UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 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)

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

 

 

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		☐

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 August 12, 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			58
Item 4.		Controls and Procedures			58
PART II – OTHER INFORMATION					59
Item 1.		Legal Proceedings			59
Item 1A.		Risk Factors			59
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			59
Item 3.		Defaults Upon Senior Securities			60
Item 4.		Mine Safety Disclosures			60
Item 5.		Other Information			60
Item 6.		Exhibits			61
SIGNATURES					61

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)

 

 

Assets		June 30, 2020				December 31, 2019
Cash and due from banks		$	30,669			$	30,794
Federal funds sold			60,131				8,317
Total cash and cash equivalents			90,800				39,111
Securities held-to-maturity (fair value of $4,283 in 2020 and $3,861 in 2019)			3,679				3,688
Securities available-for-sale, at fair value			55,072				59,655
Restricted stock, at cost			1,551				1,506
Loans, net of allowance for loan losses of $6,193 in 2020 and $4,829 in 2019			623,564				573,274
Loans held for sale			6,098				4,221
Premises and equipment, net			16,622				16,698
Interest receivable			2,505				1,866
Cash value - bank owned life insurance			16,387				13,686
Other real estate owned			1,616				2,339
Deferred tax asset, net			622				1,177
Other assets			8,582				8,173
Total assets		$	827,098			$	725,394
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing demand		$	134,523			$	93,936
NOW, money market and savings			424,842				362,821
Time			186,621				192,702
Total deposits			745,986				649,459
Capital notes			7,275				5,000
Income taxes payable			107				124
Interest payable			172				173
Other liabilities			9,093				9,193
Total liabilities		$	762,633			$	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 June 30, 2020 and December 31, 2019			9,286				9,325
Additional paid-in-capital			30,989				31,225
Retained earnings			22,109				20,900
Accumulated other comprehensive income (loss)			2,081				(5	)
Total stockholders’ equity		$	64,465			$	61,445
Total liabilities and stockholders’ equity		$	827,098			$	725,394

 

1

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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

 

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
Interest Income		2020				2019				2020				2019
Loans		$	6,732			$	6,816			$	13,737			$	13,470
Securities
US Government and agency obligations			151				184				338				369
Mortgage backed securities			55				56				114				117
Municipals - taxable			80				81				155				160
Municipals - tax exempt			—				—				—				2
Dividends			24				33				33				51
Other (Corporates)			23				24				46				47
Interest bearing deposits			6				74				70				165
Federal Funds sold			10				122				76				243
Total interest income			7,081				7,390				14,569				14,624
Interest Expense
Deposits
NOW, money market savings			166				362				492				668
Time Deposits			912				826				1,858				1,574
Finance leases			28				—				58				—
Capital notes			57				50				107				100
Total interest expense			1,163				1,238				2,515				2,342
Net interest income			5,918				6,152				12,054				12,282
Provision for loan losses			760				116				1,648				326
Net interest income after provision for loan losses			5,158				6,036				10,406				11,956
Noninterest income
Gain on sales of loans held for sale			1,950				1,075				3,127				1,766
Service charges, fees and commissions			514				461				1,002				900
Life insurance income			110				84				188				167
Other			2				39				14				45
Gain on sales and calls of securities, net			213				—				644				—
Total noninterest income			2,789				1,659				4,975				2,878
Noninterest expenses
Salaries and employee benefits			3,973				3,153				7,327				6,081
Occupancy			382				417				818				838
Equipment			569				536				1,178				994
Supplies			106				142				233				304
Professional, data processing, and other outside expense			970				859				1,894				1,674
Marketing			179				276				315				421
Credit expense			276				156				472				283
Other real estate expenses			21				1				120				140
FDIC insurance expense			87				94				144				188
Other			372				341				631				651
Total noninterest expenses			6,935				5,975				13,132				11,574
Income before income taxes			1,012				1,720				2,249				3,260
Income tax expense			191				343				433				649
Net Income		$	821			$	1,377			$	1,816			$	2,611
Weighted average shares outstanding - basic			4,339,436				4,378,436				4,343,738				4,378,436
Weighted average shares outstanding - diluted			4,339,436				4,383,021				4,343,738				4,381,994
Earnings per common share - basic		$	0.19			$	0.31			$	0.42			$	0.60
Earnings per common share - diluted		$	0.19			$	0.31			$	0.42			$	0.60

 

2

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollar amounts in thousands) (unaudited)

 

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2020				2019				2020				2019
Net Income		$	821			$	1,377			$	1,816			$	2,611
Other comprehensive income:
Unrealized gains on securities available-for-sale			998				1,180				3,285				2,491
Tax effect			(210	)			(248	)			(690	)			(523	)
Reclassification adjustment for gains included in net income (1)			(213	)			—				(644	)			—
Tax effect (2)			44				—				135				—
Other comprehensive income, net of tax			619				932				2,086				1,968
Comprehensive income		$	1,440			$	2,309			$	3,902			$	4,579

 

(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.

