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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2018

 

 

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Virginia   001-35402   20-0500300

(State or other jurisdiction of

incorporation or organization)

 

(Commission

file number)

 

(I.R.S. Employer

Identification No.)

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

(434) 846-2000

(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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   ☐  (do not check if a smaller reporting company)    Smaller reporting company  
Emerging growth company       

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,378,436 shares of Common Stock, par value $2.14 per share, were outstanding at August 8, 2018.

 

 

 


Table of Contents

Table of Contents

 

PART I – FINANCIAL INFORMATION

     1  

Item 1.

 

Consolidated Financial Statements

     1  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     50  

Item 4.

 

Controls and Procedures

     50  

PART II – OTHER INFORMATION

     51  

Item 1.

 

Legal Proceedings

     51  

Item 1A.

 

Risk Factors

     51  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     51  

Item 3.

 

Defaults Upon Senior Securities

     51  

Item 4.

 

Mine Safety Disclosures

     51  

Item 5.

 

Other Information

     52  

Item 6.

 

Exhibits

     52  

SIGNATURES

     54  


Table of Contents

PART I – FINANCIAL INFORMATION

 

  Item 1.

Consolidated Financial Statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts) (2018 unaudited)

 

     June 30,     December 31,  
     2018     2017  

Assets

    

Cash and due from banks

   $ 25,717     $ 20,267  

Federal funds sold

     8,132       16,751  
  

 

 

   

 

 

 

Total cash and cash equivalents

     33,849       37,018  

Securities held-to-maturity (fair value of $3,448 in 2018 and $5,619 in 2017)

     3,706       5,713  

Securities available-for-sale, at fair value

     53,688       55,312  

Restricted stock, at cost

     1,462       1,505  

Loans, net of allowance for loan losses of $4,688 in 2018 and 4,752 in 2017

     523,730       491,022  

Loans held for sale

     5,815       2,626  

Premises and equipment, net

     11,995       12,055  

Interest receivable

     1,755       1,713  

Cash value - bank owned life insurance

     13,188       13,018  

Other real estate owned

     2,585       2,650  

Income taxes receivable

     1,339       1,366  

Deferred tax asset, net

     1,695       1,418  

Other assets

     1,059       925  
  

 

 

   

 

 

 

Total assets

   $ 655,866     $ 626,341  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest bearing demand

   $ 86,757     $ 74,102  

NOW, money market and savings

     328,082       307,987  

Time

     181,229       185,404  
  

 

 

   

 

 

 

Total deposits

     596,068       567,493  

Capital notes

     5,000       5,000  

Interest payable

     107       111  

Other liabilities

     2,167       2,072  
  

 

 

   

 

 

 

Total liabilities

   $ 603,342     $ 574,676  
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ equity

    

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

   $ —       $ —    

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 4,378,436 as of June 30, 2018 and December 31, 2017

     9,370       9,370  

Additional paid-in-capital

     31,495       31,495  

Retained earnings

     14,167       12,269  

Accumulated other comprehensive (loss)

     (2,508     (1,469
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 52,524     $ 51,665  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 655,866     $ 626,341  
  

 

 

   

 

 

 

 

1

See accompanying notes to these consolidated financial statements


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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

 

     For the Three Months      For the Six Months  
     Ended June 30,      Ended June 30,  
     2018      2017      2018      2017  

Interest Income

           

Loans

   $ 6,195      $ 5,465      $ 11,869      $ 10,653  

Securities

           

US Government and agency obligations

     186        121        384        234  

Mortgage backed securities

     66        77        134        143  

Municipals - taxable

     83        80        162        149  

Municipals - tax exempt

     —          10        3        21  

Dividends

     23        28        31        35  

Other (Corporates)

     24        30        47        57  

Interest bearing deposits

     56        17        91        32  

Federal Funds sold

     92        23        159        36  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     6,725        5,851        12,880        11,360  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

           

NOW, money market savings

     231        175        423        344  

Time Deposits

     625        486        1,206        951  

FHLB borrowings

     16        —          17        —    

Capital notes 4% due 1/24/2022

     50        50        100        87  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     922        711        1,746        1,382  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     5,803        5,140        11,134        9,978  

Provision for loan losses

     315        445        337        545  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,488        4,695        10,797        9,433  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income

           

Gain on sales of loans held for sale

     873        598        1,493        969  

Service charges, fees and commissions

     465        443        929        828  

Increase in cash value of life insurance

     85        87        170        173  

Other

     18        24        35        33  

Gain on sales and calls of securities, net

     —          52        —          62  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,441        1,204        2,627        2,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses

           

Salaries and employee benefits

     2,832        2,396        5,545        4,776  

Occupancy

     360        365        755        737  

Equipment

     398        438        777        786  

Supplies

     140        123        289        257  

Professional, data processing, and other outside expenses

     837        697        1,652        1,377  

Marketing

     187        236        327        384  

Credit expense

     112        137        237        231  

Other real estate expenses

     86        24        126        36  

FDIC insurance expense

     99        88        200        191  

Other

     255        252        495        478  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     5,306        4,756        10,403        9,253  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,623        1,143        3,021        2,245  

Income tax expense

     323        356        598        698  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 1,300      $ 787      $ 2,423      $ 1,547  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - basic

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

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     4,378,436        4,378,519        4,378,481        4,378,527  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share - basic

   $ 0.30      $ 0.18      $ 0.55      $ 0.35  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share - diluted

   $ 0.30      $ 0.18      $ 0.55      $ 0.35  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

2

See accompanying notes to these consolidated financial statements


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2018 and 2017

(dollar amounts in thousands) (unaudited)

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  
     2018     2017     2018     2017  

Net Income

   $ 1,300   $ 787   $ 2,423   $ 1,547
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

        

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

     (240     571     (1,316     994

Tax effect

     51     (194     277     (338

Reclassification adjustment for gains included in net income (1)

     —         (52     —         (62

Tax effect (2)

     —         17     —         21
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (189     342     (1,039     615
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,111   $ 1,129   $ 1,384   $ 2,162
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Gains are included in “gain on sales and calls of securities, net” on the consolidated statements of income.

(2)

The tax effect on these reclassifications is reflected in “income tax expense” on the consolidated statements of income.

