurgence on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets;
operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Financial specifically;
government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations), including changes to address the impact of COVID-19;
economic, market, political and competitive forces affecting Financial’s banking and other businesses;
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 interest rates, monetary policy and general economic conditions, which may impact Financial’s net interest income;
changes in the value of real estate securing loans made by the Bank;
diversion of management time on pandemic-related issues;
adoption of new accounting standards or changes in existing standards;
changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic;
compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Financial may pursue or implement;
a potential resurgence of economic and political tensions with China, the ongoing war between Russia and Ukraine and potential expansion of combatants, and the sanctions imposed on Russia by numerous countries and private companies, all of which may have a destabilizing effect on financial markets and economic activity; and
the risk that Financial’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Financial specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the most recently filed Form 10-K.
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 th e 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
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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 “Receivables”, 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”).
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 and Provision for Loan Losses” 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.
Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the nets assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The initial goodwill impairment test will occur in 2022 as goodwill was the result of a transaction on December 31, 2021. The Company has selected September 1 of each year as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our consolidated balance sheet.
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 four other business activities: mortgage banking through the Bank’s Mortgage Division (which we refer to as “Mortgage”), investment services through the Bank’s Investment division (which we refer to as “Investment Division”), insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance business”), and as of December 31, 2021, investment advisory services through the Company’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc., which we refer to as “PWW.”
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, Lexington and Rustburg. The Bank strives to provide its customers with products comparable to statewide regional banks
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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.
We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that had approximately $650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. PWW generates revenue primarily through investment advisory fees.
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 noninterest income, including gains on sales of loans held for sale and service charges, and investment advisory fees, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.
The Bank intends to enhance its profitability by increasing its market share in our service areas, providing additional services to its customers, and controlling costs.
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 4935 Boonsboro Road, Suites C and D in Lynchburg (the “Boonsboro Branch”),
A branch located at 4105 Boonsboro Road in Lynchburg (the “Peakland 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 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”),
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”), and
A branch l ocated at 13 Village Highway, Rustburg, VA (the “Rustburg Branch”).
Limited Service Branches
Westminster -Canterbury facilities located at 501 VES Road, Lynchburg, Virginia, and
Westminster- Canterbury facilities located at 250 Pantops Mountain Road, Charlottesville, Virginia.
Loan Production Offices
Residential mortgage loan production office located at the Forest Branch,
Residential mortgage loan production office located at 570 West Main St., Wytheville, Virginia
Residential mortgage loan production office located at 2001 South Main Street, Blacksburg, Virginia, and
Commercial, consumer and residential mortgage loan production office located at the Water Street Branch.
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The Investment division and the Insurance business operate primarily out of offices located at the Main Street Office. PWW operates our investment advisory business primarily from its offices at 1925 Atherholt Road in Lynchburg.
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 may open 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. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit and construct a branch at this location could be between $900,000 and $1,500,000.
Real property located at 1925 Atherholt Road, Lynchburg, Virginia . On December 31, 2021, the Bank purchased real property located at 1925 Atherholt Road, Lynchburg, Virginia. The building currently serves as the offices for Financial’s wholly-owned subsidiary, PWW. PWW is currently leasing the space from the Bank on a month-to-month basis. While the Bank currently does not have a timeline for a branch at this location, the space is attractive for a branch due to its close proximity to Centra’s Lynchburg General Hospital. The investment needed to upfit the property will be minimal.
Although the Bank cannot predict with certainty the financial impact of each new branch, management generally anticipates that each new branch will become profitable within 12 to 18 months of operation.
Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept and/or use these commitments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:
September 30, 2022
(in thousands)
Commitments to extend credit $ 201,235
Letters of Credit 3,575
Total $ 204,810
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.
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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 ultimately realize gains related to its rate lock commitments due to changes in interest rates.
SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion represents management’s discussion and analysis of the financial condition of Financial as of September 30, 2022 and December 31, 2021 and the results of operations of Financial for the three and nine month periods ended September 30, 2022 and 2021. This discussion should be read in conjunction with the financial statements included elsewhere herein.