 

3

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2020 and 2019

(dollar amounts in thousands) (unaudited)

 

 

		For the Six Months Ended June 30,
		2020				2019
Cash flows from operating activities
Net Income		$	1,816			$	2,611
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,008				690
Stock based compensation expense			53				53
Net amortization and accretion of premiums and discounts on securities			196				199
(Gain) on sales of available-for-sale securities			(644	)			—
(Gain) on sales of loans held for sale			(3,127	)			(1,766	)
Proceeds from sales of loans held for sale			125,134				66,292
Origination of loans held for sale			(123,884	)			(67,299	)
Provision for loan losses			1,648				326
(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			(188	)			(167	)
(Increase) in interest receivable			(639	)			(19	)
(Increase) decrease in other assets			(1,040	)			47
(Decrease) increase in income taxes payable			(17	)			648
(Decrease) increase in interest payable			(1	)			32
(Decrease) in other liabilities			7				(454	)
Net cash provided by operating activities		$	418			$	1,321
Cash flows from investing activities
Purchases of securities available-for-sale		$	(11,334)			$	-
Proceeds from maturities, calls and paydowns of securities available-for-sale			1,202				1,207
Proceeds from sale of securities available-for-sale			17,813				—
Purchases of bank owned life insurance			(2,750	)			—
Life insurance proceeds			588				—
(Purchase) of Federal Home Loan Bank stock			(45	)			(44	)
Proceeds from sale of other real estate owned			645				349
Origination of loans, net of principal collected			(51,956	)			(22,744	)
Purchases of premises and equipment			(652	)			(2,899	)
Net cash (used in) investing activities		$	(46,489	)		$	(24,131	)
Cash flows from financing activities
Net increase in deposits		$	96,527			$	5,141
Principal payments on finance lease obligations			(160	)			—
Repurchases of common stock			(275	)			—
Dividends paid to common stockholders			(607	)			(526	)
Proceeds from sale of 3.25% capital notes due 6/30/2025			7,275				—
Retirement of 4% capital notes due 1/24/2022			(5,000	)			—
Net cash provided by financing activities		$	97,760			$	4,615
Increase (decrease) in cash and cash equivalents			51,689				(18,195	)
Cash and cash equivalents at beginning of period		$	39,111			$	50,325
Cash and cash equivalents at end of period		$	90,800			$	32,130
Non cash transactions
Transfer of loans to other real estate owned		$	18			$	460
Fair value adjustment for securities available-for-sale			2,641				2,491
Lease liabilities arising from right-of-use assets			—				6,373
Cash transactions
Cash paid for interest		$	2,516			$	2,310
Cash paid for income taxes			435				—

 

4

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Six Months Ended June 30, 2020 and 2019

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

 

 

		Shares Outstanding				Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive (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
Net Income			—				—				—				1,377				—				1,377
Dividends paid on common stock ($0.06 per share)			—				—				—				(263	)			—				(263	)
Other comprehensive income			—				—				—				—				932				932
Balance at June 30, 2019			4,378,436			$	9,370			$	31,495			$	18,606			$	(275)			$	59,196
																		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
Net Income			—				—				—				821				—				821
Dividends paid on common stock ($0.07 per share)			—				—				—				(303	)			—				(303	)
Other comprehensive income			—				—				—				—				619				619
Balance at June 30, 2020			4,339,436			$	9,286			$	30,989			$	22,109			$	2,081			$	64,465

 

5

See accompanying notes to these consolidated financial statements

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of June 30, 2020 and for the three and six months ended June 30, 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 and six month periods ended June 30, 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 and six months ended June 30, 2020 and 2019.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2020				2019				2020				2019
Net income		$	821,000			$	1,377,000			$	1,816,000			$	2,611,000
Weighted average number of shares			4,339,436				4,378,436				4,343,738				4,378,436
Restricted stock units affect of incremental shares			—				4,585				—				3,558
Weighted average diluted shares			4,339,436				4,383,021				4,343,738				4,381,994
Basic EPS (weighted avg shares)		$	0.19			$	0.31			$	0.42			$	0.60
Diluted EPS (Including incremental shares)		$	0.19			$	0.31			$	0.42			$	0.60

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. 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 June 30, 2020 and 2019, in connection with the restricted stock unit awards was approximately $26,000 and $26,000, respectively. The total expense recognized for the six months ended June 30, 2020 and 2019, in connection with the restricted stock unit awards was approximately $53,000 and $53,000, respectively. There were no forfeitures during the three and six month periods ending June 30, 2020.

