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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 March 31, 2021

 

 

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Virginia   001-35402   20-0500300

(State or other jurisdiction of

incorporation or organization)

  (Commission file number)  

(I.R.S. Employer

Identification No.)

 

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

(434) 846-2000

(Registrant’s telephone number, including area code)

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

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

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

 

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

 

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,324,836 shares of Common Stock, par value $2.14 per share, were outstanding at May 12, 2021.

 

 

 


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      36  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      60  

Item 4.

  Controls and Procedures      60  

PART II – OTHER INFORMATION

     61  

Item 1.

  Legal Proceedings      61  

Item 1A.

  Risk Factors      61  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      61  

Item 3.

  Defaults Upon Senior Securities      62  

Item 4.

  Mine Safety Disclosures      62  

Item 5.

  Other Information      62  

Item 6.

  Exhibits      63  

SIGNATURES

     63  

 


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) (2021 unaudited)

 

Assets    March 31,
2021
    December 31,
2020
 

Cash and due from banks

   $  33,725     $  31,683  

Federal funds sold

     90,325       69,203  
  

 

 

   

 

 

 

Total cash and cash equivalents

     124,050       100,886  

Securities held-to-maturity (fair value of $3,948 in 2021 and $4,192 in 2020)

     3,667       3,671  

Securities available-for-sale, at fair value

     99,832       90,185  

Restricted stock, at cost

     1,551       1,551  

Loans, net of allowance for loan losses of $7,106 in 2021 and $7,156 in 2020

     606,485       601,934  

Loans held for sale

     4,150       7,102  

Premises and equipment, net

     17,228       16,982  

Interest receivable

     2,256       2,350  

Cash value—bank owned life insurance

     16,453       16,355  

Other real estate owned

     761       1,105  

Other assets

     9,927       9,265  
  

 

 

   

 

 

 

Total assets

   $  886,360     $  851,386  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest bearing demand

   $  158,469     $  143,345  

NOW, money market and savings

     497,191       463,506  

Time

     145,530       158,116  
  

 

 

   

 

 

 

Total deposits

     801,190       764,967  

Capital notes

     10,029       10,027  

Interest payable

     64       85  

Other liabilities

     9,743       9,575  
  

 

 

   

 

 

 

Total liabilities

   $  821,026     $  784,654  
  

 

 

   

 

 

 

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 4,324,836 and 4,339,436 as of March 31, 2021 and December 31, 2020

     9,255       9,286  

Additional paid-in-capital

     30,808       30,989  

Retained earnings

     26,196       24,665  

Accumulated other comprehensive (loss) income

     (925     1,792  
  

 

 

   

 

 

 

Total stockholders’ equity

   $  65,334     $  66,732  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $  886,360     $  851,386  
  

 

 

   

 

 

 

 

 

See accompanying notes to these consolidated financial statements

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Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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

 

     For the Three Months Ended
March 31,
 
     2021      2020  

Interest Income

     

Loans

   $  6,860      $  7,005  

Securities

     

US Government and agency obligations

     191        187  

Mortgage backed securities

     77        59  

Municipals—taxable

     143        75  

Municipals—tax exempt

     10        —    

Dividends

     6        9  

Other (Corporates)

     50        23  

Interest bearing deposits

     14        64  

Federal Funds sold

     14        66  
  

 

 

    

 

 

 

Total interest income

     7,365        7,488  
  

 

 

    

 

 

 

Interest Expense

     

Deposits

     

NOW, money market savings

     135        326  

Time Deposits

     373        946  

Finance leases

     27        30  

Capital notes

     82        50  
  

 

 

    

 

 

 

Total interest expense

     617        1,352  
  

 

 

    

 

 

 

Net interest income

     6,748        6,136  

Provision for loan losses

     —          888  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     6,748        5,248  
  

 

 

    

 

 

 

Noninterest income

     

Gain on sales of loans held for sale

     1,774        1,177  

Service charges, fees and commissions

     554        488  

Life insurance income

     98        78  

Other

     8        12  

Gain on sales and calls of securities, net

     —          431  
  

 

 

    

 

 

 

Total noninterest income

     2,434        2,186  
  

 

 

    

 

 

 

Noninterest expenses

     

Salaries and employee benefits

     3,732        3,354  

Occupancy

     428        436  

Equipment

     626        609  

Supplies

     118        127  

Professional, data processing, and other outside expense

     914        924  

Marketing

     273        136  

Credit expense

     276        196  

Other real estate expenses

     66        99  

FDIC insurance expense

     165        57  

Other

     291        259  
  

 

 

    

 

 

 

Total noninterest expenses

     6,889        6,197  
  

 

 

    

 

 

 

Income before income taxes

     2,293        1,237  

Income tax expense

     458        242  
  

 

 

    

 

 

 

Net Income

   $  1,835      $  995  
  

 

 

    

 

 

 

Weighted average shares outstanding—basic

     4,333,274        4,348,040  
  

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     4,333,274        4,348,040  
  

 

 

    

 

 

 

Earnings per common share—basic

   $  0.42      $  0.23  
  

 

 

    

 

 

 

Earnings per common share—diluted

   $  0.42      $  0.23  
  

 

 

    

 

 

 

 

See accompanying notes to these consolidated financial statements

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Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands) (unaudited)

 

     For the Three Months
Ended March 31,
 
     2021     2020  

Net Income

   $  1,835   $  995
  

 

 

   

 

 

 

Other comprehensive (loss) income:

    

Unrealized gains on securities available-for-sale

     (3,439     2,287

Tax effect

     722     (480

Reclassification adjustment for gains included in net income (1)

     —         (431

Tax effect (2)

     —         91
  

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (2,717     1,467
  

 

 

   

 

 

 

Comprehensive (loss) income

   $  (882   $  2,462
  

 

 

   

 

 

 

 

(1)

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

(2)

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

See accompanying notes to these consolidated financial statements

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2021 and 2020

(dollar amounts in thousands) (unaudited)

 

     For the Three Months Ended March 31,  
     2021     2020  

Cash flows from operating activities

    

Net Income

   $  1,835   $  995

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

    

Depreciation and amortization

     506     504

Stock based compensation expense

     27     27

Net amortization and accretion of premiums and discounts on securities

     628     100

Amortization of debt issuance costs

     2     —    

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

     —         (431

(Gain) on sales of loans held for sale

     (1,774     (1,177

Proceeds from sales of loans held for sale

     82,424     46,037

Origination of loans held for sale

     (77,698     (46,773

Provision for loan losses

     —         888

Loss (gain) on sale of other real estate owned

     66     (6

Impairment of other real estate owned

     —         102

Bank owned life insurance income

     (98     (78

Decrease (increase) in interest receivable

     94     (56

(Increase) decrease in other assets

     (65     39

(Decrease) increase in interest payable

     (21     3

Increase in other liabilities

     245     17
  

 

 

   

 

 

 

Net cash provided by operating activities

   $  6,171   $  191
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of securities available-for-sale

   $  (14,543   $  (8,259)  

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

     833     495

Proceeds from sale of securities available-for-sale

     —         14,619

Purchases of bank owned life insurance

     —         (2,750

Life insurance proceeds

     —         588

Proceeds from sale of other real estate owned

     344     500

Origination of loans, net of principal collected

     (4,617     1,709

Purchases of premises and equipment

     (627     (159
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

   $  (18,610   $  6,743
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

   $  36,223   $  18,811

Principal payments on finance lease obligations

     (104     (80

Repurchase of common stock

     (212     (275

Dividends paid to common stockholders

     (304     (304
  

 

 

   

 

 

 

Net cash provided by financing activities

   $  35,603   $  18,152
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     23,164     25,086

Cash and cash equivalents at beginning of period

   $  100,886   $  39,111
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $  124,050   $  64,197
  

 

 

   

 

 

 

Non cash transactions

    

Transfer of loans to other real estate owned

   $  66   $  18

Fair value adjustment for securities available-for-sale

     (3,439     1,856

Cash transactions

    

Cash paid for interest

   $  638   $  1,349

Cash paid for income taxes

     —         —    

 

 

See accompanying notes to these consolidated financial statements

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2021 and 2020

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

 

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

Balance at December 31, 2019

     4,357,436      $  9,325      $  31,225      $  20,900      $  (5)      $  61,445  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     —          —          —          995        —          995  

Dividends paid on common stock ($0.28 per share)

     —          —          —          (304)        —          (304)  

Repurchase of common stock

     (18,000)        (39)        (236)        —          —          (275)  

Other comprehensive income

     —          —          —          —          1,467        1,467  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2020

     4,339,436      $  9,286      $  30,989      $  21,591      $  1,462      $  63,328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2020

     4,339,436      $  9,286      $  30,989      $  24,665      $  1,792      $  66,732  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     —          —          —          1,835        —          1,835  

Dividends paid on common stock ($0.28 per share)

     —          —          —          (304)        —          (304)  

Repurchase of common stock

     (14,600)        (31)        (181)        —          —          (212)  

Other comprehensive (loss)

     —          —          —          —          (2,717)        (2,717)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2021

     4,324,836      $  9,255      $  30,808      $  26,196      $ (925)      $  65,334  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to these consolidated financial statements

 

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Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of March 31, 2021 and 2020 and for the three months ended March 31, 2021 and 2020 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, 2020. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2020 included in Financial’s Annual Report on Form 10-K. Results for the three month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Certain immaterial reclassifications have been made to prior period balances to conform to the current period presentation.