 

3

See accompanying notes to these consolidated financial statements


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2018 and 2017

(dollar amounts in thousands) (unaudited)

 

     For the Six Months Ended June 30,  
     2018     2017  

Cash flows from operating activities

    

Net Income

   $ 2,423   $ 1,547

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

    

Depreciation and amortization

     434     396

Net amortization and accretion of premiums and discounts on securities

     205     185

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

     —         (62

(Gain) on sales of loans held for sale

     (1,493     (969

Proceeds from sales of loans held for sale

     56,811     36,364

Origination of loans held for sale

     (58,507     (34,076

Provision for loan losses

     337     545

(Gain) loss on sale of other real estate owned

     (5     17

Impairment of other real estate owned

     110     —    

(Increase) in cash value of life insurance

     (170     (173

(Increase) decrease in interest receivable

     (42     80

(Increase) decrease in other assets

     (134     70

Decrease (increase) in income taxes receivable

     27     (77

(Decrease) in interest payable

     (4     (10

Increase in other liabilities

     95     65
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 87   $ 3,902
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from calls of securities held-to-maturity

   $ 2,000   $ —    

Purchases of securities available-for-sale

     (998     (15,481

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

     1,108     2,013

Proceeds from sale of securities available-for-sale

     —         5,749

(Purchase) of Federal Reserve Bank stock

     —         (90

Redemption (purchase) of Federal Home Loan Bank stock

     43     (42

Proceeds from sale of other real estate owned

     525     253

Origination of loans, net of principal collected

     (33,610     (20,115

Purchases of premises and equipment

     (374     (865
  

 

 

   

 

 

 

Net cash (used in) investing activities

   $ (31,306   $ (28,578
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

   $ 28,575   $ 9,750

Net increase in repurchase agreements

     —         5,000

Dividends paid to common stockholders

     (525     (525

Proceeds fom sale of 4% capital notes due 1/24/2022

     —         5,000
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 28,050   $ 19,225
  

 

 

   

 

 

 

(Decrease) in cash and cash equivalents

     (3,169     (5,451

Cash and cash equivalents at beginning of period

   $ 37,018   $ 28,683
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 33,849   $ 23,232
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to other real estate owned

   $ 565   $ 675

Fair value adjustment for securities available-for-sale

     (1,316     932

Cash transactions

    

Cash paid for interest

   $ 1,750   $ 1,392

Cash paid for income taxes

     650     775

 

4

See accompanying notes to these consolidated financial statements


Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2018 and 2017

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

 

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

Balance at December 31, 2016

     4,378,436      $ 9,370      $ 31,495      $ 10,156     $ (1,600   $ 49,421  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          1,547       —         1,547  

Dividends paid on common stock ($0.12 per share)

     —          —          —          (525     —         (525

Other comprehensive income

     —          —          —          —         615       615  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

     4,378,436      $ 9,370      $ 31,495      $ 11,178     $ (985   $ 51,058  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     —          —          —          2,423       —         2,423  

Dividends paid on common stock ($0.12 per share)

     —          —          —          (525     —         (525

Other comprehensive loss

     —          —          —          —         (1,039     (1,039
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

5

See accompanying notes to these consolidated financial statements


Table of Contents

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 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, 2017. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2017 included in Financial’s Annual Report on Form 10-K. Results for the three and six month periods ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

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

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

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

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

 

6


Table of Contents

Note 2 – Use of Estimates

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

Note 3 – Earnings Per Common Share (EPS)

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of 1999 Financial (the “1999 Plan”) are considered in calculating diluted earnings per share. The following is a summary of the earnings per share calculation for the three and six months ended June 30, 2018 and 2017.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2018      2017      2018      2017  

Net income

   $ 1,300,000      $ 787,000      $ 2,423,000      $ 1,547,000  

Weighted average number of shares

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

Options effect of incremental shares

     —          83        45        91  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted shares

     4,378,436        4,378,519        4,378,481        4,378,527  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS (weighted avg shares)

   $ 0.30      $ 0.18      $ 0.55      $ 0.35  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS (Including Option Shares)

   $ 0.30      $ 0.18      $ 0.55      $ 0.35  
  

 

 

    

 

 

    

 

 

    

 

 

 

No option shares were excluded in calculating diluted earnings per share for any of the periods presented.

Note 4 – Stock Based Compensation

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

 

7


Table of Contents

Note 4 – Stock Based Compensation (continued)

 

Stock option plan activity for the six months ended June 30, 2018 is summarized below:

 

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

Options outstanding, January 1, 2018

     636    $ 12.79      

Granted

     —          —          

Exercised

     —          —          

Forfeited

     (636      12.79      
  

 

 

          

Options outstanding, June 30, 2018

     —        $ —          —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable, June 30, 2018

     —        $ —          —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Intrinsic value is calculated by subtracting the exercise price of option shares from the market price of underlying shares as of June 30, 2018 and multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is greater than the market price on a given date.

All compensation expense related to the foregoing stock option plan has been recognized. The Company’s ability to grant additional options shares under the 1999 Plan has expired and no outstanding options remain outstanding from the 1999 Plan.

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. To date the Company has not awarded any equity compensation under the 2018 Incentive Plan.

Note 5 – Fair Value Measurements

Determination of Fair Value

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

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

 

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Note 5 – Fair Value Measurements (continued)

 

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.

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

Fair Value on a Recurring Basis

Securities Available-for-Sale

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

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

 

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Note 5 – Fair Value Measurements (continued)

 

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

 

            Carrying Value at June 30, 2018 (in thousands)  

Description

   Balance as of
June 30,
2018
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

   $ 1,810      $ —        $ 1,810      $ —    

US agency obligations

     23,078        —          23,078        —    

Mortgage-backed securities

     12,996        —          12,996        —    

Municipals

     12,028        —          12,028        —    

Corporates

     3,776        —          3,776        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 53,688      $ —        $ 53,688      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
            Carrying Value at December 31, 2017 (in thousands)  

Description

   Balance as of
December 31,
2017
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

US Treasuries

   $ 1,858      $        $ 1,858      $    

US agency obligations

     23,850        —          23,850        —    

Mortgage-backed securities

     13,388        —          13,388        —    

Municipals

     12,274        —          12,274        —    

Corporates

     3,942        —          3,942        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 55,312      $ —        $ 55,312      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value on a Non-recurring Basis

Impaired loans

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

 

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Note 5 – Fair Value Measurements (continued)

 

Loans held for sale

Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended June 30, 2018. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale, net on the Consolidated Statements of Income.

Other real estate owned

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

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

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

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

 

          Carrying Value at June 30, 2018  

Description

  Balance as of
June 30, 2018
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Impaired loans*

  $ 2,241     $ —       $ —       $ 2,241  

Loans held for sale

    5,815       —         5,815       —    

Other real estate owned

    2,585       —         —         2,585  

 

*

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

 

          Carrying Value at December 31, 2017  

Description

  Balance as of
December 31,
2017
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs (Level 3)
 

Impaired loans*

  $ 2,523     $ —       $ —       $ 2,523  

Loans held for sale

    2,626       —         2,626       —    

Other real estate owned

    2,650       —         —         2,650  

 

*

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

 

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Note 5 – Fair Value Measurements (continued)

 

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

 

     Quantitative information about Level 3 Fair Value Measurements for June 30, 2018
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range (Weighted
Average)

Assets

           

Impaired loans

   $ 2,241      Discounted appraised value   

Selling cost

   0% - 10% (8%)
        

Discount for lack of marketability and age of appraisal

   0% - 20% (6%)

OREO

     2,585      Discounted appraised value   

Selling cost

   0% - 10% (6%)
        

Discount for lack of marketability and age of appraisal

   0% - 25% (15%)
     Quantitative information about Level 3 Fair Value Measurements for December 31, 2017
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range (Weighted
Average)

Assets

           

Impaired loans

   $ 2,523      Discounted appraised value   

Selling cost

   0% - 10% (8%)
        

Discount for lack of marketability and age of appraisal

   0% - 20% (6%)

OREO

     2,650      Discounted appraised value   

Selling cost

   0% - 10% (6%)
        

Discount for lack of marketability and age of appraisal

   0% - 25% (15%)

 

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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 June 30, 2018 and December 31, 2017 was as follows (in thousands):

 