At June 30, 2020, the unrecognized stock-based compensation expense related to unvested restricted stock awards amounted to approximately $159,000. The unrecognized expense will be recognized ratably over the remaining vesting period of 1.50 years. The Company accounts for forfeitures as they occur.

Note 5 – Fair Value Measurements

Determination of Fair Value

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

 

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.

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

 

9

Note 5 – Fair Value Measurements (continued)

 

 

						Carrying Value at June 30, 2020 (in thousands)
Description		Balance as of June 30, 2020				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
US Treasuries		$	2,038			$	—			$	2,038			$	—
US agency obligations			26,102				—				26,102				—
Mortgage-backed securities			9,424				—				9,424				—
Municipals			13,247				—				13,247				—
Corporates			4,261				—				4,261				—
Total available-for-sale securities		$	55,072			$	—			$	55,072			$	—
						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 June 30, 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 June 30, 2020
Description		Balance as of June 30, 2020				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans*		$	2,486			$	—			$	—			$	2,486
Other real estate owned			1,616				—				—				1,616

 

* 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 June 30, 2020 (dollars in thousands)
		Fair Value				Valuation Technique(s)		Unobservable Input		Range (Weighted Average) (1)
Assets
Impaired loans		$	2,486			Discounted appraised value		Selling cost		0%—10% (8%)
								Discount for lack of marketability and age of appraisal		0%—20% (6%)
OREO			1,616			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 June 30, 2020 and December 31, 2019 was as follows (in thousands):

 

						Fair Value Measurements at June 30, 2020 using
Assets		Carrying Amounts				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance
Cash and due from banks		$	30,669			$	30,669			$	—			$	—			$	30,669
Fed funds sold			60,131				60,131				—				—				60,131
Securities
Available-for-sale			55,072				—				55,072				—				55,072
Held-to-maturity			3,679				—				4,283				—				4,283
101Restricted stock			1,551								1,551				—				1,551
Loans, net (1)			623,564				—				—				623,253				623,253
Loans held for sale			6,098				—				6,098				—				6,098
Interest receivable			2,505				—				2,505				—				2,505
BOLI			16,387				—				16,387				—				16,387
Liabilities
Deposits		$	745,986			$	—			$	748,299			$	—			$	748,299
Capital notes			7,275				—				6,456				—				6,456
Interest payable			172				—				172				—				172
						Fair Value Measurements at December 31, 2019 using
Assets		Carrying Amounts				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance
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.

 

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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 June 30, 2020 and December 31, 2019 (amounts in thousands):

 

						June 30, 2020
		Amortized				Gross Unrealized								Fair Value
		Costs				Gains				(Losses)
Held-to-Maturity
US agency obligations		$	3,679			$	604			$	—			$	4,283
Available-for-Sale
US Treasuries			2,000				38				—				2,038
US agency obligations			24,488				1,614				—				26,102
Mortgage-backed securities			9,119				305				—				9,424
Municipals			12,752				497				(2	)			13,247
Corporates			4,078				193				(10	)			4,261
		$52,437				$ 2,647				$ (12)				$ 55,072
						December 31, 2019
		Amortized				Gross Unrealized								Fair Value
		Costs				Gains				(Losses)
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 June 30, 2020 and December 31, 2019 (amounts in thousands):

 

		Less than 12 months								More than 12 months												Total
June 30, 2020		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Description of securities
Held-to-maturity
US agency obligations		$	—			$	—			$	—			$	—			$	—			$	—
Available-for-sale
US Treasuries			—				—				—				—				—				—
US agency obligations			—				—				—				—				—				—
Mortgage-backed securities			—				—				—				—				—				—
Municipals			674				2				—				—				674				2
Corporates			—				—				1,047				10				1,047				10
Total		$	674			$	2			$	1,047			$	10			$	1,721			$	12
		Less than 12 months								More than 12 months												Total
December 31, 2019		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized 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