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

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

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

 

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Note 2 – Use of Estimates

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

Note 3 – Earnings Per Common Share (EPS)

The following is a summary of the earnings per share calculation for the three months ended March 31, 2021 and 2020.

 

     Three Months Ended  
     March 31,  
     2021      2020  

Net income

   $  1,835,000      $  995,000  

Weighted average number of shares

     4,333,274        4,348,040  

Restricted stock units/stock options affect of incremental shares

     —          —    
  

 

 

    

 

 

 

Weighted average diluted shares

     4,333,274        4,348,040  
  

 

 

    

 

 

 

Basic EPS (weighted avg shares)

   $  0.42      $  0.23  
  

 

 

    

 

 

 

Diluted EPS (including incremental shares)

   $  0.42      $  0.23  
  

 

 

    

 

 

 

In 2021 and 2020, all restricted stock units (RSUs) were excluded from calculating diluted earnings per share as the Company elected to settle units vesting in 2021 and 2020 wholly in cash. Going forward, management has adopted a cash settlement policy for all currently outstanding RSUs. Prior to 2020, the presumption was that the shares would be settled in common stock and the RSUs were included in the calculation of diluted EPS. There were no potentially dilutive shares excluded from the 2021 and 2020 earnings per share calculation because they were anti-dilutive.

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.

 

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Note 4 – Stock Based Compensation (continued)

 

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

On January 2, 2019, the Company granted its first block of equity compensation under the 2018 Incentive Plan consisting of 24,500 restricted stock units. The recipients of restricted stock units do not receive shares of the Company’s stock immediately, but instead may receive shares, cash in lieu of shares, or a combination thereof upon satisfying the requisite service period specified by the terms and conditions of the grant. Additionally, the recipients of restricted stock units do not enjoy the rights of holder of the Company’s common stock until the units have vested and as such, they do not have voting rights or rights to nonforfeitable dividends. The related compensation expense is based on the fair value of the Company’s stock. RSUs vest over 3 years in thirds with the first one-third vesting on January 2, 2020. The value of the first one-third vested portion of the grant was settled with cash payments and no shares were issued.

The total expense recognized for the three months ended March 31, 2021 and 2020, in connection with the restricted stock unit awards was approximately $27,000 in each of the periods. There were no forfeitures during the three month period ending March 31, 2021.

At March 31, 2021, the unrecognized stock-based compensation expense related to unvested restricted stock units amounted to approximately $80,000. The unrecognized expense will be recognized ratably over the remaining vesting period of 0.75 years. The Company accounts for forfeitures as they occur.

Note 5 – Fair Value Measurements

Determination of Fair Value

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

 

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Note 5 – Fair Value Measurements (continued)

 

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

Fair Value Hierarchy

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

 

   

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

 

   

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

 

   

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

Fair Value on a Recurring Basis

Securities Available-for-Sale

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

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

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

 

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Note 5 – Fair Value Measurements (continued)

 

Derivatives Assets/Liabilities – Interest Rate Lock Commitments (IRLCs)

The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 3.

 

            Carrying Value at March 31, 2021 (in
thousands)
 

Description

   Balance as
of

March 31,
2021
     Quoted Prices
in Active
Markets for
Identical
Assets

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

US Treasuries

   $ 2,022      $  —        $ 2,022      $  —    

US agency obligations

     46,751        —          46,751        —    

Mortgage-backed securities

     16,488        —          16,488        —    

Municipals

     28,250        —          28,250        —    

Corporates

     6,321        —          6,321        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 99,832      $ —        $  99,832      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

IRLCs—asset

     262        —          —          262  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $  100,094      $ —        $ 99,832      $ 262  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Carrying Value at December 31, 2020 (in thousands)  

Description

   Balance as of
December 31,
2020
     Quoted Prices
in Active
Markets for
Identical
Assets

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

US Treasuries

   $ 2,027      $ —        $ 2,027      $ —    

US agency obligations

     41,320        —          41,320        —    

Mortgage-backed securities

     15,696        —          15,696        —    

Municipals

     24,773        —          24,773        —    

Corporates

     6,369        —          6,369        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $  90,185      $  —        $  90,185      $  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

IRLCs – asset

     425        —          —          425  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 90,610      $ —        $ 90,185      $ 425  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

Note 5 – Fair Value Measurements (continued)

 

The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:

 

 

     Quantitative information about Level 3 Fair Value Measurements for March 31,  2021
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range (Weighted

Average) (1)

Assets

           

IRLCs—asset

   $  262      Market approach    Range of pull through rate    70%—100% (85%)

 

(1)

Weighted based on the relative value of the instruments

     Quantitative information about Level 3 Fair Value Measurements for December 31,  2020
(dollars in thousands)
     Fair Value     

Valuation
Technique(s)

  

Unobservable Input

  

Range
(Weighted
Average) (1)

Assets

           

IRLCs—asset

   $  425      Market approach    Range of pull through rate    70%—100% (85%)

 

(1)

Weighted based on the relative value of the instruments

Fair Value on a Non-recurring Basis

Impaired loans

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

 

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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 March 31, 2021. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale, net on the Consolidated Statements of Income.

Other real estate owned

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

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

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

 

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Note 5 – Fair Value Measurements (continued)

 

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

 

            Carrying Value at March 31, 2021  

Description

   Balance as of
March 31,
2021
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans*

   $  1,842      $  —        $  —        $  1,842  

Other real estate owned

     761        —          —          761  

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

 

            Carrying Value at December 31, 2020  

Description

   Balance as of
December 31,
2020
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans*

   $  1,829      $  —        $  —        $  1,829  

Other real estate owned

     1,105        —          —          1,105  

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

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

 

     Quantitative information about Level 3 Fair Value Measurements for March 31, 2021
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range (Weighted

Average) (1)

Assets

           

Impaired loans

   $  1,842      Discounted appraised value    Selling cost    0%—10% (8%)
         Discount for lack of marketability and age of appraisal    0%—20% (6%)

OREO

     761      Discounted appraised value    Selling cost    10%
         Discount for lack of marketability and age of appraisal    0%—25% (15%)

 

(1)

Weighted based on the relative value of the instruments.

 

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Note 5 – Fair Value Measurements (continued)

 

     Quantitative information about Level 3 Fair Value Measurements for December 31, 2020
(dollars in thousands)
     Fair
Value
    

Valuation Technique(s)

  

Unobservable Input

  

Range (Weighted

Average) (1)

Assets

           

Impaired loans

   $  1, 829      Discounted appraised value    Selling cost    0%—10% (8%)
        

Discount for lack of marketability and age of appraisal

   0%—20% (6%)

OREO

     1,105      Discounted appraised value    Selling cost    10%
        

Discount for lack of marketability and age of appraisal

   0%—25% (15%)

 

(1)

Weighted based on the relative value of the instruments.

Financial Instruments

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

 

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Table of Contents

Note 5 – Fair Value Measurements (continued)

 

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments and their placement in the fair value hierarchy at March 31, 2021 and December 31, 2020 was as follows (in thousands):

 

       Fair Value Measurements at March 31, 2021 using  
            Quoted Prices      Significant                
            in Active      Other      Significant         
            Markets for      Observable      Unobservable         
     Carrying      Identical Assets      Inputs      Inputs         
Assets    Amounts      (Level 1)      (Level 2)      (Level 3)      Balance  

Cash and due from banks

   $ 33,725      $ 33,725      $ —        $ —        $ 33,725  

Fed funds sold

     90,325        90,325        —          —          90,325  

Securities

              

Available-for-sale

     99,832        —          99,832        —          99,832  

Held-to-maturity

     3,667        —          3,948        —          3,948  

Restricted stock

     1,551           1,551        —          1,551  

Loans, net (1)

     606,485        —          —          614,956        614,956  

Loans held for sale

     4,150        —          4,150        —          4,150  

Interest receivable

     303        —          303        —          303  

BOLI

     16,453        —          16,453        —          16,453  

Derivatives—IRLCs

     262        —          —          262        262  

Liabilities

              

Deposits

   $ 801,190      $ —        $ 802,071      $ —        $ 802,071  

Capital notes

     10,029        —          9,058        —          9,058  

Interest payable

     64        —          64        —          64  

 

            Fair Value Measurements at December 31, 2020 using  
            Quoted Prices      Significant                
            in Active      Other      Significant         
            Markets for      Observable      Unobservable         
     Carrying      Identical Assets      Inputs      Inputs         
Assets    Amounts      (Level 1)      (Level 2)      (Level 3)      Balance  

Cash and due from banks

   $ 31,683      $ 31,683      $ —        $ —        $ 31,683  

Fed funds sold

     69,203        69,203        —          —          69,203  

Securities

              

Available-for-sale

     90,185        —          90,185        —          90,185  

Held-to-maturity

     3,671        —          4,192        —          4,192  

Restricted stock

     1,551        —          1,551        —          1,551  

Loans, net

     601,934        —          —          598,745        598,745  

Loans held for sale

     7,102        —          7,102        —          7,102  

Interest receivable

     2,350        —          2,350        —          2,350  

BOLI

     16,355        —          16,355        —          16,355  

Derivatives—IRLCs

     425        —          —          425        425  

Liabilities

              

Deposits

   $ 764,967      $ —        $ 766,212      $ —        $ 766,212  

Capital notes

     10,027        —          9,003        —          9,003  

Interest payable

     85        —          85        —          85  

 

(1)

Carrying amount is net of unearned income and the Allowance.