       Fair Value Measurements at June 30, 2018 using  
            Quoted Prices      Significant                
            in Active      Other      Significant         
            Markets for      Observable      Unobservable         
     Carrying      Identical Assets      Inputs      Inputs         
     Amounts      (Level 1)      (Level 2)      (Level 3)      Balance  

Assets

              

Cash and due from banks

   $ 25,717      $ 25,717      $ —        $ —        $ 25,717  

Fed funds sold

     8,132        8,132        —          —          8,132  

Securities

              

Available-for-sale

     53,688        —          53,688        —          53,688  

Held-to-maturity

     3,706        —          3,448        —          3,448  

Restricted stock

     1,462           1,462        —          1,462  

Loans, net (1)

     523,730        —          —          511,265        511,265  

Loans held for sale

     5,815        —          5,815        —          5,815  

Interest receivable

     1,755        —          1,755        —          1,755  

BOLI

     13,188        —          13,188        —          13,188  

Liabilities

              

Deposits

   $ 596,068      $ —        $ 596,664      $ —        $ 599,664  

Capital notes

     5,000        —          4,670        —          4,670  

Interest payable

     107        —          107        —          107  

 

            Fair Value Measurements at December 31, 2017 using  
            Quoted Prices      Significant                
            in Active      Other      Significant         
            Markets for      Observable      Unobservable         
     Carrying      Identical Assets      Inputs      Inputs         
     Amounts      (Level 1)      (Level 2)      (Level 3)      Balance  

Assets

              

Cash and due from banks

   $ 20,267      $ 20,267      $ —        $ —        $ 20,267  

Fed funds sold

     16,751        16,751              16,751  

Securities

              

Available-for-sale

     55,312        —          55,312        —          55,312  

Held-to-maturity

     5,713        —          5,619        —          5,619  

Restricted stock

     1,505        —          1,505           1,505  

Loans, net (1)

     491,022        —          —          492,397        492,397  

Loans held for sale

     2,626        —          2,626        —          2,626  

Interest receivable

     1,713        —          1,713        —          1,713  

BOLI

     13,018        —          13,018        —          13,018  

Liabilities

              

Deposits

   $ 567,493      $ —        $ 568,224      $ —        $ 568,224  

Capital notes

     5,000        —          5,310           5,310  

Interest payable

     111        —          111        —          111  

 

(1)

Carrying amount is net of unearned income and the Allowance. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans as of June 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

 

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Note 5 – Fair Value Measurements (continued)

 

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

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

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

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

Note 6 – Capital Notes

On January 25, 2017, Financial closed a private placement of unregistered debt securities (the “2017 Offering”) pursuant to which Financial issued $5,000,000 in principal of notes (the “2017 Notes”). The 2017 Notes bear interest at the rate of 4% per year with interest payable quarterly in arrears. The 2017 Notes are to mature on January 24, 2022, but are subject to prepayment in whole or in part on or after January 24, 2018 at Financial’s sole discretion on 30 days written notice to the holders. Of the proceeds, $3,000,000 was injected into the Bank as equity capital in March 2017. It is anticipated the remaining $2,000,000 will remain at the holding company level for debt service on the 2017 Notes.

 

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Note 7 - Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of June 30, 2018 and December 31, 2017 (amounts in thousands):

 

     June 30, 2018  
     Amortized      Gross Unrealized      Fair Value  
     Costs      Gains      (Losses)  

Held-to-Maturity

           

US agency obligations

   $ 3,706      $ —        $ (258    $ 3,448  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US Treasuries

     1,959        —          (149      1,810  

US agency obligations

     24,792        5        (1,719      23,078  

Mortgage-backed securities

     13,519        3        (526      12,996  

Municipals

     12,485        1        (458      12,028  

Corporates

     4,109        —          (333      3,776  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 56,684      $ 9      $ (3,185    $ 53,688  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Amortized      Gross Unrealized      Fair Value  
     Costs      Gains      (Losses)  

Held-to-Maturity

           

US agency obligations

   $ 5,713      $ 8      $ (102    $ 5,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US Treasuries

     1,956        —          (98      1,858  

US agency obligations

     24,881        5        (1,036      23,850  

Mortgage-backed securities

     13,662        2        (276      13,388  

Municipals

     12,556        16        (298      12,274  

Corporates

     4,117        —          (175      3,942  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 57,172      $ 23      $ (1,883    $ 55,312  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 7 – Securities (continued)

 

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2018 and December 31, 2017 (amounts in thousands):

 

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

June 30, 2018

   Value      Losses      Value      Losses      Value      Losses  

Description of securities

                 

Held-to-maturity

                 

US agency obligations

   $ 2,436      $ 167      $ 1,270      $ 91      $ 3,706      $ 258  

Available-for-sale

                 

US Treasuries

     —          —          1,810        149        1,810        149  

US agency obligations

     11,086        567        11,995        1,152        23,081        1,719  

Mortgage-backed securities

     963        31        11,236        495        12,199        526  

Municipals

     213        10        11,305        448        11,518        458  

Corporates

     —          —          3,776        333        3,776        333  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,262      $ 608      $ 40,122      $ 2,577      $ 52,384      $ 3,185  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2017

   Value      Losses      Value      Losses      Value      Losses  

Description of securities

                 

Held-to-maturity

                 

US agency obligations

   $ 2,367      $ 70      $ 1,243      $ 32      $ 3,610      $ 102  

Available-for-sale

                 

US Treasuries

     —          —          1,858        98        1,858        98  

US agency obligations

     11,465        215        12,379        821        23,844        1,036  

Mortgage-backed securities

     2,802        26        9,712        250        12,514        276  

Municipals

     4,823        41        5,644        257        10,467        298  

Corporates

     —          —          3,942        175        3,942        175  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,090      $ 282      $ 33,535      $ 1,601      $ 52,625      $ 1,883  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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).

 

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Note 7 – Securities (continued)

 

At June 30, 2018, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of June 30, 2018, the Bank owned 60 securities in an unrealized loss position that were being evaluated for other than temporary impairment. Eleven of these securities were S&P rated AAA, 46 were rated AA and three were rated A. As of June 30, 2018, 33 of these securities were direct obligations of the U.S. government or government sponsored entities, 22 were municipal issues, and five were investments in domestic corporate issued securities.

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

There were no gross gains on available-for-sale securities during the three and six month periods ended June 30, 2018 compared to $52 and $62 for the same respective periods in 2017. There were no losses on sales of available-for-sale securities and no sales of held-to-maturity securities during the three and six month periods ended June 30, 2018 and 2017.