All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Financial Condition Summary
September 30, 2022 as Compared to December 31, 2021
Total assets were $962,570,000 on September 30, 2022 compared with $ 987,634,000 at December 31, 2021, a decrease of 2.54%. The decrease in total assets was primarily due to a decrease in cash and cash equivalents. This decrease in cash and cash equivalents was due primarily to i) a decrease in Federal funds sold; ii) the use of cash to fund loan growth; and iii) the use of cash to purchase securities available-for-sale to take advantage of the increase in interest rates. The resulting increase in securities available-for-sale was offset by an increase in the unrealized loss (mark to market) on the majority of the securities in the available-for-sale portfolio.
Total deposits decreased from $887,056,000 as of December 31, 2021 to $883,069,000 on September 30, 2022, a decrease of 0.45%. The decrease resulted in large part from decreases in the following deposit categories: noninterest-bearing demand deposits and time deposits.
Total loans, excluding loans held for sale, increased to $620,511,000 on September 30, 2022 from $583,384,000 on December 31, 2021, resulting from an increase in c ommercial real estate loans (owner occupied and non-owner occupied and excluding construction loans). Growth was partially offset by the continued payoff of PPP loans, the payoff of two substandard loans, and normal amortization. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $614,117,000 on September 30, 2022 from $576,469,000 on December 31, 2021, an increase of 6.53%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):
September 30, 2022 December 31, 2021
Amount Percentage (%) Amount Percentage (%)
Commercial $ 101,225 16.31 $ 105,067 18.01
Commercial Real Estate 357,304 57.58 338,149 57.97
Consumer 98,507 15.88 89,102 15.27
Residential 63,475 10.23 51,066 8.75
Total loans $ 620,511 100.00 $ 583,384 100.00
Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and OREO decreased to $1,354,000 on September 30, 2022 from $1,715,000 on December 31, 2021. OREO decreased to $566,000 on September 30, 2022 from $761,000 on December 31, 2021. The Bank accepted a contract for the purchase of one of its OREO properties and wrote down the value of that property to the contract price, resulting in the OREO decrease. Non-performing loans decreased from $954,000 at December 31, 2021 to $788,000 at September 30, 2022.
As discussed in more detail below under “ Results of Operations—Allowance and Provision 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.
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Due to changes in economic conditions following the COVID-19 pandemic, including labor shortages, supply chain disruptions, inflation and the rising interest rate environment, we anticipate that our commercial, commercial real estate, residential and consumer borrowers may encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings. Any potential financial impacts are unknown at this time.
OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2021, the Bank was carrying two OREO properties on its books at a value of $761,000. While the Bank neither acquired nor disposed of any OREO property during the nine months ended September 30, 2022, the Bank accepted a contract to sell one OREO property. The contract is subject to a study period and other customary contingencies. Because the contract price was below the amount at which the Bank was carrying the property, the Bank wrote down the value of the property, resulting in a book value of $566,000 for its two OREO properties on September 30, 2022. The remaining OREO property is available for sale and is being actively marketed.
The Bank had loans in the amount of $431,000 at September 30, 2022 classified as performing TDRs as compared to $372,000 at December 31, 2021. 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 because either the loan was modified to provide for interest only payments for a limited duration or to extend the maturity date.
At the beginning of the COVID-19 pandemic, we developed relief programs to assist borrowers in financial need. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that were insignificant. The Bank modified a total of 191 loans. The principal balances of these loans on September 30, 2022 (adjusted for payoffs) totaled approximately $76 million. As of September 30, 2022 and December 31, 2021, none of the 191 previously modified loans remained in deferment and all such previously deferred loans are current.
