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, 2020

 

 

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: 4,339,436 shares of Common Stock, par value $2.14 per share, were outstanding at May 13, 2020.

 

 

 

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			34
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			56
Item 4.		Controls and Procedures			56
PART II – OTHER INFORMATION					57
Item 1.		Legal Proceedings			57
Item 1A.		Risk Factors			57
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3.		Defaults Upon Senior Securities			58
Item 4.		Mine Safety Disclosures			58
Item 5.		Other Information			58
Item 6.		Exhibits			59
SIGNATURES					60

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) (2020 unaudited)

 

		March 31, 2020				December 31, 2019
Assets
Cash and due from banks		$	31,656			$	30,794
Federal funds sold			32,541				8,317
Total cash and cash equivalents			64,197				39,111
Securities held-to-maturity (fair value of $4,223 in 2020 and $3,861 in 2019)			3,683				3,688
Securities available-for-sale, at fair value			54,992				59,655
Restricted stock, at cost			1,506				1,506
Loans, net of allowance for loan losses of $5,474 in 2020 and $4,829 in 2019			570,659				573,274
Loans held for sale			6,134				4,221
Premises and equipment, net			16,493				16,698
Interest receivable			1,922				1,866
Cash value - bank owned life insurance			16,278				13,686
Other real estate owned			1,761				2,339
Deferred tax asset, net			788				1,177
Other assets			7,642				8,173
Total assets		$	746,055			$	725,394
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing demand		$	97,104			$	93,936
NOW, money market and savings			377,507				362,821
Time			193,659				192,702
Total deposits			668,270				649,459
Capital notes			5,000				5,000
Income taxes payable			347				124
Interest payable			176				173
Other liabilities			8,934				9,193
Total liabilities		$	682,727			$	663,949
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 4,339,436 and 4,357,436 as of March 31, 2020 and December 31, 2019			9,286				9,325
Additional paid-in-capital			30,989				31,225
Retained earnings			21,591				20,900
Accumulated other comprehensive income (loss)			1,462				(5	)
Total stockholders’ equity		$	63,328			$	61,445
Total liabilities and stockholders’ equity		$	746,055			$	725,394

 

See accompanying notes to these consolidated financial statements

1

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,
		2020				2019
Interest Income
Loans		$	7,005			$	6,654
Securities
US Government and agency obligations			187				185
Mortgage backed securities			59				61
Municipals - taxable			75				78
Municipals - tax exempt			—				3
Dividends			9				18
Other (Corporates)			23				23
Interest bearing deposits			64				91
Federal Funds sold			66				121
Total interest income			7,488				7,234
Interest Expense
Deposits
NOW, money market savings			326				306
Time Deposits			946				748
Finance leases			30				—
Capital notes			50				50
Total interest expense			1,352				1,104
Net interest income			6,136				6,130
Provision for loan losses			888				210
Net interest income after provision for loan losses			5,248				5,920
Noninterest income
Gain on sales of loans held for sale			1,177				691
Service charges, fees and commissions			488				439
Life insurance income			78				83
Other			12				6
Gain on sales and calls of securities, net			431				—
Total noninterest income			2,186				1,219
Noninterest expenses
Salaries and employee benefits			3,354				2,928
Occupancy			436				421
Equipment			609				458
Supplies			127				162
Professional, data processing, and other outside expense			924				815
Marketing			136				145
Credit expense			196				127
Other real estate expenses			99				139
FDIC insurance expense			57				94
Other			259				310
Total noninterest expenses			6,197				5,599
Income before income taxes			1,237				1,540
Income tax expense			242				306
Net Income		$	995			$	1,234
Weighted average shares outstanding - basic			4,348,040				4,378,436
Weighted average shares outstanding - diluted			4,348,040				4,380,959
Earnings per common share - basic		$	0.23			$	0.28
Earnings per common share - diluted		$	0.23			$	0.28

 

See accompanying notes to these consolidated financial statements

2

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollar amounts in thousands) (unaudited)

 

		For the Three Months Ended March 31,
		2020				2019
Net Income		$	995			$	1,234
Other comprehensive income:
Unrealized gains on securities available-for-sale			2,287				1,311
Tax effect			(480	)			(275	)
Reclassification adjustment for gains included in net income (1)			(431	)			—
Tax effect (2)			91				—
Other comprehensive income, net of tax			1,467				1,036
Comprehensive income		$	2,462			$	2,270