Note 8 – Business Segments

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

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

 

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Table of Contents

Note 8 – Business Segments (continued)

 

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2018 and 2017 was as follows (dollars in thousands):

Business Segments

 

     Community                
     Banking      Mortgage      Total  

Six months ended June 30, 2018

        

Net interest income

   $ 11,134      $ —        $ 11,134  

Provision for loan losses

     337        —          337  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     10,797        —          10,797  

Noninterest income

     1,132        1,495        2,627  

Noninterest expenses

     9,207        1,196        10,403  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,722        299        3,021  

Income tax expense

     546        52        598  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 2,176      $ 247      $ 2,423  
  

 

 

    

 

 

    

 

 

 

Total assets

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

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2017

        

Net interest income

   $ 9,978      $ —        $ 9,978  

Provision for loan losses

     545        —          545  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     9,433        —          9,433  

Noninterest income

     1,096        969        2,065  

Noninterest expenses

     8,489        764        9,253  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,040        205        2,245  

Income tax expense

     630        68        698  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,410      $ 137      $ 1,547  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 592,998      $ 2,639      $ 595,637  
  

 

 

    

 

 

    

 

 

 
     Community                
     Banking      Mortgage      Total  

Three months ended June 30, 2018

        

Net interest income

   $ 5,803      $ —        $ 5,803  

Provision for loan losses

     315        —          315  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,488        —          5,488  

Noninterest income

     566        875        1,441  

Noninterest expenses

     4,603        703        5,306  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,451        172        1,623  

Income tax expense

     298        25        323  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,153      $ 147      $ 1,300  
  

 

 

    

 

 

    

 

 

 

Total assets

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

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2017

        

Net interest income

   $ 5,140      $ —        $ 5,140  

Provision for loan losses

     445        —          445  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,695        —          4,695  

Noninterest income

     606        598        1,204  

Noninterest expenses

     4,361        395        4,756  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     940        203        1,143  

Income tax expense

     289        67        356  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 651      $ 136      $ 787  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 592,998      $ 2,639      $ 595,637  
  

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

Note 9 – Loans, allowance for loan losses and OREO

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

 

Loan     Loan Classes:  
Segments:      
  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

 

19


Table of Contents

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

 

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

 

     As of:  
     June 30,      December 31,  
     2018      2017  

Commercial

   $ 102,618      $ 96,127  

Commercial real estate

     278,494        251,807  

Consumer

     84,195        83,746  

Residential

     63,111        64,094  
  

 

 

    

 

 

 

Total loans (1)

     528,418        495,774  

Less allowance for loan losses

     4,688        4,752  
  

 

 

    

 

 

 

Net loans

   $ 523,730      $ 491,022  
  

 

 

    

 

 

 

 

(1)

Includes net deferred costs and premiums of $674 and $940 as of June 30, 2018 and December 31, 2017, 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.

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.

 

20


Table of Contents
 

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

 

 

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

 

 

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

 

 

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

 

21


Table of Contents

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

 

Loans on Non-Accrual Status

(dollars in thousands)

 

     As of  
     June 30, 2018      December 31, 2017  

Commercial

   $ 763      $ 727  

Commercial Real Estate:

 

Commercial Mortgages-Owner Occupied

     1,495        1,465  

Commercial Mortgages-Non-Owner Occupied

     210        468  

Commercial Construction

     30        —    

Consumer

     

Consumer Unsecured

     1        —    

Consumer Secured

     390        566  

Residential:

 

  

Residential Mortgages

     252        1,025  

Residential Consumer Construction

     54        58  
  

 

 

    

 

 

 

Totals

   $ 3,195      $ 4,309  
  

 

 

    

 

 

 

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO decreased to $2,585 on June 30, 2018 from $2,650 on December 31, 2017. The following table represents the changes in OREO balance during the six months ended June 30, 2018 and year ended December 31, 2017.

OREO Changes

(dollars in thousands)

 

     Six months ended      Year ended  
     June 30, 2018      December 31, 2017  

Balance at the beginning of the year (net)

   $ 2,650      $ 2,370  

Transfers from loans

     565        815  

Capitalized costs

     —          40  

Valuation adjustments

     (110      (60

Sales proceeds

     (525      (514

Gain (loss) on disposition

     5        (1
  

 

 

    

 

 

 

Balance at the end of the period (net)

   $ 2,585      $ 2,650  
  

 

 

    

 

 

 

At June 30, 2018 and December 31, 2017, the Company had $0 of consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held seven residential real estate properties carried on the books in other real estate owned at a value of $545 as of June 30, 2018 and three residential real estate properties carried on the books at a value of $520 in other real estate owned as of December 31, 2017.

 

22


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

 

     Impaired Loans  
     (dollars in thousands)  
     As of and For the Six months Ended June 30, 2018  
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
2018    Investment      Balance      Allowance      Investment      Recognized  

With No Related Allowance Recorded:

              

Commercial

   $ 755      $ 866      $ —        $ 840      $ 7  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,308        2,408        —          2,368        72  

Commercial Mortgage Non-Owner Occupied

     171        171        —          423        8  

Commercial Construction

     30        713        —          15        —    

Consumer

              

Consumer Unsecured

     —          —          —          —          —    

Consumer Secured

     160        161        —          220        7  

Residential

              

Residential Mortgages

     1,443        1,513        —          1,512        37  

Residential Consumer Construction

     —          —          —          —          —    

With An Allowance Recorded:

              

Commercial

   $ 353      $ 749      $ 168      $ 335      $ 6  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     508        508        72        587        15  

Commercial Mortgage Non-Owner Occupied

     205        205        48        139        6  

Commercial Construction

     —          —          —          85        —    

Consumer

              

Consumer Unsecured

     2        2        2        2        —    

Consumer Secured

     323        330        132        375        6  

Residential

              

Residential Mortgages

     —          —          —          76        —    

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              

Commercial

   $ 1,108      $ 1,615      $ 168      $ 1,175      $ 13  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,816        2,916        72        2,955        87  

Commercial Mortgage Non-Owner Occupied

     376        376        48        562        14  

Commercial Construction

     30        713        —          100        —    

Consumer

              

Consumer Unsecured

     2        2        2        2        —    

Consumer Secured

     483        491        132        595        13  

Residential

              

Residential Mortgages

     1,443        1,513        —          1,588        37  

Residential Consumer Construction

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,258      $ 7,626      $ 422      $ 6,977      $ 164  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

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

 

     Impaired Loans  
     (dollars in thousands)  
     As of and For the Year Ended December 31, 2017  
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
2017    Investment      Balance      Allowance      Investment      Recognized  

With No Related Allowance Recorded:

              

Commercial

   $ 925      $ 1,505      $ —        $ 812      $ 54  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     2,427        2,539        —          2,723        179  

Commercial Mortgage Non-Owner Occupied

     675        690        —          512        30  

Commercial Construction

     —          —          —          —          —    

Consumer

              

Consumer Unsecured

     —          —          —          —          —    

Consumer Secured

     279        283        —          149        11  

Residential

              

Residential Mortgages

     1,580        1,673        —          1,568        63  

Residential Consumer Construction

     —          —          —          —          —    

With An Allowance Recorded:

              

Commercial

   $ 317      $ 323      $ 112      $ 919      $ 16  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     665        665        93        1,126        39  

Commercial Mortgage Non-Owner Occupied

     73        73        18        74        5  

Commercial Construction

     169        695        79        169        —    

Consumer

              

Consumer Unsecured

     2        2        2        1        —    

Consumer Secured

     427        445        255        269        11  

Residential

              

Residential Mortgages

     151        178        4        425        3  

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              

Commercial

   $ 1,242      $ 1,828      $ 112      $ 1,731      $ 70  

Commercial Real Estate

              

Commercial Mortgages-Owner Occupied

     3,092        3,204        93        3,849        218  

Commercial Mortgage Non-Owner Occupied

     748        763        18        586        35  

Commercial Construction

     169        695        79        169        —    

Consumer

              