Cash and cash equivalents decreased to $81,020,000 on September 30, 2022 from $183,153,000 on December 31, 2021. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease was due primarily to i) a decrease in federal funds sold; ii) the use of cash to fund loan growth; and iii) the use of cash to purchase securities available-for-sale to take advantage of the increase in interest rates. In addition, 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 essentially flat, decreasing slightly to $3,643,000 on September 30, 2022 from $3,655,000 on December 31, 2021. This 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 $191,131,000 on September 30, 2022, from $161,267,000 on December 31, 2021. During the nine months ended September 30, 2022, the Bank purchased $71,580,000 in available-for-sale securities, which was responsible for the increase in securities available-for sale. During the nine months ended September 30, 2022 the Bank did not sell any securities available-for-sale and received $8,861,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale, which partially offset the increase. The increase was offset in part by an increase in the unrealized loss on securities available for sale of approximately $32,530,000 from December 31, 2021 to September 30, 2022. This decrease is attributable to changes in market rates of interest rather than the credit worthiness of the issuers. Financial does not expect to realize the losses as it has the intent and ability to hold the securities until their recovery, which may be at maturity.
Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $489,000 at September 30, 2022 and $426,000 at December 31, 2021, an increase of $63,000. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Liquidity and Capital
At September 30, 2022, Financial, on a consolidated basis, had liquid assets of $272,151,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $33,779,000 (representing current market value) of the available-for-sale securities are pledged as collateral with $28,525,000 pledged as security for public deposits, and $5,254,000 pledged as security on a line of credit the Bank may draw on from time to time to meet liquidity needs. This line of credit currently has a zero balance. Management believes that liquid assets were adequate at September 30, 2022. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank.
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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.
The aftermath of the COVID-19 pandemic could have a material negative impact on Financial’s short-term or long-term liquidity. For example, if customers unexpectedly draw down on existing lines of credit, our liquidity could be impacted. While we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic, management is closely monitoring our sources and uses of funds in order to meet our cash flow requirements while maximizing profits.
At September 30, 2022, the Bank had a leverage ratio of approximately 8.57%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 10.81% and a total risk-based capital ratio of approximately 11.66%. As of September 30, 2022 and December 31, 2021, the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of September 30, 2022 and December 31, 2021:
Bank Level Only Capital Ratios
Analysis of Capital for Bank of the James (Bank only)
(dollars in thousands)
September 30, December 31,
Analysis of Capital 2022 2021
Tier 1 capital
Common Stock $ 3,742 $ 3,742
Surplus 22,325 22,325
Retained earnings 55,937 52,821
Total Tier 1 capital $ 82,004 $ 78,888
Common Equity Tier 1 Capital (CET1) $ 82,004 $ 78,888
Tier 2 capital
Allowance for loan losses $ 6,394 $ 6,915
Total Tier 2 capital: $ 6,394 $ 6,915
Total risk-based capital $ 88,398 $ 85,803
Risk weighted assets $ 758,295 $ 693,400
Average total assets $ 956,978 $ 959,794
Actual Regulatory Benchmarks
For Capital For Well
September 30, December 31, Adequacy Capitalized
2022 2021 Purposes (1) Purposes
Capital Ratios:
Tier 1 capital to average total assets 8.57% 8.22% 4.000% 5.000%
Common Equity Tier 1 capital 10.81% 11.38% 7.000% 6.500%
Tier 1 risk-based capital ratio 10.81% 11.38% 8.500% 8.000%
Total risk-based capital ratio 11.66% 12.37% 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 September 30, 2022 would be slightly lower than those of the Bank because a portion of proceeds from the sale of notes previously issued by the holding company were contributed to the Bank as equity.
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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 a result, the Bank is required to have a minimum ratio of Tier 1 capital to average total assets of 4.00% (exclusive of the capital conservation buffer), 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 risk-based capital ratio of 8.5% (inclusive of the capital conservation buffer). 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.
On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2022 and 2021
Earnings Summary
Financial had net income including all operating segments of $2,574,000 and $7,005,000 for the three and nine months ended September 30, 2022, compared to $1,881,000 and $5,730,000 for the comparable periods in 2021. Basic and diluted earnings per common share for the three and nine months ended September 30, 2022 were $0.55 and $1.48, compared to basic and diluted earnings per share of $0.40 and $1.21 for the three and nine months ended September 30, 2021.