 

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Note 6—Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2021 and December 31, 2020 (amounts in thousands):

 

     March 31, 2021  
     Amortized      Gross Unrealized      Fair Value  
     Costs      Gains      (Losses)         

Held-to-Maturity

           

US agency obligations

   $ 3,667      $ 281      $ —        $ 3,948  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US Treasuries

     2,000        22        —          2,022  

US agency obligations

     47,427        649        (1,325      46,751  

Mortgage-backed securities

     16,646        149        (307      16,488  

Municipals

     28,864        336        (950      28,250  

Corporates

     6,066        255        —          6,321  
  

 

 

    

 

 

    

 

 

    

 

 

 
     $101,003      $1,411      $(2,582)      $99,832  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2020  
     Amortized      Gross Unrealized      Fair Value  
     Costs      Gains      (Losses)         

Held-to-Maturity

           

US agency obligations

   $ 3,671      $ 521      $ —        $ 4,192  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale

           

US Treasuries

   $ 2,000      $ 27      $ —        $ 2,027  

US agency obligations

     40,111        1,544        (335      41,320  

Mortgage-backed securities

     15,461        241        (6      15,696  

Municipals

     24,275        594        (96      24,773  

Corporates

     6,070        299        —          6,369  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 87,917      $ 2,705      $ (437    $ 90,185  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 6 – Securities (continued)

 

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2021 and December 31, 2020 (amounts in thousands):

 

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

March 31, 2021

   Value      Losses      Value      Losses      Value      Losses  

Description of securities

                 

Held-to-maturity

                 

US agency obligations

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

Available-for-sale

                 

US Treasuries

     —          —          —          —          —          —    

US agency obligations

     25,166        1,325        —          —          25,166        1,325  

Mortgage-backed securities

     10,750        307        —          —          10,750        307  

Municipals

     17,178        950        —          —          17,178        950  

Corporates

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 53,094      $ 2,582      $ —        $ —        $ 53,094      $ 2,582  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

Less than 12 months

     More than 12 months      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

December 31, 2020

   Value      Losses      Value      Losses      Value      Losses  

Description of securities

                 

Held-to-maturity

                 

US agency obligations

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

Available-for-sale

                 

US Treasuries

     —          —          —          —          —          —    

US agency obligations

     15,808        335        —          —          15,808        335  

Mortgage-backed securities

     8,201        6        —          —          8,201        6  

Municipals

     8,202        96        —          —          8,202        96  

Corporates

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,211      $ 437      $ —        $ —        $ 32,211      $ 437  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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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Table of Contents

Note 6 – Securities (continued)

 

At March 31, 2021, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of March 31, 2021, the Bank owned 36 securities in an unrealized loss position that were being evaluated for other than temporary impairment. Thirteen of these securities was S&P rated AAA and 23 were rated AA. As of March 31, 2021, 20 of these securities were municipal issues and 16 were backed by the US government.

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

There were no sales of available-for-sale securities during the three months ended March 31, 2021 as compared to $14,619 in sales during the same periods in 2020. In 2020, there were gross gains on sales of available-for-sale securities of $431 during the three month periods ended March 31, 2020. There were no sales of held-to-maturity securities during the three month periods ended March 31, 2021 and 2019.

Note 7 – Business Segments

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

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

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three months ended March 31, 2021 and 2020 was as follows (dollars in thousands):

 

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Table of Contents

Note 7 – Business Segments (continued)

 

Business Segments

 

     Community                
     Banking      Mortgage      Total  

For the three months ended March 31, 2021

        

Net interest income

   $ 6,748      $ —        $ 6,748  

Provision for loan losses

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     6,748        —          6,748  

Noninterest income

     660        1,774        2,434  

Noninterest expenses

     5,504        1,385        6,889  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,904        389        2,293  

Income tax expense

     376        82        458  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,528      $ 307      $ 1,835  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 881,535      $ 4,825      $ 886,360  
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2020

        

Net interest income

   $ 6,136      $ —        $ 6,136  

Provision for loan losses

     888        —          888  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,248        —          5,248  

Noninterest income

     1,009        1,177        2,186  

Noninterest expenses

     5,340        857        6,197  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     917        320        1,237  

Income tax expense

     175        67        242  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 742      $ 253      $ 995  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 739,651      $ 6,404      $ 746,055  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 8 – Loans, allowance for loan losses and OREO

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

 

Loan Segments:    Loan Classes:

Commercial

  

Commercial and industrial loans

Commercial real estate

  

Commercial mortgages – owner occupied

  

Commercial mortgages – non-owner occupied

  

Commercial construction

Consumer

  

Consumer unsecured

  

Consumer secured

Residential

  

Residential mortgages

  

Residential consumer construction

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

 

     As of:  
     March 31,      December 31,  
     2021      2020  

Commercial

   $ 155,235      $ 145,145  

Commercial real estate

     311,826        309,563  

Consumer

     90,496        92,344  

Residential

     56,034        62,038  
  

 

 

    

 

 

 

Total loans (1)

     613,591        609,090  

Less allowance for loan losses

     7,106        7,156  
  

 

 

    

 

 

 

Net loans

   $ 606,485      $ 601,934  
  

 

 

    

 

 

 

 

(1)

Includes net deferred (fees) of ($716) and ($18) as of March 31, 2021 and December 31, 2020, respectively.

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

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

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

 

RATING 1   

Excellent

RATING 2   

Above Average

RATING 3   

Satisfactory

RATING 4   

Acceptable / Low Satisfactory

RATING 5   

Monitor

RATING 6   

Special Mention

RATING 7   

Substandard

RATING 8   

Doubtful

RATING 9   

Loss

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

 

   

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

 

   

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

 

   

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

 

   

“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

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.

Loans on Non-Accrual Status

(dollars in thousands)

 

     As of  
     March 31, 2021      December 31, 2020  

Commercial

   $ 117      $ 121  

Commercial Real Estate:

 

Commercial Mortgages-Owner Occupied

     911        940  

Commercial Mortgages-Non-Owner Occupied

     668        552  

Commercial Construction

     —          —    

Consumer

     

Consumer Unsecured

     —          —    

Consumer Secured

     60        240  

Residential:

 

  

Residential Mortgages

     207        210  

Residential Consumer Construction

     —          —    
  

 

 

    

 

 

 

Totals

   $ 1,963      $ 2,063  
  

 

 

    

 

 

 

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank which was acquired through purchase at foreclosure or from the borrower through a deed in lieu of foreclosure. OREO decreased to $761 on March 31, 2021 from $1,105 on December 31, 2020. The following table represents the changes in

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

OREO balance during the three months ended March 31, 2021 and year ended December 31, 2020.

OREO Changes

(dollars in thousands)

     Three Months Ended      Year Ended  
     March 31, 2021      December 31, 2020  

Balance at the beginning of the year (net)

   $ 1,105      $ 2,339  

Transfers from loans

     66        18  

Capitalized costs

     —          —    

Valuation adjustments

     —          (437

Sales proceeds

     (344      (844

Gain (loss) on disposition

     (66      29  
  

 

 

    

 

 

 

Balance at the end of the period (net)

   $ 761      $ 1,105  
  

 

 

    

 

 

 

At March 31, 2021 and December 31, 2020, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held no residential real estate property in other real estate owned as of March 31, 2021 and December 31, 2020.