Consumer Unsecured

     2        2        2        1        —    

Consumer Secured

     706        728        255        418        22  

Residential

              

Residential Mortgages

     1,731        1,851        4        1,993        66  

Residential Consumer Construction

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,690      $ 9,071      $ 563      $ 8,747      $ 411  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Six months Ended June 30, 2018
 
           Commercial                    
2018    Commercial     Real Estate     Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (215     (142     (186     (12     (555

Recoveries

     101       3       50       —         154  

Provision

     356       105       (130     6       337  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,506     $ 1,704     $ 906     $ 572     $ 4,688  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 168     $ 120     $ 134     $ —       $ 422  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,338       1,584       772       572       4,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,506     $ 1,704     $ 906     $ 572     $ 4,688  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,108     $ 3,222     $ 485     $ 1,443     $ 6,258  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     101,510       275,272       83,710       61,668       522,160  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 102,618     $ 278,494     $ 84,195     $ 63,111     $ 528,418  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Year Ended December 31, 2017
 
           Commercial                    
2017    Commercial     Real Estate     Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

   $ 2,192     $ 2,109     $ 954     $ 461     $ 5,716  

Charge-offs

     (1,652     (91     (246     (105     (2,094

Recoveries

     6       41       51       39       137  

Provision

     718       (321     413       183       993  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 112     $ 190     $ 257     $ 4     $ 563  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,152       1,548       915       574       4,189  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,242     $ 4,009     $ 708     $ 1,731     $ 7,690  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     94,885       247,798       83,038       62,363       488,084  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 96,127     $ 251,807     $ 83,746     $ 64,094     $ 495,774  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

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

 

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

Commercial

   $ 114      $ 161      $ 395      $ 670      $ 101,948      $ 102,618      $ —    

Commercial Real Estate:

                    

Commercial Mortgages- Owner Occupied

     493        —          597        1,090        101,027        102,117        —    

Commercial Mortgages-Non-Owner Occupied

     145        130        —          275        162,660        162,935        —    

Commercial Construction

     253        296        30        579        12,863        13,442        —    

Consumer:

                    

Consumer Unsecured

     1        1        —          2        7,619        7,621        —    

Consumer Secured

     307        101        216        624        75,950        76,574        —    

Residential:

                    

Residential Mortgages

     649        127        213        989        54,059        55,048        —    

Residential Consumer Construction

     —          —          54        54        8,009        8,063        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,962      $ 816      $ 1,505      $ 4,283      $ 524,135      $ 528,418      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Age Analysis of Past Due Loans as of  
     December 31, 2017  
     (dollars in thousands)  
                   Greater                           Recorded Investment  
     30-59 Days      60-89 Days      than      Total Past             Total      > 90 Days &  
2017    Past Due      Past Due      90 Days      Due      Current      Loans      Accruing  

Commercial

   $ 320      $ —        $ 250      $ 570      $ 95,557      $ 96,127      $ —    

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     904        64        177        1,145        92,504        93,649        —    

Commercial Mortgages-Non-Owner Occupied

     —          361        299        660        138,101        138,761        —    

Commercial Construction

     —          —          169        169        19,228        19,397        —    

Consumer:

                    

Consumer Unsecured

     3        —          —          3        6,977        6,980        —    

Consumer Secured

     245        139        462        846        75,920        76,766        —    

Residential:

                    

Residential Mortgages

     706        414        532        1,652        51,545        53,197        —    

Residential Consumer Construction

     —          —          58        58        10,839        10,897        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,178      $ 978      $ 1,947      $ 5,103      $ 490,671      $ 495,774      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

 

     Credit Quality Information - by Class  
     June 30, 2018  
     (dollars in thousands)  
2018    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 100,317      $ 723      $ 382      $ 1,196      $ —        $ 102,618  

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

     92,813        2,799        3,634        2,871        —          102,117  

Commercial Mortgages-Non Owner Occupied

     159,790        1,577        1,092        476        —          162,935  

Commercial Construction

     13,412        —          —          30        —          13,442  

Consumer

                 

Consumer Unsecured

     7,606        —          13        2        —          7,621  

Consumer Secured

     75,843        66        89        576        —          76,574  

Residential:

                 

Residential Mortgages

     53,033        —          239        1,776        —          55,048  

Residential Consumer Construction

     8,009        —          —          54        —          8,063  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 510,823      $ 5,165      $ 5,449      $ 6,981      $ —        $ 528,418  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Information - by Class  
     December 31, 2017  
     (dollars in thousands)  
2017    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 93,571      $ 1,217      $ 4      $ 1,335      $ —          96,127  

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

     83,834        2,926        3,734        3,155        —          93,649  

Commercial Mortgages-Non Owner Occupied

     135,855        1,898        152        856        —          138,761  

Commercial Construction

     18,423        —          805        169        —          19,397  

Consumer

                 

Consumer Unsecured

     6,978        —          —          2        —          6,980  

Consumer Secured

     75,774        90        —          902        —          76,766  

Residential:

                 

Residential Mortgages

     50,816        —          241        2,140        —          53,197  

Residential Consumer Construction

     10,839        —          —          58        —          10,897  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 476,090      $ 6,131      $ 4,936      $ 8,617      $ —        $ 495,774  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

Troubled Debt Restructurings (TDR)

There were no loan modifications that would have been classified as TDRs during the three and six months ended June 30, 2018 and 2017.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and six months ended June 30, 2018 and 2017.

At June 30, 2018 and December 31, 2017, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

Note 10 – Revenue Recognition

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

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

Service Charges on Deposit Accounts

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

Fees, Exchange, and Other Service Charges

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

 

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Note 10 – Revenue Recognition (continued)

 

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.

Other

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

Note 11 – Recent accounting pronouncements

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

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

 

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Note 11 – Recent accounting pronouncements (continued)

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments provide targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include clarifications related to: measurement elections, transition requirements, and adjustments associated with equity securities without readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities; presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements for liabilities denominated in a foreign currency for which the fair value option has been elected. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-03 to have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The amendments expand the scope

 

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Note 11 – Recent accounting pronouncements (continued)

 

of Topic 718 to include share-based payments issued to nonemployees for goods or services and supersedes Subtopic 505-50. As a result, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

GENERAL

Critical Accounting Policies

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

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

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

 

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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 for Loan Losses and Loan Loss Reserve” below for further discussion of the allowance for loan losses.

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

Overview

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

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

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

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

 

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

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

Full Service Branches

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

Limited Service Branches

 

   

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

 

   

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

 

   

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

 

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Loan Production Offices

 

   

Residential mortgage loan production office located at the Forest Branch,

 

   

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

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

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

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

 

   

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

 

   

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

 

   

Real property located at 45 South Main Street, Lexington, Virginia. The bank does not anticipate opening a branch at this location prior to 2019.

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

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

 

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and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:

 

     June 30, 2018
(in thousands)
 

Commitments to extend credit

   $ 127,019  

Letters of Credit

     3,034  
  

 

 

 

Total

   $ 130,053  
  

 

 

 

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

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

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

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of June 30, 2018 and December 31, 2017 and the results of operations of Financial for the three and six month periods ended June 30, 2018 and 2017. This discussion should be read in conjunction with the financial statements included elsewhere herein.