 

(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

3

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2020 and 2019

(dollar amounts in thousands) (unaudited)

 

		For the Three Months Ended March 31,
		2020				2019
Cash flows from operating activities
Net Income		$	995			$	1,234
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			504				377
Stock based compensation expense			27				27
Net amortization and accretion of premiums and discounts on securities			100				100
(Gain) on sales of available-for-sale securities			(431	)			—
(Gain) on sales of loans held for sale			(1,177	)			(691	)
Proceeds from sales of loans held for sale			46,037				20,428
Origination of loans held for sale			(46,773	)			(20,671	)
Provision for loan losses			888				210
(Gain) loss on sale of other real estate owned			(6	)			13
Impairment of other real estate owned			102				115
(Increase) in cash value of life insurance			(78	)			(83	)
(Increase) in interest receivable			(56	)			(204	)
Decrease (increase) in other assets			39				(3	)
Increase in income taxes payable			223				(305	)
Increase in interest payable			3				27
(Decrease) in other liabilities			(206	)			(261	)
Net cash provided by operating activities		$	191			$	313
Cash flows from investing activities
Purchases of securities available-for-sale		$	(8,259)			$	—
Proceeds from maturities, calls and paydowns of securities available-for-sale			495				444
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			500				349
Origination of loans, net of principal collected			1,709				(6,453	)
Purchases of premises and equipment			(159	)			(1,286	)
Net cash provided by (used in) investing activities		$	6,743			$	(6,946)
Cash flows from financing activities
Net increase in deposits		$	18,811			$	4,701
Principal payments on finance lease obligations			(80	)			—
Repurchases of common stock			(275	)			—
Dividends paid to common stockholders			(304	)			(263	)
Net cash provided by financing activities		$	18,152			$	4,438
Increase (decrease) in cash and cash equivalents			25,086				(2,195	)
Cash and cash equivalents at beginning of period		$	39,111			$	50,325
Cash and cash equivalents at end of period		$	64,197			$	48,740
Non cash transactions
Transfer of loans to other real estate owned		$	18			$	300
Fair value adjustment for securities available-for-sale			1,856				1,311
Lease liabilities arising from right-of-use assets			—				2,990
Cash transactions
Cash paid for interest		$	1,349			$	1,077
Cash paid for income taxes			—				—

 

See accompanying notes to these consolidated financial statements

4

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2020 and 2019

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

 

																		Accumulated
										Additional								Other
		Shares				Common				Paid-in				Retained				Comprehensive
		Outstanding				Stock				Capital				Earnings				(Loss)				Total
Balance at December 31, 2018			4,378,436			$	9,370			$	31,495			$	16,521			$	(2,243	)		$	55,143
Net Income			—				—				—				1,234				—				1,234
Dividends paid on common stock ($0.06 per share)			—				—				—				(263	)			—				(263	)
Other comprehensive income			—				—				—				—				1,036				1,036
Balance at March 31, 2019			4,378,436			$	9,370			$	31,495			$	17,492			$	(1,207)			$	57,150
																		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 ($0.07 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

 

See accompanying notes to these consolidated financial statements

5

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, 2020 and for the three months ended March 31, 2020 and 2019 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, 2019. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2019 included in Financial’s Annual Report on Form 10-K. Results for the three month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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.

 

6

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, 2020 and 2019.

 

		Three Months Ended
		March 31,
		2020				2019
Net income		$	995,000			$	1,234,000
Weighted average number of shares			4,348,040				4,378,436
Restricted stock units affect of incremental shares			—				2,523
Weighted average diluted shares			4,348,040				4,380,959
Basic EPS (weighted avg shares)		$	0.23			$	0.28
Diluted EPS (Including incremental shares)		$	0.23			$	0.28

In 2020, all restricted stock units (RSUs) were excluded from calculating diluted earnings per share as the Company elected to settle units vesting in 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 were excluded from the 2019 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.

 

 

7

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 grant date fair value of the Company’s stock of $13.00 per share. Shares vest over 3 years in thirds with the first one-third vesting 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, 2020 and 2019, in connection with the restricted stock unit awards was approximately $27,000 and $27,000, respectively. There were no forfeitures during the three month periods ending March 31, 2020.