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

 

          Impaired Loans  
          (dollars in thousands)  
          As of and For the Three Months Ended March 31, 2021  
2021         Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              
  

Commercial

   $ 277    $ 327    $ —        $ 309    $ 6
  

Commercial Real Estate

              
  

Commercial Mortgages-Owner Occupied

     2,105      2,461      —          2,124      41
  

Commercial Mortgage Non-Owner Occupied

     634      685      —          637      4
  

Commercial Construction

     —          —          —          —          —    
  

Consumer

              
  

Consumer Unsecured

     —          —          —          —          —    
  

Consumer Secured

     223      223      —          283      4
  

Residential

              
  

Residential Mortgages

     1,339      1,409      —          1,343      12
  

Residential Consumer Construction

     —          —          —          —          —    

With an Allowance Recorded:

              
  

Commercial

   $ —        $ —        $ —        $ 2    $ —    
  

Commercial Real Estate

              
  

Commercial Mortgages-Owner Occupied

     —          —          —          —          —    
  

Commercial Mortgage Non-Owner Occupied

     —          —          —          —          —    
  

Commercial Construction

     —          —          —          —          —    
  

Consumer

              
  

Consumer Unsecured

     —          —          —          —          —    
  

Consumer Secured

     —          —          —          —          —    
  

Residential

              
  

Residential Mortgages

     —          —          —          —          —    
  

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              
  

Commercial

   $ 277    $ 327    $ —        $ 311    $ 6
  

Commercial Real Estate

              
  

Commercial Mortgages-Owner Occupied

     2,105      2,461      —          2,124      41
  

Commercial Mortgage Non-Owner Occupied

     634      685      —          637      4
  

Commercial Construction

     —          —          —          —          —    
  

Consumer

              
  

Consumer Unsecured

     —          —          —          —          —    
  

Consumer Secured

     223      223      —          283      4
  

Residential

              
  

Residential Mortgages

     1,339      1,409      —          1,343      12
  

Residential Consumer Construction

     —          —          —          —          —    
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 4,578    $ 5,105    $ —        $ 4,698    $ 67
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

 

          Impaired Loans  
          (dollars in thousands)  
          As of and For the Year Ended December 31, 2020  
                 Unpaid             Average      Interest  
          Recorded      Principal      Related      Recorded      Income  
2020         Investment      Balance      Allowance      Investment      Recognized  

With No Related Allowance Recorded:

              
  

Commercial

   $ 341    $ 341    $ -        $ 405    $ 30
  

Commercial Real Estate

              
  

Commercial Mortgages-Owner Occupied

     2,143      2,496      —          2,305      135
  

Commercial Mortgage Non-Owner Occupied

     639      677      —          601      43
  

Commercial Construction

     —          —          —          —          —    
  

Consumer

              
  

Consumer Unsecured

     —          —          —          —          —    
  

Consumer Secured

     343      346      —          225      16
  

Residential

              
  

Residential Mortgages

     1,347      1,415      —          1,319      62
  

Residential Consumer Construction

     —          —          —          —          —    

With an Allowance Recorded:

              
  

Commercial

   $ 4    $ 4    $ 4    $ 6    $ -    
  

Commercial Real Estate

              
  

Commercial Mortgages-Owner Occupied

     —          —          —          6      —    
  

Commercial Mortgage Non-Owner Occupied

     —          —          —          7      —    
  

Commercial Construction

     —          —          —          —          —    
  

Consumer

              
  

Consumer Unsecured

     —          —          —          —          —    
  

Consumer Secured

     —          —          —          —          —    
  

Residential

              
  

Residential Mortgages

     —          —          —          70      —    
  

Residential Consumer Construction

     —          —          —          —          —    

Totals:

              
  

Commercial

   $ 345    $ 345    $ 4    $ 411    $ 30
  

Commercial Real Estate

              
  

Commercial Mortgages-Owner Occupied

     2,143      2,496      —          2,311      135
  

Commercial Mortgage Non-Owner Occupied

     639      677      —          608      43
  

Commercial Construction

     —          —          —          —          —    
  

Consumer

              
  

Consumer Unsecured

     —          —          —          —          —    
  

Consumer Secured

     343      346      —          225      16
  

Residential

              
  

Residential Mortgages

     1,347      1,415      —          1,389      62
  

Residential Consumer Construction

     —          —          —          —          —    
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 4,817    $ 5,279    $ 4    $ 4,944    $ 286
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

     Allowance for Loan Losses and Recorded Investment in Loans  
     (dollars in thousands)  
     As of and For the Three Months Ended March 31, 2021  
           Commercial                    
2021    Commercial     Real Estate     Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 2,001   $ 3,550   $ 868   $ 737   $ 7,156

Charge-Offs

     (54     —         (10     —         (64

Recoveries

     4     3     6     1     14

Provision

     127     (81     (34     (12     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     2,078     3,472     830     726     7,106

Ending Balance: Individually evaluated for impairment

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     2,078     3,472     830     726     7,106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 2,078   $ 3,472   $ 830   $ 726   $ 7,106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     277     2,739     223     1,339     4,578
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     154,958     309,087     90,273     54,695     609,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 155,235   $ 311,826   $ 90,496   $ 56,034   $ 613,591
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

     Allowance for Loan Losses and Recorded Investment in Loans  
     (dollars in thousands)  
     As of and For the Year Ended December 31, 2020  
           Commercial                    
2020    Commercial     Real Estate     Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $ 1,330   $ 1,932   $ 865   $ 702   $ 4,829

Charge-Offs

     (96     (224     (75     (53     (448

Recoveries

     20     139     53     15     227

Provision

     747     1,703     25     73     2,548
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     2,001     3,550     868     737     7,156

Ending Balance: Individually evaluated for impairment

     4     —         —         —         4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,997     3,550     868     737     7,152
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 2,001   $ 3,550   $ 868   $ 737   $ 7,156
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     345     2,782     343     1,347     4,817
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     144,800     306,781     92,001     60,691     604,273
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $ 145,145   $ 309,563   $ 92,344   $ 62,038   $ 609,090
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

     Age Analysis of Past Due Loans as of  
     March 31, 2021  
     (dollars in thousands)  
                   Greater                           Recorded Investment  
     30-59 Days      60-89 Days      than      Total Past             Total      > 90 Days &  
2021    Past Due      Past Due      90 Days      Due      Current      Loans      Accruing  

Commercial

   $ —        $ 31      $ —        $ 31      $ 155,204      $ 155,235      $ —    

Commercial Real Estate:

                    

Commercial Mortgages- Owner Occupied

     108        —          633        741        108,933        109,674        —    

Commercial Mortgages-Non-Owner Occupied

     100        —          627        727        169,722        170,449        —    

Commercial Construction

     —          —          —          —          31,703        31,703        —    

Consumer:

                    

Consumer Unsecured

     63        —          —          63        3,722        3,785        —    

Consumer Secured

     201        6        49        256        86,455        86,711        —    

Residential:

                    

Residential Mortgages

     264        68        207        539        42,315        42,854        —    

Residential Consumer Construction

     —          —          —          —          13,180        13,180        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 736      $ 105      $ 1,516      $ 2,357      $ 611,234      $ 613,591      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Age Analysis of Past Due Loans as of  
     December 31, 2020  
     (dollars in thousands)  
                   Greater                           Recorded Investment  
     30-59 Days      60-89 Days      than      Total Past             Total      > 90 Days &  
2020    Past Due      Past Due      90 Days      Due      Current      Loans      Accruing  

Commercial

   $ 157      $ —        $ —        $ 157      $ 144,988      $ 145,145      $ —    

Commercial Real Estate:

                    

Commercial Mortgages-Owner Occupied

     38        —          842        880        107,342        108,222        —    

Commercial Mortgages-Non-Owner Occupied

     252        116        394        762        170,307        171,069        —    

Commercial Construction

     —          —          —          —          30,272        30,272        —    

Consumer:

                    

Consumer Unsecured

     7        —          —          7        3,764        3,771        —    

Consumer Secured

     309        27        229        565        88,008        88,573        —    

Residential:

                    

Residential Mortgages

     575        243        210        1,028        45,868        46,896        —    

Residential Consumer Construction

     —          —          —          —          15,142        15,142        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,338      $ 386      $ 1,675      $ 3,399      $ 605,691      $ 609,090      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 8 – Loans, allowance for loan losses and OREO (continued)

 

     Credit Quality Information—by Class  
     March 31, 2021  
     (dollars in thousands)  
2021    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 143,337      $ 4,530      $ 7,050      $ 318      $ —        $ 155,235  

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

     99,739        3,406        4,424        2,105        —          109,674  

Commercial Mortgages-Non-Owner Occupied

     161,407        7,213        1,028        801        —          170,449  

Commercial Construction

     31,703                             —          31,703  

Consumer

                 

Consumer Unsecured

     3,758               26        1        —          3,785  

Consumer Secured

     86,363                      348        —          86,711  

Residential:

                 

Residential Mortgages

     41,408                      1,446        —          42,854  

Residential Consumer Construction

     13,180                             —          13,180  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 580,895      $ 15,149      $ 12,528      $ 5,019      $ —        $ 613,591  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Credit Quality Information—by Class  
     December 31, 2020  
     (dollars in thousands)  
2020    Pass      Monitor      Special
Mention
     Substandard      Doubtful      Totals  

Commercial

   $ 133,075      $ 4,332      $ 7,386      $ 352      $ —        $ 145,145  

Commercial Real Estate:

 

              

Commercial Mortgages-Owner Occupied

     98,623        3,028        4,428        2,143        —          108,222  

Commercial Mortgages-Non -Owner Occupied

     161,300        7,277        1,682        810        —          171,069  

Commercial Construction

     30,272        —          —          —          —          30,272  

Consumer

                 

Consumer Unsecured

     3,740        —          30        1        —          3,771  

Consumer Secured

     88,044        —          —          529        —          88,573  

Residential:

                 

Residential Mortgages

     45,441        —          —          1,455        —          46,896  

Residential Consumer Construction

     15,142        —          —          —          —          15,142  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 575,637      $ 14,637      $ 13,526      $ 5,290      $ —        $ 609,090  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 8 – 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 months ended March 31, 2021 and 2020.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended March 31, 2021 and 2020.