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

Financial Condition Summary

June 30, 2018 as Compared to December 31, 2017

Total assets were $655,866,000 on June 30, 2018 compared with $626,341,000 at December 31, 2017, an increase of 4.71%. The increase in total assets was primarily due to growth in the loan portfolio which was funded primarily by the increase in deposits.

Total deposits increased from $567,493,000 as of December 31, 2017 to $596,068,000 on June 30, 2018, an increase of 5.04%. The increase resulted in large part from increases in non-interest bearing demand deposits and an increase in NOW, money market, and savings accounts. NOW, money market, and savings deposits increased from $307,987,000 on December 31, 2017 to $328,082,000 on June 30, 2018. Noninterest bearing demand deposits increased from $74,102,000 on December 31, 2017 to $86,757,000 on June 30, 2018. Time deposits decreased from $185,404,000 on December 31, 2017 to $181,229,000 on June 30, 2018.

 

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Total loans, excluding loans held for sale, increased to $528,418,000 on June 30, 2018 from $495,774,000 on December 31, 2017. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $523,730,000 on June 30, 2018 from $491,022,000 on December 31, 2017, an increase of 6.66%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):

 

     June 30, 2018     December 31, 2017  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 102,618        19.42   $ 96,127        19.39

Commercial Real Estate

     278,494        52.71     251,807        50.79

Consumer

     84,195        15.93     83,746        16.89

Residential

     63,111        11.94     64,094        12.93
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 528,418        100.00   $ 495,774        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (“OREO”) decreased to $5,780,000 on June 30, 2018 from $6,959,000 on December 31, 2017. OREO decreased to $2,585,000 on June 30, 2018 from $2,650,000 on December 31, 2017. This decrease was due in large part to a downward adjustment of the carrying value of certain OREO resulting from a change in appraised value and the Bank’s ability to sell OREO properties during the six months ended June 30, 2018 and was offset in part by new foreclosures during the period. Non-performing loans decreased from $4,309,000 at December 31, 2017 to $3,195,000 at June 30, 2018. As discussed in more detail below under “Results of Operations—Allowance for Loan Losses,” management has provided for the anticipated losses on these loans in the allowance for loan losses. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for loan losses charged against earnings.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2017, the Bank was carrying seven OREO properties on its books at a value of $2,650,000. During the six months ended June 30, 2018, the Bank acquired seven additional OREO properties and disposed of three OREO properties, and as of June 30, 2018 the Bank is carrying eleven OREO properties at a value of $2,585,000. The OREO properties are available for sale and are being actively marketed.

The Bank had loans in the amount of $432,000 at June 30, 2018 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $440,000 at December 31, 2017. None of these TDRs were included in non-accrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year.

Cash and cash equivalents decreased to $33,849,000 on June 30, 2018 from $37,018,000 on December 31, 2017. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). The decrease in cash and cash equivalents was due primarily to an decrease in federal funds sold, the proceeds of which were used to fund loans. In addition, in April, the Bank repaid an FHLB advance in the amount of $10,000,000. Cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

 

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Securities held-to-maturity decreased to $3,706,000 on June 30, 2018 from $5,713,000 on December 31, 2017. This decrease resulted from the maturity of a security with a par value of $2,000,000 during the quarter. Securities available-for-sale, which are carried on the balance sheet at fair market value, decreased to $53,688,000 on June 30, 2018, from $55,312,000 on December 31, 2017. The decrease resulted from the normal amortization of and principal payments on mortgage-backed securities in the available-for-sale portfolio along with a decrease in fair value related to an increase in interest rates. During the six months ended June 30, 2018 the Bank received $1,108,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale and $0 in proceeds from the sale of securities available-for-sale. The Bank purchased $998,000 in securities available-for sale during the same period.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $564,000 at June 30, 2018 and $607,000 at December 31, 2017, a decrease of $43,000. This decrease is attributable to the FHLBA’s redemption of stock as a result of the repayment of the $10,000,000 advance noted above. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Liquidity and Capital

At June 30, 2018, Financial, on a consolidated basis, had liquid assets of $87,537,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $16,638,000 (representing current book value) of the available-for-sale securities are pledged as collateral with $8,183,000 pledged as security for public deposits, and $8,455,000 pledged as security on a line of credit the Bank may draw on from time to time to meet liquidity needs. This line of credit currently has a zero balance. Management believes that liquid assets were adequate at June 30, 2018. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, if additional liquidity is needed, the Bank has the ability to purchase federal funds on the open market, borrow from the FHLBA using loans or investments within the Bank’s portfolio as collateral, and to borrow from the Federal Reserve Bank’s discount window.

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

On January 25, 2017, Financial closed a private placement of unregistered debt securities (the “2017 Offering”) pursuant to which Financial issued $5,000,000 in principal of notes (the “2017 Notes”). The 2017 Notes bear interest at the rate of 4% per year with interest payable quarterly in arrears. The 2017 Notes are to mature on January 24, 2022, but are subject to prepayment in whole or in part on or after January 24, 2018 at Financial’s sole discretion on 30 days written notice to the holders. Of the proceeds, $3,000,000 was injected into the Bank as equity capital in March 2017. The Company left the remaining $2,000,000 at the holding company level for debt service on the 2017 Notes and other general corporate purposes.

At June 30, 2018, the Bank had a leverage ratio of approximately 9.08%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 11.24% and a total risk-based capital ratio of approximately 12.13%. As of June 30, 2018 and December 31, 2017 the Bank’s regulatory capital levels

 

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exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of June 30, 2018 and December 31, 2017:

Bank Level Only Capital Ratios

 

     June 30,      December 31,  
Analysis of Capital (in 000’s)    2018      2017  

Tier 1 capital

     

Common Stock

   $ 3,742      $ 3,742  

Surplus

     22,325        22,325  

Retained earnings

     33,713        31,069  
  

 

 

    

 

 

 

Total Tier 1 capital

   $ 59,780      $ 57,136  
  

 

 

    

 

 

 

Common Equity Tier 1 Capital (CET1)

   $ 59,780      $ 57,136  
  

 

 

    

 

 

 

Tier 2 capital

     

Allowance for loan losses

   $ 4,688      $ 4,752  

Total Tier 2 capital:

   $ 4,688      $ 4,752  
  

 

 

    

 

 

 

Total risk-based capital

   $ 64,468      $ 61,888  
  

 

 

    

 

 

 

Risk weighted assets

   $ 531,673      $ 513,419  

Average total assets

   $ 658,588      $ 626,422  

 

    Actual     Regulatory
Benchmarks
 
                For Capital     For Well  
    June 30,     December 31,     Adequacy     Capitalized  
    2018     2017     Purposes (1)     Purposes  

Capital Ratios:

       

Tier 1 capital to average total assets

    9.08     9.12     4.00     5.00

Common Equity Tier 1 Ratio

    11.24     11.13     7.00     6.50

Tier 1 risk-based capital ratio

    11.24     11.13     8.50     8.00

Total risk-based capital ratio

    12.13     12.05     10.50     10.00

 

(1)

Includes the capital conservation buffer after full phase-in.