The increase in net income for the three months ended September 30, 2022, as compared to the prior year period was due primarily to i) a recovery of loan losses of loan losses of $300,000 during the quarter as compared to no recovery in the same period in 2021; ii) an increase in net interest income for the three months ended September 30, 2022 from the same period in 2021 of $1,078,000, and iii) an increase in noninterest income of $1,032,000 for the three months ended September 30, 2022 from the same period in 2021. The increase in net income was partially offset by a decrease in gains on loans held for sale as a well an increase in noninterest expense.
The increase in net income for the nine months ended September 30, 2022, as compared to the prior year period was due primarily to i) a recovery of loan losses of $900,000 during the first nine months as compared to no recovery in the same period in 2021; ii) an increase in net interest income for the nine months ended September 30, 2022 from the same period in 2021 of $1,134,000, and iii) an increase in noninterest income of $2,214,000 for the nine months ended September 30, 2022 from the same period in 2021. The increase in net income was partially offset by a decrease in gains on loans held for sale as a well an increase in noninterest expense.
These operating results represent an annualized return on average stockholders’ equity of 19.47% and 15.45% for the three and nine months ended September 30, 2022, compared with 11.03% and 11.58% for the three and nine months ended September 30, 2021. This increase for the three and nine months ended September 30, 2022 was due to an increase in our net income and a decrease in stockholders’ equity as a result of a decrease in the value of available-for-sale securities resulting from an application of the mark-to-market accounting rules. The Company had an annualized return on average assets of 1.05% and 0.95% for the three and nine months ended September 30, 2022 compared with 0.80% and 0.85% for the same periods in 2021. The increase for the three and nine months ended September 30, 2022 largely resulted from an increase in the Bank’s net income and a decrease in average assets, which was caused in part by a decrease in the value of the securities available-for-sale as discussed above.
See “ Noninterest Income” below for mortgage business and wealth management segment discussions.
Interest Income, Interest Expense, and Net Interest Income
For the three months ended September 30, 2022, interest income increased to $8,399,000 from $7,315,000 for the same period in 2021, due primarily to an increase in interest earning assets. In the comparable period of 2021, the yield on loans was elevated due to the accretion of PPP fees as PPP loans were forgiven. The average rate received on loans was 4.37% and 4.18% for the three and nine months ended September 30, 2022 as compared to 4.38% and 4.40% for the same periods in 2021. The rate on total average earning assets increased during the three months ended September 30, 2022 because of a general increase in market rates. Despite this increase in market interest rates, the rate on total average earning assets decreased for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 because of a decrease in loan fee accretion. The decrease in loan
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fees was primarily due to the winding up of the PPP program. The average rate received on average earning assets was 3.64% and 3.31% for the three and nine months ended September 30, 2022 as compared to 3.34% and 3.46% % for the same periods in 2021. The rate on total average earning assets decreased for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily because the decrease in fees earned from the forgiveness of PPP loans previously discussed.
Interest expense increased slightly to $499,000 for the three months ended September 30, 2022 from $493,000 for the three months end September 30, 2021 and decreased to $1,498,000 for the nine months ended September 30, 2022 from $1,634,000 for the comparable period in 2021. The decrease for the nine months resulted primarily from a decrease in interest rates paid on deposits during the first nine months of the year. The increase in interest rates during the second quarter is reflected in the increased expense for the third quarter of 2022. The Bank’s average rate paid on interest bearing deposits was 0.15% and 0.16% during the three and nine months ended September 30, 2022 as compared to 0.22% and 0.27% for the same periods in 2021.