At March 31, 2021 and December 31, 2020, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that are insignificant.

Since the beginning of the pandemic in the spring of 2020, the Bank has modified a total of 191 loans. The principal balances of these loans on March 31, 2021 (adjusted for payoffs) totaled approximately $90 million. As of March 31, 2020, 5 of the 191 previously modified loans remain in deferment. The principal balance of these 5 loans is approximately $6.12 million, which represents 1.00% of the total loan portfolio. Of the total deferrals, all 5 loans are for deferrals of principal only. There are no loans for which principal and interested are being deferred.

If a customer requests a second modification, an extensive evaluation of the circumstances surrounding the need for the request is conducted. Procedurally, a commercial borrower will be required to present financial forecasts, proof of business sustainability, and verification of sources of repayment to the primary loan officer, the Chief Lending Officer, and the Chief Credit Officer before a second deferral is granted. Retail borrowers are also required to submit in writing the reason for the need for a second deferral request before an additional deferral is granted. Relationships whose situations do not warrant a second deferral will most likely be downgraded and subsequently evaluated for specific impairment within the allowance for loan loss. We are not currently evaluating any relationships, for additional deferrals.

In accordance with provisions of Section 4013 of the CARES Act (March 2020) and the Joint Interagency Regulatory Guidance (March 2020, revised April 2020), the above modifications were not considered to be TDRs. The CARES Act addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Interagency Guidance encouraged financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19 and explained that in consultation with the Financial Accounting Standards Board (FASB) staff, the federal banking agencies concluded that short-term modifications (e.g. six months or less) made on a good faith basis to borrowers who were current as of the implementation date of a relief program and not TDRs. In December 2020, the Consolidated Appropriations Act extended the period established by Section 4013 of the CARES Act for providing temporary relief from TDR classification to the earlier of January 1, 2022 or 60 days after the date when the national emergency concerning COVID-19 terminates.

 

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Note 9 – Revenue Recognition

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and

monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

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

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.

 

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Note 10 – Recent accounting pronouncements and other authoritative guidance

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has been in discussions with its core processor to coordinate plans for implementation and has contracted with an additional vendor to begin implementation.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

 

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Note 10 – Recent accounting pronouncements and other authoritative guidance (continued)

 

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022The Company has identified a small number of affected loans and is evaluating other benchmarks to substitute for LIBOR such as SOFR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

In March 2020 (Revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers,

 

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Note 10 – Recent accounting pronouncements and other authoritative guidance (continued)

 

extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In addition, upon expiration of the initial loan modification period, the Bank, pursuant to the “Joint Statement on Additional Loan Accommodations Related to COVID-19” published August 3, 2020, is encouraged to continue to work with effected borrowers on additional loan modifications. This interagency guidance is expected to continue have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

Note 11—COVID-19 and Current Economic Conditions

On March 11, 2020, the World Health Organization announced that the COVID-19 outbreak was deemed a pandemic, and on March 13, 2020, the President declared the ongoing COVID-19 pandemic of sufficient magnitude to warrant an emergency declaration. The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and when state and local economies will return to operational norms, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. In addition, we rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the outbreak could negatively impact our employees and customers’ ability to engage in banking and other financial transactions. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas.

Management will continue to evaluate current economic conditions to determine the impact of the pandemic on the ability of our customers to fulfill their financial obligations to the Company, as well as the values of our financial and nonfinancial assets resulting from the market disruption. Accordingly, significant estimates used in the preparation of our financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods. As the full effects are not yet known, it is not currently possible to ascertain the overall impact of COVID-19 on the Company’s business. However, as the pandemic continues to evolve into a prolonged worldwide health crisis, the pandemic could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

Note 12 – Capital Notes

On April 13, 2020, the Company commenced a private placement of unregistered debt securities (the “2020 Offering”). In the 2020 Offering, the Company sold and closed $10,050,000 in principal of notes (the “2020 Notes”) during the 2nd and 3rd quarters of 2020. The 2020 Offering officially ended on July 8, 2020. The 2020 Notes bear interest at the rate of 3.25% per year with interest payable quarterly in arrears. The 2020 Notes will mature on September 30, 2025 and are subject to full or partial repayment on or after September 30, 2021. The balance of the 2020 Notes on the March 31, 2021 consolidated balance sheet is net of unamortized issuance costs.

 

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Note 12 – Capital Notes (continued)

 

On September 24, 2020 the Bank used $5,000,000 of the proceeds for the payment of principal of the Company’s previously outstanding 4.00% notes that were issued in 2017. The Company intends to use the balance of the proceeds from the 2020 Offering for general corporate purposes in the discretion of Company’s management such as payment of interest on the 2020 Notes and as a contribution of additional capital to the Bank.

 

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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. Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Financial and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Financial’s control, include, but are not necessarily limited to the following:

 

   

the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets;

 

   

operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Financial specifically;

 

   

government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations), including changes to address the impact of COVID-19;

 

   

economic, market, political and competitive forces affecting Financial’s banking and other businesses;

 

   

competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act;

 

   

changes in interest rates, monetary policy and general economic conditions, which may impact Financial’s net interest income;

 

   

changes in the value of real estate securing loans made by the Bank;

 

   

diversion of management time on pandemic-related issues;

 

   

adoption of new accounting standards or changes in existing standards;

 

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changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic;

 

   

compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Financial may pursue or implement; and

 

   

the risk that Financial’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Financial specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.

IMPACT OF COVID-19

Effects on Market Areas

The COVID-19 pandemic and certain provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and other recent legislative and regulatory relief efforts have had and are expected to continue to have a material impact on the Company’s operations, as further discussed below.

Policy and Regulatory Developments

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

 

   

The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0—0.25%.

 

   

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the Paycheck Protection Program, or PPP Program, which was subsequently increased by $320 billion on April 24, 2020. Under the PPP program, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP program. Effective August 8, 2020, banks ceased taking applications under the PPP program. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to loan modifications and classification as troubled debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19.

 

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On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs, and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. In addition, upon expiration of the initial loan modification period, the Bank, pursuant to the “Joint Statement on Additional Loan Accommodations Related to COVID-19” published August 3, 2020, is encouraged to continue to work with effected borrowers on additional loan modifications. Loan modifications made through December 31, 2020 are disclosed within Note 5 – Loans and Allowance for Loan Losses.

 

   

On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) into law to provide continued assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic. Section 311 of the Economic Aid Act added a new temporary provision that authorizes the SBA to guarantee Paycheck Protection Program Second Draw Loans (the “PPP Second Draw Program”), under generally the same terms and conditions available under the PPP Under section 311, SBA may guarantee loans under the PPP Second Draw Program through March 31, 2021 (‘‘Second Draw PPP Loans’’) to borrowers that previously received an initial PPP loan and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan. In addition, the Economic Aid Act permits individuals and business that did not receive an initial PPP loan to apply under the PPP Program.

 

   

In accordance with the relief provisions of the CARES Act and the March 22, 2020 (revised April 2020) Joint Interagency Regulatory Guidance, the above modifications were not considered to be troubled debt restructurings and were excluded from TDR classification. The TDR relief provisions provided for by the CARES Act were extended in December 2020 by the Consolidated Appropriations Act through the earlier of January 1, 2022 or 60 days after the national COVID-19 emergency terminates.

Effects on Our Business

The COVID-19 pandemic and the specific developments referred to above are may have a significant impact on our business. As a result, we anticipate that our financial condition, capital levels and results of operations could be significantly adversely affected, as described in further detail below.

COVID-19 Crisis Management

As an essential service provider, Bank of the James has continued to provide uninterrupted service to its clients throughout the COVID-19 crisis. On March 2, 2020 the Company’s Management Committee initiated plans in response to the emerging risk related to the pandemic.

 

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From the beginning, our management of the crisis has focused on protecting the health and well-being of our employees and clients while continuing to provide our clients with full access to banking services. As the operational risk related to the COVID-19 crisis evolved, the Company took proactive measures to manage operational risk, including the following:

 

   

The Company has implemented its Business Continuity Plan.