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $1,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis at June 30, 2018 would be slightly lower than those of the Bank.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The phase-in period for this rule began in January 2015. Under the final rule, minimum requirements were increased for both the quantity and quality of capital held by banking organizations. The rule included a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The capital conservation buffer began its phase-in on January 1, 2016 at 0.625% and increases by an additional 0.625% annually until it reaches 2.5% on January 1, 2019. This will result in an effective Tier 1 capital ratio of 8.5% upon full implementation. The capital conservation buffer will limit capital distributions, stock redemptions, and certain discretionary bonuses. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and Financial to pay dividends, repurchase shares or pay discretionary bonuses. The rule also 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.

 

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2018 and 2017

Earnings Summary

Financial had net income including all operating segments of $1,300,000 and $2,423,000 for the three and six months ended June 30, 2018, compared to $787,000 and $1,547,000 for the comparable periods in 2017. Basic and diluted earnings per common share for the three and six months ended June 30, 2018 were $0.30 and $0.55, compared to basic and diluted earnings per share of $0.18 and $0.35 for the three and six months ended June 30, 2017.

The increase in net income for the three and six months ended June 30, 2018 as compared to the prior year was due primarily to an increase in net interest income and non-interest income and was partially offset by an increase in non-interest expense. Non-interest expense increased in large part because of the Bank’s continued emphasis on growth in Charlottesville, Harrisonburg, and Roanoke. These efforts resulted in increases in personnel, professional, data processing, and other outside expenses.

Also as discussed below under Income Taxes, the reduction in both income tax expense and the effective rate due to the passage of the Tax and Jobs Act of 2017 contributed to the increase in net income for the three and six months ended June 30, 2018 as compared to the same periods in 2017.

These operating results represent an annualized return on average stockholders’ equity of 9.67% and 9.15% for the three and six months ended June 30, 2018, compared with 6.13% and 6.09% for the three and six months ended June 30, 2017. This increase for the three and six months was a direct result of the increase in net income. The Company had an annualized return on average assets of 0.79% and 0.76% for the three and six months ended June 30, 2018 compared with 0.54% and 0.54% for the same periods in 2017. The increase for the three and six months ended June 30, 2018 largely resulted from an increase in net income.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $6,725,000 and $12,880,000 for the three and six months ended June 30, 2018 from $5,851,000 and $11,360,000 for the same periods in 2017, increases of 14.94% and 13.38%, respectively. Interest income increased primarily because of increased balances in the loan portfolio and increases in interest rates tied to floating rate loans. The average rate received on earning assets increased from 4.26% and 4.21% to 4.33% and 4.27% for the three and six months ended June 30, 2018 from the comparable periods in 2017. The rate on total average earning assets increased for the three and six months ended June 30, 2018 as compared to the three and six months ended June 30, 2017 primarily because of multiple short term rate increases by the FOMC, which, as noted above, resulted in an increase in the rates paid by borrowers on floating rate loans.

Interest expense increased to $922,000 and $1,746,000 for the three and six months ended June 30, 2018 from $711,000 and $1,382,000 for the same periods in 2017, increases of 29.68% and $26.34%. The increase in interest expense resulted primarily from an increase on the rates paid on and balances of deposits. The Bank’s average rate paid on interest bearing deposits was 0.69% and 0.70% during the three and six month periods ended June 30, 2018 as compared to 0.63% and 0.63% for the same periods in 2017.

 

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The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and six months ended June 30, 2018 was $5,803,000 and $11,134,000 as compared to $5,140,000 and $9,978,000 for the same periods in 2017, increases of 12.90% and 11.59%. The increase in net interest income for the three and six months ended June 30, 2018 as compared with the comparable periods in 2017 primarily is attributable to the increase in interest income resulting from increased loan balances and the previously discussed increase in short term rates by the FOMC. The net interest margin was 3.74% and 3.69% for the three and six months ended June 30, 2018 as compared with 3.74% and 3.70% for the same periods in 2017.

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

Non-Interest Income

Non-interest income is comprised primarily of fees and charges on transactional deposit accounts, gains on sales of mortgage loans held for sale, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income increased to $1,441,000 and $2,627,000 for the three and six months ended June 30, 2018 from $1,204,000 and $2,065,000 for the three and six months ended June 30, 2017.

This increase for the three and six months ended June 30, 2018 as compared to the same periods last year was due primarily due to an increase in gains on sales of loans held for sale from $598,000 and $969,000 for the three and six months ended June 30, 2017 to $873,000 and $1,493,000 for the period ended June 30, 2018 as well slight increases in service charges, fees, and commissions from the comparable periods ended June 30, 2017.

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 $25,400,000 and $41,485,000, or 76.14% and 70.91% of the total mortgage loans originated in the three and six months ended June 30, 2018 as compared to $16,179,000 and $22,201,000, or 76.67% and 65.15%% of the total mortgage loans originated in the same periods in 2017. The increase in the volume of purchase mortgage originations for the three and six months of 2018 resulted from the Bank’s increased presence in the Charlottesville, Harrisonburg, Roanoke, and recently, Blacksburg markets as well as continually favorable longer-term interest rates. However, despite the increase in longer-term rates, refinancing activity continued primarily due to the relatively low interest rate environment as compared to long-term historical interest rate levels. Management anticipates that purchase mortgage originations going forward will represent a majority of mortgage originations as they have in the recent past.

Management anticipates that residential mortgage rates will remain stable or trend upward during the remainder of 2018. Management expects that the Mortgage division’s reputation in Region 2000, steady residential real estate inventory and the recent hiring of additional mortgage loan originators in Roanoke, Harrisonburg and Charlottesville, and Blacksburg, will result in strong mortgage originations through the remainder of 2018. In addition, Management believes that regulatory pressure may result in a decreased number of competitors to the Mortgage division and this could result in an increase in market share. Management also believes that in the event that interest rates rise, revenue from the mortgage segment could be under pressure.

 

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Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s impact on noninterest income will remain immaterial in 2018.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three full-time employees that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2018.

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2018 increased to $5,306,000 and $10,403,000 from $4,756,000 and $9,253,000, increases of 11.56% and 12.43% from the comparable periods in 2017. This increase resulted from increases for personnel expense primarily related to the expansion into Charlottesville, Harrisonburg, and Roanoke, as well as increases in professional fees, data processing and outside expenses, and other real estate expense. Total personnel expense was $2,832,000 and $5,545,000 for the three and six month periods ended June 30, 2018 as compared to $2,396,000 and $4,776,000 for the same periods in 2017.

Allowance and Provision for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision for the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon two components – specific impairment and general reserves. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due as well as all TDRs, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the loan loss calculation, the Bank provided $315,000 and $337,000 to the allowance for loan losses for the three and six month periods ended June 30, 2018. This compares to provisions of $445,000 and $545,000 for the comparable periods in 2017, representing decreases of 29.21% and 38.17%.

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 $315,000 and $555,000 for the three and six months ended June 30, 2018 as compared to $96,000 and $226,000 for the comparable periods in 2017. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three and six months ended June 30, 2018, the Bank had recoveries of charged-off loans of $17,000 and $154,000 as compared with $67,000 and $97,000 for the comparable periods in 2017.

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. As set forth in the tables below, the Bank’s allowance arising from the specific impairment evaluation as of June 30, 2018 decreased slightly as compared to December 31, 2017.