The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2022 was $7,900,000 and $21,414,000 as compared to $6,822,000 and $20,280,000 for the same periods in 2021. The net interest margin was 3.42% and 3.09% for the three and nine months ended September 30, 2022 as compared to 3.11% and 3.20% for the same periods in 2021. The increase in the net interest margin for the three-month period was primarily due to the rates on interest earning assets repricing more rapidly than the rates on interest bearing liabilities. The decrease for the nine month period was primarily attributable to the decrease in loan fees related to the PPP program in 2022 as compared to 2021. Due to rising inflation, economic uncertainties have arisen that are likely to impact net interest margin. The FOMC has implemented a series of interest rate increases that are likely to positively impact our net interest margin in the near term, but may cause long-term uncertainty. Other financial impacts could occur, though such potential impacts are unknown at this time.
Financial’s net interest margin analysis and average balance sheets are shown in Schedule I below.
Noninterest Income
Noninterest 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, fees generated from treasury management services, fees generated from our investment advisory business, and bank-owned life insurance income.
Noninterest income increased to $3,854,000 and $10,519,000 for the three and nine months ended September 30, 2022 from $2,822,000 and $8,305,000 for the same periods in 2021. This increase was primarily related to increases in service charges, fees, and commissions and fees generated from the wealth management services of PWW and was offset by decreases in gains on sales of loans held for sale to $1,472,000 and $4,675,000 during the three and nine months ended September 2022 from $2,091,0000 and $6,175,000 for the same periods in 2021. Fee income from PWW was $959,000 and $2,935,000 for the three and nine months ended September 30, 2022 as compared to $0 and $0 for the same periods in 2021. In addition, growth in fee income in the third quarter of 2022 reflected increased interchange income earned on card activity and overdraft fees.
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 $41,436,000 and $128,840,000 or 81.37% and 74.16%, respectively, of the total mortgage loans originated in the three and nine months ended September 30, 2022 as compared to $54,645,000 and $139,599,000 or 62.73% and 56.39% of the total mortgage loans originated in the same periods in 2021. Because of a rising mortgage interest rate environment, management anticipates that in the short-term purchase mortgage originations will continue to represent a majority of mortgage originations. However, management also believes that a continued increase in long term market interest rates could limit refinancing activity.
Mortgage rates increased dramatically in the first nine months of 2022 and these increases are having a negative impact on mortgage origination volume. Because of uncertainty surrounding current and near-term economic conditions arising from the COVID-19 pandemic, supply chain issues, inflation, and geopolitical concerns, management cannot predict future mortgage rates. Nevertheless, 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, Charlottesville, Blacksburg, and most recently,
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Wytheville, wi ll result in strong mortgage originations through the remainder of 2022. Management also believes that the rising interest rates could put revenue from the mortgage segment under additional pressure.
Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by 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 for the remainder of 2022.
We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that had approximately $650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. PWW generates revenue primarily through investment advisory fees. The investment advisory fees will vary based on the value of assets under management. Assets under management may fluctuate due to both client action and fluctuations in the equity and debt markets. Despite the potential for fluctuation, we anticipate that PWW will continue to contribute meaningfully to the Company’s consolidated net income.
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 for the remainder of 2022.
Noninterest Expense
Noninterest expense for the three and nine months ended September 30, 2022 increased to $8,879,000 and $24,119,000 from $7,298,000 and $21,424,000 for the same periods in 2021, increases of 21.66% and 12.58%, respectively. These increases resulted primarily from increases in personnel expenses from variable compensation along with the added personnel expense of PWW employees, occupancy expense, equipment expense, and professional, data processing, and other outside expense. In addition, director’s fees, director’s and officer’s insurance, bank security expense, and a decrease in fair value of interest rate lock commitments contributed to the increases. The increases were offset in part by a decrease in equipment expense, marketing expense, and credit expense. FDIC insurance expense decreased in both the three and nine months ended September 30, 2022. Total personnel expense was $4,529,000 and $13,051,000 for the three and nine month periods ended September 30, 2022 as compared to $4,093,000 and $11,901,000 for the same periods in 2021.
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 recorded a recovery of loan losses of $300,000 and $900,000 in the three and nine month periods ended September 30, 2022. This compares to a provision of $0 for each of the comparable periods in 2021.