 

   

All branches remain open, with routine banking services offered through online banking, drive-thru, ATMs, and limited lobby access.

 

   

Implemented a number of actions to support a healthy workforce, including:

 

   

Flexible work practices such as work-from-home options, working in shifts and placing greater distances between employees;

 

   

Discontinuation of non-essential business travel and meetings; and

 

   

Use of online meeting platforms, including successfully conducting the 2020 Annual Meeting of Shareholders in a virtual format. We intend to conduct the 2021 Annual Meeting of Shareholders virtually as well.

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

 

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of future cash flows or values that are observable in the secondary market and the loan balance. Guidelines for determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102 – “Selected Loan Loss Allowance Methodology and Documentation Issues” and the Federal Financial Institutions Examination Council’s interagency guidance, “Interagency Policy Statement on the Allowance for Loan and Lease Losses” (the “FFIEC Policy Statement”).

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

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

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

Overview

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

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state-chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns. Historically, our primary market area has been the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Recently the Bank has begun to expand to other areas in Virginia, specifically Roanoke, Charlottesville, Harrisonburg, Blacksburg, Lexington and Rustburg. 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.

 

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

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

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

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

Full-Service Branches

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

 

   

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

 

   

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

 

   

A branch located at 2101 Electric Road, Roanoke, VA (the “Oak Grove Branch”), and

 

   

A branch located at 13 Village Highway, Rustburg, VA (the “Rustburg Branch”).

Limited Service Branches

 

   

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

 

   

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

Loan Production Offices

 

   

Residential mortgage loan production office located at the Forest Branch,

 

   

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

 

   

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

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

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

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

 

   

Real property located in the Timberlake Road area of Campbell County (Lynchburg), Virginia. The Timberlake property is not suitable for its intended use as a branch bank. Management anticipates that it will be necessary to raze the current structures and replace it with appropriate new construction. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit and construct a branch at this location could be between $900,000 and $1,500,000.

 

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Real property located at 4105 Boonsboro Road, Lynchburg, Virginia. This property is a former bank branch and with minor cosmetic improvements is suitable as is to be used as a bank branch. The Bank does not anticipate utilizing this location as a bank branch until mid 2022 at the earliest.

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

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

 

     March 31, 2021
(in thousands)
 

Commitments to extend credit

   $ 159,934  

Letters of Credit

     4,286  
  

 

 

 

Total

   $ 164,220  
  

 

 

 

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

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

 

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

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of March 31, 2021 and December 31, 2020 and the results of operations of Financial for the three-month periods ended March 31, 2021 and 2020. 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

March 31, 2021 as Compared to December 31, 2020

Total assets were $886,360,000 on March 31, 2021 compared with $851,386,000 at December 31, 2020, an increase of 4.11%. The increase in total assets was primarily funded from the growth in deposits.

Total deposits increased from $764,967,000 as of December 31, 2020 to $801,190,000 on March 31, 2021, an increase of 4.74%. The increase resulted in large part from increases in the following deposit categories: non-interest-bearing demand deposits, NOW, money market, and savings accounts and was partially offset by a decrease in time deposits. The increase was attributable in part to stimulus funds and PPP loans received by our customers.

Total loans, excluding loans held for sale, increased to $613,591,000 on March 31, 2021 from $609,090,000 on December 31, 2020, resulting from the origination of loans under the ongoing PPP loan program. This growth was partially offset by normal amortization, PPP loan forgiveness, and decreased commercial loan origination in the first quarter. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $606,485,000 on March 31, 2021 from $601,934,000 on December 31, 2020, an increase of 0.76%. 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):

 

     March 31, 2021     December 31, 2020  
     Amount      Percentage     Amount      Percentage  

Commercial

   $ 155,235        25.30   $ 145,145        23.83

Commercial Real Estate

     311,826        50.82     309,563        50.82

Consumer

     90,496        14.75     92,344        15.16

Residential

     56,034        9.13     62,038        10.19
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 613,591        100.00   $ 609,090        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and OREO decreased to $2,723,000 on March 31, 2021 from $3,168,000 on December 31, 2020. OREO decreased to $761,000 on March 31, 2021 from $1,105,000 on December 31, 2020. The decrease in OREO was due in large part to the sale of one large OREO property during the first quarter. Non-performing loans decreased slightly from $2,063,000 at December 31, 2020 to $1,963,000 at March 31, 2021.

As discussed in more detail below under “Results of Operations—Allowance and Provision for Loan Losses,” management has provided for the anticipated losses on these loans in the allowance for loan losses. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for loan losses charged against earnings.

As a result of the COVID-19 pandemic, we anticipate that our commercial, commercial real estate, residential and consumer borrowers will continue to encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings. Any potential financial impacts are unknown at this time.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2020, the Bank was carrying three OREO properties on its books at a value of $1,105,000. During the three months ended March 31, 2021, the Bank acquired one additional OREO property and disposed of two OREO properties, and as of March 31, 2021 the Bank is carrying two OREO properties at a value of $761,000. The OREO properties are available for sale and are being actively marketed.

The Bank had loans in the amount of $384,000 at March 31, 2021 classified as performing TDRs as compared to $392,000 at December 31, 2020. 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.

We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that are insignificant.

Since the beginning of the pandemic in the spring of 2020, the Bank has modified a total of 191 loans. The principal balances of these loans on March 31, 2021 (adjusted for payoffs) totaled approximately $90 million. As of March 31, 2020, 5 of the 191 previously modified loans remain in deferment. The principal balance of these 5 loans is approximately $6.12 million, which represents 1.00% of the total loan portfolio. Of the total deferrals, all 5 loans are for deferrals of principal only. There are no loans for which principal and interested are being deferred.

 

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If a customer requests a second modification, an extensive evaluation of the circumstances surrounding the need for the request is conducted. Procedurally, a commercial borrower will be required to present financial forecasts, proof of business sustainability, and verification of sources of repayment to the primary loan officer, the Chief Lending Officer, and the Chief Credit Officer before a second deferral is granted. Retail borrowers are also required to submit in writing the reason for the need for a second deferral request before an additional deferral is granted. Relationships whose situations do not warrant a second deferral will most likely be downgraded and subsequently evaluated for specific impairment within the allowance for loan loss. We are not currently evaluating any relationships, for second deferrals.

In accordance with the relief provisions of the CARES Act and the March 22, 2020 (revised April 2020) Joint Interagency Regulatory Guidance, the above modifications were not considered to be troubled debt restructurings and were excluded from the TDR discussion above. The TDR relief provisions provided for by the CARES Act were extended in December 2020 by the Consolidated Appropriations Act through the earlier of January 1, 2022 or 60 days after the national COVID-19 emergency terminates.

Management has reviewed loan segments that it believes could be adversely impacted by the COVID-19 pandemic, and identified the following segments: assisted living, education/childcare, entertainment, hospitality, oil & gas (gas stations), religious/charitable, restaurants, retail & services. At March 31, 2021, the loan balances in those segments were as follows:

 

Industry

   Principal Balance
(in thousands)
     Number
of Loans
     Percent of
Total
Loan
Portfolio
 

Assisted Living

   $ 7,646        12        1.25

Education/Childcare

     6,435        14        1.05

Entertainment

     6,611        23        1.08

Hospitality

     15,209        7        2.48

Oil & Gas (Gas Stations)

     476        9        0.08

Religious/Charitable

     18,181        37        2.96

Restaurants

     17,027        48        2.77

Retail & Services

     9,960        43        1.62
  

 

 

    

 

 

    

 

 

 

Total

   $ 81,545        193        13.29
  

 

 

    

 

 

    

 

 

 

Management continues to closely monitor loans in these categories.

Cash and cash equivalents increased to $124,050,000 on March 31, 2021 from $100,886,000 on December 31, 2020. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase was due in large part to an increase in deposits related to PPP loan funds and management’s decision to carry additional liquidity in order to accommodate the use of PPP loan proceeds. 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 were flat, decreasing slightly to $3,667,000 on March 31, 2021 from $3,671,000 on December 31, 2020. This decrease is a result of normal amortization of premiums within the held-to-maturity portfolio.

Securities available-for-sale, which are carried on the balance sheet at fair market value, increased to $99,832,000 on March 31, 2021, from $90,185,000 on December 31, 2020. During the three months ended March 31, 2021, the Bank purchased $14,543,000 in available-for-sale securities, which was responsible for the increase in securities available-for sale. During the three months ended March 31, 2021 the Bank did not sell any securities available-for-sale and received $833,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale, which partially offset the increase.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $653,000 at March 31, 2021, which was unchanged from December 31, 2020. 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 March 31, 2021, Financial, on a consolidated basis, had liquid assets of $223,882,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $28,570,000 (representing current market value) of the available-for-sale securities are pledged as collateral with $20,400,000 pledged as security for public deposits, and $8,170,000 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 March 31, 2021. 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.