At March 31, 2020, the unrecognized stock-based compensation expense related to unvested restricted stock awards amounted to approximately $186,000. The unrecognized expense will be recognized ratably over the remaining vesting period of 1.75 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.

 

8

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.

 

9

Note 5 – Fair Value Measurements (continued)

 

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

 

						Carrying Value at March 31, 2020 (in thousands)
Description		Balance as of March 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		$	2,041			$	—			$	2,041			$	—
US agency obligations			27,269				—				27,269				—
Mortgage-backed securities			10,122				—				10,122				—
Municipals			11,588				—				11,588				—
Corporates			3,972				—				3,972				—
Total available-for-sale securities		$	54,992			$	—			$	54,992			$	—
						Carrying Value at December 31, 2019 (in thousands)
Description		Balance as of December 31, 2019				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
US Treasuries		$	1,964			$				$	1,964			$
US agency obligations			32,108				—				32,108				—
Mortgage-backed securities			10,264				—				10,264				—
Municipals			11,222				—				11,222				—
Corporates			4,097				—				4,097				—
Total available-for-sale securities		$	59,655			$	—			$	59,655			$	—

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.

 

10

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, 2020. 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.

 

11

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, 2020
Description		Balance as of March 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*		$	1,908			$	—			$	—			$	1,908
Other real estate owned			1,761				—				—				1,761

 

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

 

						Carrying Value at December 31, 2019
Description		Balance as of December 31, 2019				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans*		$	1,239			$	—			$	—			$	1,239
Other real estate owned			2,339				—				—				2,339

 

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

 

12

Note 5 – Fair Value Measurements (continued)

 

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

 

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

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average) (1)

Assets

Impaired loans

$

1,908

Discounted appraised value

Selling cost

0% - 10% (8%)

Discount for lack of marketability and age of appraisal

0% - 20% (6%)

OREO

1,761

Discounted appraised value

Selling cost

0%  - 10% (6%)

Discount for lack of marketability and age of appraisal

0% - 25% (15%)

 

(1)	Weighted based on the relative value of the instruments.

 

Quantitative information about Level 3 Fair Value Measurements for December 31,  2019 (dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average) (1)

Assets

Impaired loans

$

1,239

Discounted appraised value

Selling cost

0% - 10% (8%)

Discount for lack of marketability and age of appraisal

0% - 20% (6%)

OREO

2,339

Discounted appraised value

Selling cost

0% - 10% (6%)

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.

 

13

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, 2020 and December 31, 2019 was as follows (in thousands):

 

						Fair Value Measurements at March 31, 2020 using
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
		Carrying				Identical Assets				Inputs				Inputs
		Amounts				(Level 1)				(Level 2)				(Level 3)				Balance
Assets
Cash and due from banks		$	31,656			$	31,656			$	—			$	—			$	31,656
Fed funds sold			32,541				32,541				—				—				32,541
Securities
Available-for-sale			54,992				—				54,992				—				54,992
Held-to-maturity			3,683				—				4,223				—				4,223
Restricted stock			1,506								1,506				—				1,506
Loans, net (1)			570,659				—				—				569,458				569,458
Loans held for sale			6,134				—				6,134				—				6,134
Interest receivable			1,922				—				1,922				—				1,922
BOLI			16,278				—				16,278				—				16,278
Liabilities
Deposits		$	668,270			$	—			$	671,077			$	—			$	671,077
Capital notes			5,000				—				4,839				—				4,839
Interest payable			176				—				176				—				176

 

						Fair Value Measurements at December 31, 2019 using
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
		Carrying				Identical Assets				Inputs				Inputs
		Amounts				(Level 1)				(Level 2)				(Level 3)				Balance
Assets
Cash and due from banks		$	30,794			$	30,794			$	—			$	—			$	30,794
Fed funds sold			8,317				8,317				—				—				8,317
Securities
Available-for-sale			59,655				—				59,655				—				59,655
Held-to-maturity			3,688				—				3,861				—				3,861
Restricted stock			1,506				—				1,506				—				1,506
Loans, net (1)			573,274				—				—				569,850				569,850
Loans held for sale			4,221				—				4,221				—				4,221
Interest receivable			1,866				—				1,866				—				1,866
BOLI			13,686				—				13,686				—				13,686
Liabilities
Deposits		$	649,459			$	—			$	651,479			$	—			$	651,479
Capital notes			5,000				—				4,795				—				4,795
Interest payable			173				—				173				—				173

 

(1)	Carrying amount is net of unearned income and the Allowance.