At September 30, 2022, the allowance for loan losses was 1.03% of total loans outstanding, versus 1.19% and 1.23% of total loans outstanding at December 31, 2021 and September 30, 2021, respectively. The decrease in the allowance for loan losses was largely driven by decreased qualitative factor adjustments related to the ongoing COVID-19 pandemic, primarily in relation to the economy and because all loans previously in deferral due to COVID-19 conditions have resumed their normal payment schedules and were current as of September 30, 2022. The specific reserve was $0 at December 31, 2021 and September 30, 2022 . PPP loans are guaranteed in full by the U.S. Small Business Administration, and therefore, are excluded from the Company’s allowance for loan losses calculation. As shown in the table below, the total balance in the allowance decreased, from $6,915,000 as of December 31, 2021 to $6,394,000 on September 30, 2022. The decrease was due primarily to a continued decline in historical loss experience as evidenced by net recoveris during 2022, an improvement in asset quality metrics, and continued performance of loans specifically impacted by the pandemic. The effects of the pandemic may require the Company to fund increases in the allowance for loan losses in future periods.
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Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for loan losses and constitute a realized loss. Charged-off loans were $1,000 and $10,000 for the three and nine months ended September 30, 2022 as compared to $16,000 and $80,000 for the comparable periods in 2021. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three and nine months ended September 30, 2022, the Bank had recoveries of charged-off loans of $79,000 and $389,000 as compared with $80,000 and $200,000 for the comparable periods in 2021.
In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. As set forth in the tables below, the Bank’s allowance arising from the specific impairment evaluation as of September 30, 2022 was unchanged as compared to December 31, 2021.
The following tables summarize the allowance activity for the periods indicated:
Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Nine Months Ended September 30, 2022
Commercial
Commercial Real Estate Consumer Residential Total
Allowance for Loan Losses:
Beginning Balance $ 1,471 $ 3,637 $ 860 $ 947 $ 6,915
Charge-Offs - - (10) - (10)
Recoveries 96 207 15 71 389
Provision (Recovery of) (302) (861) (36) 299 (900)
Ending Balance 1,265 2,983 829 1,317 6,394
Ending Balance: Individually evaluated for impairment - - - - -
Ending Balance: Collectively evaluated for impairment 1,265 2,983 829 1,317 6,394
Totals: $ 1,265 $ 2,983 $ 829 $ 1,317 $ 6,394
Financing Receivables:
Ending Balance: Individually evaluated for impairment - 1,712 253 1,354 3,319
Ending Balance: Collectively evaluated for impairment 101,225 355,592 98,254 62,121 617,192
Totals: $ 101,225 $ 357,304 $ 98,507 $ 63,475 $ 620,511
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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, 2021
Commercial
Commercial Real Estate Consumer Residential Total
Allowance for Loan Losses:
Beginning Balance $ 2,001 $ 3,550 $ 868 $ 737 $ 7,156
Charge-Offs (53) - (38) - (91)
Recoveries 112 72 29 137 350
Provision (Recovery of) (589) 15 1 73 (500)
Ending Balance 1,471 3,637 860 947 6,915
Ending Balance: Individually evaluated for impairment - - - - -
Ending Balance: Collectively evaluated for impairment 1,471 3,637 860 947 6,915
Totals: $ 1,471 $ 3,637 $ 860 $ 947 $ 6,915
Financing Receivables:
Ending Balance: Individually evaluated for impairment 17 2,694 59 1,316 4,086
Ending Balance: Collectively evaluated for impairment 105,050 335,455 89,043 49,750 579,298
Totals: $ 105,067 $ 338,149 $ 89,102 $ 51,066 $ 583,384
The following sets forth the reconciliation of the allowance for loan losses:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) (in thousands)
2022 2021 2022 2021
Balance, beginning of period $ 6,616 $ 7,212 $ 6,915 $ 7,156
Recovery of loan losses (300) - (900) -
Loans charged off (1) (16) (10) (80)
Recoveries of loans charged off 79 80 389 200
Net recoveries 78 64 379 120
Balance, end of period $ 6,394 $ 7,276 $ 6,394 $ 7,276
No nonaccrual loans were excluded from the impaired loan disclosures at September 30, 2022 and December 31, 2021. If interest on these loans had been accrued, such income cumulatively would have approximated $218,000 and $177,000 on September 30, 2022 and December 31, 2021, 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.