The COVID-19 pandemic could have a material negative impact on Financial’s short-term or long-term liquidity. For example, if customers unexpectedly draw down on existing lines of credit, our liquidity could be impacted. While we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic, management is closely monitoring our sources and uses of funds in order to meet our cash flow requirements while maximizing profits. Based in part on recent loan activity including loans made pursuant to the PPP as discussed below under “Allowance and Provision for Loan Losses,” the Bank is monitoring liquidity to ensure it is able to fund future loans and withdrawals related to the use of PPP funds.

 

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At March 31, 2021, the Bank had a leverage ratio of approximately 8.33%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 11.47% and a total risk-based capital ratio of approximately 12.59%. As of March 31, 2021 and December 31, 2020, the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of March 31, 2021 and December 31, 2020:

Bank Level Only Capital Ratios

 

Analysis of Capital for Bank of the James (Bank only)  
(dollars in thousands)  
     March 31,      December 31,  
Analysis of Capital (in 000’s)    2021      2020  

Tier 1 capital

     

Common Stock

   $  3,742      $  3,742  

Surplus

     22,325        22,325  

Retained earnings

     46,571        44,621  
  

 

 

    

 

 

 

Total Tier 1 capital

   $  72,638      $  70,688  
  

 

 

    

 

 

 

Common Equity Tier 1 Capital (CET1)

   $  72,638      $  70,688  
  

 

 

    

 

 

 

Tier 2 capital

     

Allowance for loan losses

   $  7,106      $  7,156  

Total Tier 2 capital:

   $  7,106      $  7,156  
  

 

 

    

 

 

 

Total risk-based capital

   $  79,744      $  77,844  
  

 

 

    

 

 

 

Risk weighted assets

   $  633,451      $  635,445  

Average total assets

   $  871,732      $  853,558  

 

     Actual     Regulatory Benchmarks  
                 For Capital     For Well  
     March 31,     December 31,     Adequacy     Capitalized  
     2021     2020     Purposes (1)     Purposes  

Capital Ratios:

        

Tier 1 capital to average total assets

     8.33     8.28     4.000     5.000

Common Equity Tier 1 capital

     11.47     11.12     7.000     6.500

Tier 1 risk-based capital ratio

     11.47     11.12     8.500     8.000

Total risk-based capital ratio

     12.59     12.25     10.500     10.000

 

(1)

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

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis at March 31, 2021 would be slightly lower than those of the Bank because a portion of proceeds from the sale of notes previously issued by the holding company were contributed to the Bank as equity.

 

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

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

While the CBLR framework is currently available for banks to use in their March 31, 2021 Call Report, the Bank has elected not to opt into the CBLR framework at this time.

Results of Operations

Comparison of the Three months Ended March 31, 2021 and 2020

Earnings Summary

Financial had net income including all operating segments of $1,835,000 for the three months ended March 31, 2021, compared to $995,000 for the comparable period in 2020. Basic and diluted earnings per common share for the three months ended March 31, 2021 were $0.42, compared to basic and diluted earnings per share of $0.23 for the three months ended March 31, 2020.

The increase in net income for the three months ended March 31, 2021, as compared to the prior year period was due primarily to an decrease in the loan loss provision, as discussed in more detail below, along with minimal loan growth, and was bolstered in part by an increase in non-interest income. In the quarter ended March 31, 2020, the Bank increased the provision for loan losses due to economic uncertainty caused by the onset of the COVID-19 pandemic. Because of improving economic metrics in 2021, the provision for loan losses decreased. We anticipate that our net income for future fiscal periods will continue to be impacted as a result of the winding down of the PPP loan program. We further expect that net interest margins will remain compressed which will have a further negative impact on our earnings.

 

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These operating results represent an annualized return on average stockholders’ equity of 11.49% for the three months ended March 31, 2021, compared with 6.52% for the three months ended March 31, 2020. This increase for the three months ended March 31, 2021 was due to an increase in our net income. The Company had an annualized return on average assets of 0.85% for the three months ended March 31, 2021 compared with 0.54% for the same period in 2020. The increase for the three months ended March 31, 2021 largely resulted from an increase in the Bank’s net income and was partially offset by an increase in assets.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income decreased to $7,365,000 for the three months ended March 31, 2021 from $7,488,000 for the same period in 2020, a decrease of 1.64%. Interest income decreased because of a decrease in interest rates and was partially offset by a minimal increase in loan balances. The average rate received on loans decreased from 4.87% for the three months ended March 31, 2020 to 4.51% for the comparable period in 2021. The rate on total average earning assets decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 primarily because a decrease in the rates paid by borrowers on loans, particularly the lower yielding PPP loans.

Interest expense decreased to $617,000 for the three months ended March 31, 2021 from $1,352,000 for the same period in 2020, a decrease of 54.36%. The decrease for the three months resulted primarily from a decrease in interest rates paid on deposits. The Bank’s average rate paid on interest bearing deposits was 0.33% during the three months ended March 31, 2021 as compared to 0.90% for the same period in 2020.

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 months ended March 31, 2021 of $6,748,000 increased from $6,136,000 for the same period in 2020. The net interest margin was 3.35% for the three months ended March 31, 2021 as compared with 3.63% for the same period in 2020. The decrease was primarily caused by the impact of lower-yielding PPP loans. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact net interest margin. Other financial impacts could occur, though such potential impacts are unknown at this time.

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

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, fees generated from treasury management services, and bank-owned life insurance income. Non-interest income increased to $2,434,000 for the three months ended March 31, 2021 from $2,186,000 for the three months ended March 31, 2020.

 

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These increases for the three months ended March 31, 2021 as compared to the same period last year were due primarily to an increase in gains on sales of loans held for sale from $1,177,000 for the three months ended March 31, 2020 to $1,774,000 for the same period ended March 31, 2021. This was offset by a decrease in gains on sales of available-for-sale securities which decreased from $431,000 to $0 for three months ended March 31, 2020 and 2021.

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 $30,838,000 or 39.69% of the total mortgage loans originated in the three months ended March 31, 2021 as compared to $24,993,000 or 53.44% of the total mortgage loans originated in the same period in 2020. Management anticipates that in the short term purchase mortgage originations will continue to represent a majority of mortgage originations as they have in the recent past. However, management also believes that further decreases in long term market interest rates could trigger increased refinancing activity. While uncertainty remains, management expects mortgage rates stay near historic lows for the foreseeable future.

Although mortgage rates fluctuated dramatically in the first quarter of 2020, rates generally decreased to near historic lows in the first three months of 2020 and remained there through March 31, 2021. Because of the uncertainty surrounding current and near-term economic conditions arising from the COVID-19 pandemic, management cannot predict future mortgage rates. Nevertheless, management expects that the Mortgage division’s reputation in Region 2000, steady residential real estate inventory and the recent hiring of additional mortgage loan originators in Roanoke, Harrisonburg and Charlottesville, and Blacksburg, will result in strong mortgage originations through the remainder of 2021. Management also believes that in the event that interest rates rise, revenue from the mortgage segment could be under pressure.

Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by two dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s impact on noninterest income will remain immaterial in 2021.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three employees that are licensed to sell insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2021.

 

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Non-Interest Expense

Non-interest expense for the three months ended March 31, 2021 increased to $6,889,000 from $6,197,000, an increase of 11.17% from the comparable period in 2020. This increase resulted from increases in personnel expenses from variable compensation, credit expense, marketing expense, and FDIC insurance expense. These were offset in part by the deferral of loan origination costs of $441,000 related to the PPP program, which will be amortized to interest income along with the related fees over the lives of the related loans, and a slight decrease in OREO expense. Income recognition may be accelerated due to repayment or forgiveness of the loans. Total personnel expense was $3,732,000 for the three month period ended March 31, 2021 as compared to $3,354,000 for the same period in 2020.

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 $0 to the allowance for loan losses for the three month period ended March 31, 2021. This compares to a provision of $888,000 for the comparable period in 2020.

In the first quarter of 2020, an adjustment in qualitative factors associated with the onset of the pandemic resulted in an increase in the provision. These factors were relatively unchanged during the first quarter of 2021 from December 31, 2020 due to some signs of leveling and stabilization in the economy, and therefore no additional provision was required during the quarter ended March 31, 2021. In addition, a significant portion of loans originated in the first quarter are guaranteed by the United States Small Business Administration. These loans pose no credit risk and therefore required no provision. The components of the allowance are detailed further in table below.

At March 31, 2021, the allowance for loan losses was 1.16% of total loans outstanding, versus 1.17% of total loans outstanding at December 31, 2020. The allowance to total loans, excluding PPP loans, increased to approximately 1.26% at March 31, 2021 as compared to approximately 1.25% at December 31, 2020. Because the PPP loans are guaranteed in full by the U.S. Small Business Administration, management determined that these loans should be excluded from the calculation. At March 31, 2021, management believed the allowance for loan losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate further due to the COVID-19 pandemic, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for loan losses. The process of identifying potential credit losses is a subjective process. Therefore, the Company maintains a general reserve to cover credit losses within the portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.