 

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For the three and six months ended June 30, 2018, the Bank had a minimal change in asset quality from December 31, 2017. As shown in the table below, the total balance in the allowance decreased, from $4,752,000 as of December 31, 2017 to $4,688,000 on June 30, 2018. The allowance for loan losses as a percent of loans decreased to 0.89% as of June 30, 2018 from 0.96% as of December 31, 2017 due to an increase in the Bank’s loan balances and the slight decrease in the reserve. Increased loan balances during the quarter led to an increase in the balance of the general reserve as of June 30, 2018 as compared to December 31, 2017, but this increase was more than offset by a decrease in specific reserves when comparing the same periods. The allowance for loan losses as a percent of unimpaired loans decreased to 0.82% as of June 30, 2018 from 0.86% as of December 31, 2017 due to decrease in the amount of the reserve associated with home equity lines of credit. The allowance for loan losses as a percentage of unimpaired loans primarily decreased from the prior year end based on management’s updated evaluation of the underlying factors measured in the qualitative portion of the general reserve, taking into consideration asset quality as well as the other metrics evaluated in the analysis. Management believes that the current allowance for loan losses is adequate.

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

 

    

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

 
     As of and For the Six Months Ended June 30, 2018  
2018    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

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

Charge-offs

     (215     (142     (186     (12     (555

Recoveries

     101       3       50       —         154  

Provision

     356       105       (130 )(1)      6       337  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,506     $ 1,704     $ 906     $ 572     $ 4,688  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 168     $ 120     $ 134     $ —       $ 422  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,338       1,584       772       572       4,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 1,506     $ 1,704     $ 906     $ 572     $ 4,688  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,108     $ 3,222     $ 485     $ 1,443     $ 6,258  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     101,510       275,272       83,710       61,668       522,160  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 102,618     $ 278,494     $ 84,195     $ 63,111     $ 528,418  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The experience within the historical charge-off period used to calculate the allowance has improved which reduced the need for a provision relating to this segment.

 

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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, 2017  
2017    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning Balance

   $ 2,192     $ 2,109     $ 954     $ 461     $ 5,716  

Charge-offs

     (1,652     (91     (246     (105     (2,094

Recoveries

     6       41       51       39       137  

Provision

     718       (321 )(1)      413       183       993  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 112     $ 190     $ 257     $ 4     $ 563  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,152       1,548       915       574       4,189  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending Balance: Individually evaluated for impairment

   $ 1,242     $ 4,009     $ 708     $ 1,731     $ 7,690  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     94,885       247,798       83,038       62,363       488,084  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 96,127     $ 251,807     $ 83,746     $ 64,094     $ 495,774  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2)

The experience within the historical charge-off period used to calculate the allowance has improved which reduced the need for a provision relating to this segment.

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

 

     Three months ended
June 30,
(in thousands)
     Six months ended
June 30,
(in thousands)
 
     2018      2017      2018      2017  

Balance, beginning of period

   $ 4,671      $ 5,716      $ 4,752      $ 5,716  

Provision for loan losses

     315        445        337        545  

Loans charged off

     (315      (96      (555      (226

Recoveries of loans charged off

     17        67        154        97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (charge offs)

     (298      (29      (401      (129
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 4,688      $ 6,132      $ 4,688      $ 6,132  
  

 

 

    

 

 

    

 

 

    

 

 

 

No nonaccrual loans were excluded from the impaired loan disclosures at June 30, 2018 and December 31, 2017. If interest on these loans had been accrued, such income cumulatively would have approximated $381,000 and $472,000 on June 30, 2018 and December 31, 2017, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

 

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

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

 

RATING 1

 

Excellent

RATING 2

 

Above Average

RATING 3

 

Satisfactory

RATING 4

 

Acceptable / Low Satisfactory

RATING 5

 

Monitor

RATING 6

 

Special Mention

RATING 7

 

Substandard

RATING 8

 

Doubtful

RATING 9

 

Loss

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

 

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

Income Taxes

For the three and six months ended June 30, 2018, Financial had an income tax expense of $323,000 and $598,000 as compared to $356,000 and $698,000 for the three and six months ended June 30, 2017. This represents an effective tax rate of 19.90% and 19.79% for the three and six months ended June 30, 2018 as compared with 31.15% and 31.09% for the three and six months ended June 30, 2017. Our effective rate was lower than the statutory corporate tax rate in both quarters because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance and certain tax free municipal securities. The decrease in the expense, despite an increase in net income, as well as the decrease in the effective rate from June 30, 2017 is due to the decrease in our applicable corporate income tax rate following the passage of the Tax and Jobs Act of 2017 from 34% in the 2017 periods to 21% in the 2018 periods.

 

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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended June 30, 2018 and 2017

(dollars in thousands)

 

     2018     2017  
    

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates Earned/

Paid

   

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates

Earned/

Paid

 

ASSETS

              

Loans, including fees (1) (2)

   $ 523,634     $ 6,158        4.72   $ 477,512     $ 5,440        4.57

Loans held for sale

     3,706       37        4.00     2,347       25        4.27

Fed funds sold

     20,432       92        1.81     9,103       23        1.01

Interest bearing bank balances

     12,595       56        1.78     7,000       17        0.97

Securities (3)

     60,959       359        2.36     54,130       323        2.39

Federal agency equities

     1,514       23        6.09     1,344       28        8.36

CBB equity

     116       —          —         116       —          —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     622,956       6,725        4.33     551,552       5,856        4.26
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (4,662          (5,742     

Non-earning assets

     42,284            42,357       
  

 

 

        

 

 

      

Total assets

   $ 660,578          $ 588,167       
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 210,539     $ 189        0.36   $ 142,254     $ 117        0.33

Savings

     103,065       42        0.16     108,019       58        0.22

Time deposits

     182,790       625        1.37     169,336       486        1.15
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     496,394       856        0.69     419,609       661        0.63

Other borrowed funds

              

Repurchase agreements

     —         —          —         275       —          —    

FHLB borrowings

     3,187       16        2.01     —         —          —    

Capital Notes

     5,000       50        4.00     5,000       50        4.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     504,581       922        0.73     424,884       711        0.67
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     100,985            110,878       

Other liabilities

     1,099            922       
  

 

 

        

 

 

      

Total liabilities

     606,665            536,684       

Stockholders’ equity

     53,913            51,483       
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $ 660,578          $ 588,167       
  

 

 

        

 

 

      

Net interest income

     $ 5,803          $ 5,145     
    

 

 

        

 

 

    

Net interest margin

          3.74          3.74
       

 

 

        

 

 

 

Interest spread

          3.60          3.59
       

 

 

        

 

 

 

 

(1)

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

(2)

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

(3)

The interest income and yields calculated on securities have been tax affected to reflect any tax exempt interest on municipal securities. Assumed income tax rates of 21% and 34% were used for the second quarter of 2018 and 2017, respectively.

 

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Net Interest Margin Analysis

Average Balance Sheets

For the Six Months Ended June 30, 2018 and 2017

(dollars in thousands)

 

     2018     2017  
    

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates Earned/

Paid

   

Average

Balance

Sheet

   

Interest

Income/

Expense

    

Average

Rates

Earned/

Paid

 

ASSETS

              

Loans, including fees (1) (2)

   $ 510,479     $ 11,807        4.66   $ 473,779     $