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Below is a summary and definition of the Bank’s risk rating categories:
RATING 1 Excellent
RATING 2 Above Average
RATING 3 Satisfactory
RATING 4 Acceptable / Low Satisfactory
RATING 5 Monitor
RATING 6 Special Mention
RATING 7 Substandard
RATING 8 Doubtful
RATING 9 Loss
We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:
“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.
“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events.
“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.
“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
“ Loss .” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
Income Taxes
For the three and nine months ended September 30, 2022, Financial had an income tax expense of $601,000 and $1,709,000 as compared to $465,000 and $1,431,000 for the three and nine months ended September 30, 2021. This represents an effective tax rate of 18.93% and 19.61% for the three and nine months ended September 30, 2022 as compared with 19.82% and 19.98% for the three and nine months ended September 30, 2021. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance, and interest earned on tax free municipal bonds.
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Net Interest Margin Analysis
Average Balance Sheets
For the Three Months Ended September 30, 2022 and 2021
(dollars in thousands)
2022 2021
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned
Sheet Expense Paid Sheet Expense /Paid
ASSETS
Loans, including fees (1)(2) $ 615,208 $ 6,776 4.37% $ 594,371 $ 6,564 4.38%
Loans held for sale 4,217 54 5.08% 5,638 41 2.89%
Federal funds sold 46,147 262 2.25% 107,001 33 0.12%
Interest-bearing bank balances 18,853 101 2.13% 18,895 7 0.15%
Securities (3) 230,986 1,210 2.08% 142,670 668 1.86%
Federal agency equities 1,271 5 1.56% 1,208 4 1.31%
CBB equity 116 — - % 116 — - %
Total earning assets 916,798 8,408 3.64% 869,899 7,317 3.34%
Allowance for loan losses (6,633) (7,242)
Non-earning assets 58,820 68,189
Total assets $ 968,985 $ 930,846
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand interest bearing 459,755 114 0.10% 422,840 116 0.11%
Savings 138,016 19 0.05% 114,612 30 0.10%
Time deposits 130,885 143 0.43% 141,550 239 0.67%
Total interest bearing deposits 728,656 276 0.15% 679,002 385 0.22%
Other borrowed funds
Other borrowings 10,672 117 4.35% — — - %
Financing leases 3,546 24 2.69% 3,677 26 2.81%
Capital notes 10,035 82 3.24% 10,030 82 3.24%
Total interest-bearing liabilities 752,909 499 0.26% 692,709 493 0.28%
Noninterest bearing deposits 156,946 164,450
Other liabilities 6,679 6,030
Total liabilities 916,534 863,189
Stockholders’ equity 52,451 67,657
Total liabilities and
Stockholders’ equity $ 968,985 $ 930,846
Net interest earnings $ 7,909 $ 6,824
Net interest margin 3.42% 3.11%
Interest spread 3.38% 3.05%
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(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 periods presented.