 

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We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. The March 22, 2020 (revised April 2020) statement issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), passed on March 27, 2020 provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. §§1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to certain borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, short-term interest only payments, or other delays in payment that are insignificant.

Since the beginning of the pandemic in the spring of 2020, the Bank has modified a total of 191 loans. The principal balances of these loans on March 31, 2021 (adjusted for payoffs) totaled approximately $90 million. As of March 31, 2020, 5 of the 191 previously modified loans remain in deferment. The principal balance of these 5 loans is approximately $6.12 million, which represents 1.00% of the total loan portfolio. Of the total deferrals, all 5 loans are for deferrals of principal only. There are no loans for which principal and interested are being deferred.

If a customer requests a second modification, an extensive evaluation of the circumstances surrounding the need for the request is conducted. Procedurally, a commercial borrower will be required to present financial forecasts, proof of business sustainability, and verification of sources of repayment to the primary loan officer, the Chief Lending Officer, and the Chief Credit Officer before a second deferral is granted. Retail borrowers are also required to submit in writing the reason for the need for a second deferral request before an additional deferral is granted. Relationships whose situations do not warrant a second deferral will most likely be downgraded and subsequently evaluated for specific impairment within the allowance for loan loss. As of March 31, 2021, we are currently evaluating 1 relationship, totaling approximately $3,000,000, for a second deferral.

In accordance with the March 22, 2020 (revised April 2020) Joint Interagency Regulatory Guidance as well as the legislative relief provision, the above modifications were not considered to be troubled debt restructurings and were excluded from the TDR discussion above.

Section 1102 of the CARES Act created the Paycheck Protection Program (“PPP”), which appropriated $349 billion (which was subsequently increased by an additional $320 billion including $60 billion set aside for small, midsize, and community lenders) in loans designed to provide a direct incentive for sole proprietors, independent contractors, self-employed persons, non-profits and small businesses with less than 500 employees, allowing for narrow exceptions with businesses greater than 500 employees, to keep their workers on the payroll. These loans will be fully forgiven by the Small Business Administration if the funds are used for payroll costs, interest on mortgages, rent, or utilities as long as at least 75% of the forgiven amount was used for payroll. Additionally, loan payments will also be deferred for ten months. The initial Program started on April 3, 2020 and ended on August 8, 2020. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees.

 

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On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) into law to provide continued assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic. Section 311 of the Economic Aid Act added a new temporary provision that authorizes the SBA to guarantee Paycheck Protection Program Second Draw Loans (the “PPP Second Draw Program”), under generally the same terms and conditions available under the PPP Under section 311, SBA may guarantee loans under the PPP Second Draw Program through March 31, 2021 (‘‘Second Draw PPP Loans’’) to borrowers that previously received an initial PPP loan and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan. In addition, the Economic Aid Act permits individuals and business that did not receive an initial PPP loan to apply under the PPP Program.

The Bank began accepting applications from qualified customers on April 3, 2020 and, as of March 31, 2021, had helped provide over $102,600,000 in funding to over 894 clients through the PPP. The Bank received 251 applications in the first quarter of 2021.

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 $64,000 for the three months ended March 31, 2021 as compared to $260,000 for the comparable period in 2020. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three months ended March 31, 2021, the Bank had recoveries of charged-off loans of $14,000 as compared with $17,000 for the comparable period in 2020.

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 March 31, 2021 was relatively unchanged as compared to December 31, 2020.

As shown in the table below, the total balance in the allowance decreased, from $7,156,000 as of December 31, 2020 to $7,106,000 on March 31, 2021. The allowance for loan losses as a percent of loans decreased to 1.16% as of March 31, 2021 from 1.17% as of December 31, 2020. The allowance for loan losses as a percent of unimpaired loans was 1.16% at March 31, 2021 as compared to 1.17% at December 31, 2020. The general reserve as a percentage of unimpaired loan balances remained at 1.16% (or 1.26% excluding PPP loans) as of March 31, 2021 as compared to 1.17% (or 1.25% excluding PPP loans) as of December 31, 2020. Management will continue to evaluate the adequacy of the allowance for loan losses as more economic data becomes available and as changes within the Company’s portfolio are known. The effects of the pandemic may require the Company to fund additional increases in the allowance for loan losses in future periods.

 

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

 

     Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Three Months Ended March 31, 2021
 
2021    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $  2,001   $  3,550   $  868   $  737   $  7,156

Charge-Offs

     (54     —         (10     —         (64

Recoveries

     4     3     6     1     14

Provision

     127     (81     (34     (12     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     2,078     3,472     830     726     7,106

Ending Balance: Individually evaluated for impairment

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     2,078     3,472     830     726     7,106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $  2,078   $  3,472   $  830   $  726   $  7,106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     277     2,739     223     1,339     4,578
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     154,958     309,087     90,273     54,695     609,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $  155,235   $  311,826   $  90,496   $  56,034   $  613,591
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 2020
 
2020    Commercial     Commercial
Real Estate
    Consumer     Residential     Total  

Allowance for Credit Losses:

          

Beginning Balance

   $  1,330   $  1,932   $  865   $  702   $  4,829

Charge-Offs

     (96     (224     (75     (53     (448

Recoveries

     20     139     53     15     227

Provision

     747     1,703     25     73     2,548
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     2,001     3,550     868     737     7,156

Ending Balance: Individually evaluated for impairment

     4     —         —         —         4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     1,997     3,550     868     737     7,152
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $  2,001   $  3,550   $  868   $  737   $  7,156
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables:

          

Ending Balance: Individually evaluated for impairment

     345     2,782     343     1,347     4,817
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively evaluated for impairment

     144,800     306,781     92,001     60,691     604,273
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals:

   $  145,145   $  309,563   $  92,344   $  62,038   $  609,090
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended
March 31,
(in thousands)
 
     2021      2020  

Balance, beginning of period

   $  7,156      $  4,829  

Provision for loan losses

     —          888  

Loans charged off

     (64      (260

Recoveries of loans charged off

     14        17  
  

 

 

    

 

 

 

Net (charge offs)

     (50      (243
  

 

 

    

 

 

 

Balance, end of period

   $  7,106      $  5,474  
  

 

 

    

 

 

 

 

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No nonaccrual loans were excluded from the impaired loan disclosures at March 31, 2021 and December 31, 2020. If interest on these loans had been accrued, such income cumulatively would have approximated $173,000 and $158,000 on March 31, 2021 and December 31, 2020, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

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

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

 

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

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

 

   

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

 

   

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

 

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

 

   

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

 

   

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

 

   

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

Income Taxes

For the three months ended March 31, 2021, Financial had an income tax expense of $458,000 as compared to $242,000 for the three months ended March 31, 2020. This represents an effective tax rate of 19.97% for the three months ended March 31, 2021 as compared with 19.56% for the three months ended March 31, 2020. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance.

 

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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended March 31, 2021 and 2020

(dollars in thousands)

 

     2021     2020  
    

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)

   $  611,420     $  6,792        4.51   $  574,185     $  6,968        4.87

Loans held for sale

     6,158       68        4.48     3,653       37        4.06

Fed funds sold

     82,579       14        0.07     24,192       66        1.09

Interest bearing bank balances

     18,657       14        0.30     18,007       64        1.43

Securities (3)

     96,246       474        2.00     55,962       344        2.47

Federal agency equities

     1,435       6        1.70     1,390       9        2.60

CBB equity

     116       —          —         116       —          —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     816,611       7,368        3.66     677,505       7,488        4.43
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (7,156          (4,907     

Non-earning assets

     63,903            63,161       
  

 

 

        

 

 

      

Total assets

   $ 873,358          $ 735,759       
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 377,894     $ 107        0.11   $ 284,389     $ 276        0.39

Savings

     102,162       28        0.11     86,901       50        0.23

Time deposits

     149,560       373        1.01     193,355       946        1.96

Total interest bearing deposits

     629,616       508        0.33     564,645       1,272        0.90

Other borrowed funds

              

Financing leases

     4,092       27        2.68     4,415       30        2.73

Capital Notes

     10,028       82        3.32     5,000       50        4.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     643,736       617        0.39     574,060       1,352        0.94
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest bearing deposits

     158,692            95,218       

Other liabilities

     6,136            5,238       
  

 

 

        

 

 

      

Total liabilities

     808,564            674,516       

Stockholders’ equity

     64,794            61,243       
  

 

 

        

 

 

      

Total liabilities and Stockholders’ equity

   $  873,358          $  735,759       
  

 

 

        

 

 

      

Net interest income

     $  6,751          $  6,136     
    

 

 

        

 

 

    

Net interest margin

          3.35          3.63
       

 

 

        

 

 

 

Interest spread

          3.27          3.49
       

 

 

        

 

 

 

 

(1)

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

(2)

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

(3)

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

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable

 

Item 4.

Controls and Procedures