 

14

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, 2020 and December 31, 2019 (amounts in thousands):

 

		March 31, 2020
		Amortized				Gross Unrealized
		Costs				Gains				(Losses)				Fair Value
Held-to-Maturity
US agency obligations		$	3,683			$	540			$	—			$	4,223
Available-for-Sale
US Treasuries			2,000				41				—				2,041
US agency obligations			26,141				1,128				—				27,269
Mortgage-backed securities			9,830				344				(52	)			10,122
Municipals			11,089				499				—				11,588
Corporates			4,082				21				(131	)			3,972
		$	53,142			$	2,033			$	(183	)		$	54,992

 

		December 31, 2019
		Amortized				Gross Unrealized
		Costs				Gains				(Losses)				Fair Value
Held-to-Maturity
US agency obligations		$	3,688			$	173			$	—			$	3,861
Available-for-Sale
US Treasuries			1,966				—				(2	)			1,964
US agency obligations			32,163				278				(333	)			32,108
Mortgage-backed securities			10,328				42				(106	)			10,264
Municipals			11,118				117				(13	)			11,222
Corporates			4,086				32				(21	)			4,097
		$	59,661			$	469			$	(475	)		$	59,655

 

15

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, 2020 and December 31, 2019 (amounts in thousands):

 

		Less than 12 months								More than 12 months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
March 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			—				—				—				—				—				—
Mortgage-backed securities			—				—				648				52				648				52
Municipals			—				—				—				—				—				—
Corporates			1,982				15				944				116				2,926				131
Total		$	1,982			$	15			$	1,592			$	168			$	3,574			$	183

 

		Less than 12 months								More than 12 months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
December 31, 2019		Value				Losses				Value				Losses				Value				Losses
Description of securities
Held-to-maturity
US agency obligations		$	—			$	—			$	—			$	—			$	—			$	—
Available-for-sale
US Treasuries			—				—				1,964				2				1,964				2
US agency obligations			12,395				218				12,048				115				24,443				333
Mortgage-backed securities			—				—				6,609				106				6,609				106
Municipals			—				—				2,736				13				2,736				13
Corporates			—				—				1,042				21				1,042				21
Total		$	12,395			$	218			$	24,399			$	257			$	36,794			$	475

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).

 

16

Note 6 – Securities (continued)

 

At March 31, 2020, 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, 2020, the Bank owned five securities in an unrealized loss position that were being evaluated for other than temporary impairment. Two of these securities were S&P rated AAA, one was rated AA, one was rated A, and one was rated BBB+. As of March 31, 2020, two of these securities were direct obligations of the U.S. government or government sponsored entities and three were investments in domestic corporate issued securities.

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

Gross gains on sales of available-for-sale securities were $431 during the three months ended March 31, 2020 as compared to $0 during the same periods in 2019. There were no gross losses on sales of available-for-sale securities during the three month periods ended March 31, 2020 and 2019. There were no sales of held-to-maturity securities during the three month periods ended March 31, 2020 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.

 

17

Note 7 – Business Segments (continued)

 

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three months ended March 31, 2020 and 2019 was as follows (dollars in thousands):

Business Segments

 

		Community
		Banking				Mortgage				Total
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
Three months ended March 31, 2019
Net interest income		$	6,130			$	—			$	6,130
Provision for loan losses			210				—				210
Net interest income after provision for loan losses			5,920				—				5,920
Noninterest income			528				691				1,219
Noninterest expenses			5,025				574				5,599
Income before income taxes			1,423				117				1,540
Income tax expense			281				25				306
Net income		$	1,142			$	92			$	1,234
Total assets		$	681,531			$	2,857			$	684,388

 

18

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,
		2020				2019
Commercial		$	115,529			$	114,257
Commercial real estate			302,562				303,900
Consumer			91,330				89,945
Residential			66,712				70,001
Total loans (1)			576,133				578,103
Less allowance for loan losses			5,474				4,829
Net loans		$	570,659			$	573,274

 

(1)	Includes net deferred costs and premiums of $550 and $572 as of March 31, 2020 and December 31, 2019, 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.

 

19