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Net Interst Margin Analysis
Average Balance Sheets
For the Nine Months Ended September 30, 2022 and 2021
(dollars in thousands)
2022 2021
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned
Sheet Expense Paid Sheet Expense /Paid
ASSETS
Loans, including fees (1)(2) $ 600,286 $ 18,779 4.18% $ 605,314 $ 19,943 4.40%
Loans held for sale 3,978 130 4.37% 5,777 146 3.38%
Federal funds sold 82,142 463 0.75% 97,762 67 0.09%
Interest-bearing bank balances 18,853 135 0.96% 18,793 26 0.18%
Securities (3) 220,863 3,384 2.05% 118,662 1,700 1.92%
Federal agency equities 1,244 36 3.87% 1,306 39 3.99%
CBB equity 116 — - % 116 — - %
Total earning assets 927,482 22,927 3.31% 847,730 21,921 3.46%
Allowance for loan losses (6,829) (7,179)
Non-earning assets 66,214 65,838
Total assets $ 986,867 $ 906,389
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand interest bearing 456,851 318 0.09% 391,298 332 0.11%
Savings 131,266 56 0.06% 106,009 87 0.11%
Time deposits 136,949 467 0.46% 146,580 890 0.81%
Total interest bearing deposits 725,066 841 0.16% 643,887 1,309 0.27%
Other borrowed funds
Other borrowings 10,805 339 4.19% — — 0.00%
Financing leases 3,640 73 2.68% 3,841 80 2.78%
Capital notes 10,034 245 3.26% 10,028 245 3.27%
Total interest-bearing liabilities 749,545 1,498 0.27% 657,756 1,634 0.33%
Noninterest bearing deposits 170,208 164,974
Other liabilities 6,511 9,753
Total liabilities 926,264 832,483
Stockholders’ equity 60,603 65,434
Total liabilities and
Stockholders’ equity $ 986,867 $ 897,917
Net interest earnings $ 21,429 $ 20,287
Net interest margin 3.09% 3.20%
Interest spread 3.04% 3.13%
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(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 periods presented.
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Item 3. Quantitative and Qualitative Disclosures About Mark et Risk
Not applicable
Item 4. Controls and Pro cedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Financial’s management, including Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes during the quarter ended September 30, 2022, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those controls subsequent to the date of our most recent evaluation of internal controls over financial reporting.
PART II – OTHER INFORMATI ON
Item 1. Legal Procee dings
The Company is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.
Item 1A. Risk Fact ors
For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 29, 2022. There have been no material changes from risk factors as previously disclosed in Part 1 Item 1A of the Company’s Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable
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(c) The following table provides information about repurchases of common stock by the Company for the quarter ended September 30, 2022:
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs (1)
July 1, 2022 through July 31, 2022 (2) - N/A - $500,000
August 1, 2022 through August 30, 2022 (2) (3) 112,000 $12.51 112,000 $98,482
September 1, 2022 through September 30, 2022 (2) (3) - N/A 112,000 $98,482
Total 112,000 $12.51 112,000 $98,482
(1) The company repurchased 112,000 shares for an aggregate of $1,402,000 during the quarter ended September 30, 2022. All purchases were made in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Securities Exchange Act of 1934.
(2) On July 19, 2022, the Company’s board of directors approved a share repurchase program under which the Company was authorized to repurchase, from time to time as the Company deems appropriate, up to an aggregate of $500,000 of shares of the Company’s common stock. The program, as amended, will expire by its terms on July 18, 2023. Repurchases may be made in the open market, through block trades, or otherwise, an in privately negotiated transactions.
(3) On August 18, 2022, the Company’s board of directors increased this aggregate amount available for the repurchase of shares to $1,500,000. The program, as amended, will expire by its terms on July 18, 2023. Repurchases may be made in the open market, through block trades, or otherwise, an in privately negotiated transactions.
Item 3. Defaults Upon Senior Secur ities
Not applicable
Item 4. Mine Safety Disclo sures
Not applicable
Item 5. Other Informat ion
Not applicable
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Item 6. Exhib its
Exhibit No. Description of Exhibit
31.1 Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated Novmeber 10, 2022
31.2 Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated Novmeber 10, 2022
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated Novmeber 10, 2022
101 The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three and nine months ended September 30, 2022 and 2021 (iv) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2022 and 2021 (v) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2022 and 2021; (vi) Notes to Unaudited Consolidated Financial Statements.
SIGNATUR ES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BANK OF THE JAMES FINANCIAL GROUP, INC.
Date: Novmeber 10, 2022 By /S/ Robert R. Chapman III
Robert R. Chapman III, President
(Principal Executive Officer)
Date: Novmeber 10, 2022 By /S/ J. Todd Scruggs
J. Todd Scruggs, Secretary and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
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