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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, 2013
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). ¨ Yes x 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: 3,352,725 shares of Common Stock, par value $2.14 per share, were outstanding at August 8, 2013.
| 1 | ||||||
|
Item 1. |
1 | |||||
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
30 | ||||
|
Item 3. |
46 | |||||
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Item 4. |
46 | |||||
| 46 | ||||||
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Item 1. |
46 | |||||
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Item 1A. |
46 | |||||
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Item 2. |
47 | |||||
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Item 3. |
47 | |||||
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Item 4. |
47 | |||||
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Item 5. |
47 | |||||
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Item 6. |
48 | |||||
| 49 | ||||||
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) (2013 unaudited)
| 6/30/2013 | 12/31/2012 | |||||||
|
Assets |
||||||||
|
Cash and due from banks |
$ | 16,165 | $ | 16,827 | ||||
|
Federal funds sold |
9,302 | 24,171 | ||||||
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|||||
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Total cash and cash equivalents |
25,467 | 40,998 | ||||||
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|||||
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Securities held-to-maturity (fair value of $3,322 in 2013 and $3,417 in 2012) |
3,063 | 3,075 | ||||||
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Securities available-for-sale, at fair value |
43,022 | 50,294 | ||||||
|
Restricted stock, at cost |
1,428 | 1,538 | ||||||
|
Loans, net of allowance for loan losses of $5,475 in 2013 and $5,535 in 2012 |
331,703 | 319,922 | ||||||
|
Loans held for sale |
861 | 904 | ||||||
|
Premises and equipment, net |
8,240 | 8,340 | ||||||
|
Software, net |
260 | 252 | ||||||
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Interest receivable |
1,443 | 1,557 | ||||||
|
Cash value - bank owned life insurance |
9,082 | 8,931 | ||||||
|
Other real estate owned, net of valuation allowance |
1,817 | 2,112 | ||||||
|
Income taxes receivable |
678 | 624 | ||||||
|
Deferred tax asset |
2,472 | 1,367 | ||||||
|
Other assets |
1,335 | 1,467 | ||||||
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|||||
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Total assets |
$ | 430,871 | $ | 441,381 | ||||
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|||||
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Liabilities and Stockholders’ Equity |
||||||||
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Deposits |
||||||||
|
Noninterest bearing demand |
$ | 50,745 | $ | 66,917 | ||||
|
NOW, money market and savings |
243,044 | 239,812 | ||||||
|
Time |
94,999 | 92,286 | ||||||
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|||||
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Total deposits |
388,788 | 399,015 | ||||||
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FHLB borrowings |
2,000 | 2,000 | ||||||
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Capital notes |
10,000 | 10,000 | ||||||
|
Interest payable |
68 | 70 | ||||||
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Other liabilities |
962 | 683 | ||||||
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|||||
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Total liabilities |
$ | 401,818 | $ | 411,768 | ||||
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Stockholders’ equity |
||||||||
|
Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 3,352,725 as of June 30, 2013 and December 31, 2012 |
$ | 7,175 | $ | 7,175 | ||||
|
Additional paid-in capital |
22,806 | 22,806 | ||||||
|
Accumulated other comprehensive income (loss) |
(1,577 | ) | 568 | |||||
|
Retained earnings (deficit) |
649 | (936 | ) | |||||
|
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|
|||||
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Total stockholders’ equity |
$ | 29,053 | $ | 29,613 | ||||
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|||||
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Total liabilities and stockholders’ equity |
$ | 430,871 | $ | 441,381 | ||||
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|||||
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 | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Interest Income |
||||||||||||||||
|
Loans |
$ | 4,199 | $ | 4,178 | $ | 8,362 | $ | 8,402 | ||||||||
|
Securities |
||||||||||||||||
|
US Government and agency obligations |
172 | 241 | 362 | 521 | ||||||||||||
|
Mortgage backed securities |
10 | 7 | 14 | 20 | ||||||||||||
|
Municipals |
141 | 171 | 293 | 325 | ||||||||||||
|
Dividends |
25 | 25 | 30 | 29 | ||||||||||||
|
Other (Corporates) |
12 | 17 | 28 | 23 | ||||||||||||
|
Federal Funds sold |
8 | 6 | 15 | 11 | ||||||||||||
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|||||||||
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Total interest income |
4,567 | 4,645 | 9,104 | 9,331 | ||||||||||||
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|||||||||
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Interest Expense |
||||||||||||||||
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Deposits |
||||||||||||||||
|
NOW, money market savings |
124 | 209 | 248 | 414 | ||||||||||||
|
Time Deposits |
317 | 392 | 640 | 813 | ||||||||||||
|
FHLB borrowings |
19 | 75 | 38 | 149 | ||||||||||||
|
Reverse repurchase agreements |
— | — | — | 15 | ||||||||||||
|
Capital notes |
150 | 133 | 300 | 238 | ||||||||||||
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|||||||||
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Total interest expense |
610 | 809 | 1,226 | 1,629 | ||||||||||||
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|||||||||
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Net interest income |
3,957 | 3,836 | 7,878 | 7,702 | ||||||||||||
|
Provision for loan losses |
55 | 425 | 290 | 1,175 | ||||||||||||
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|||||||||
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Net interest income after provision for loan losses |
3,902 | 3,411 | 7,588 | 6,527 | ||||||||||||
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|||||||||
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Other operating income |
||||||||||||||||
|
Mortgage fee income |
340 | 289 | 659 | 515 | ||||||||||||
|
Service charges, fees and commissions |
325 | 311 | 628 | 594 | ||||||||||||
|
Increase in cash value of life insurance |
76 | 82 | 151 | 164 | ||||||||||||
|
Other |
29 | 32 | 37 | 71 | ||||||||||||
|
Gain on sale of available-for-sale securities |
135 | 129 | 394 | 170 | ||||||||||||
|
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|
|||||||||
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Total other operating income |
905 | 843 | 1,869 | 1,514 | ||||||||||||
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|
|||||||||
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Other operating expenses |
||||||||||||||||
|
Salaries and employee benefits |
1,726 | 1,546 | 3,502 | 3,049 | ||||||||||||
|
Occupancy |
285 | 291 | 590 | 577 | ||||||||||||
|
Equipment |
240 | 245 | 501 | 498 | ||||||||||||
|
Supplies |
93 | 103 | 183 | 216 | ||||||||||||
|
Professional, data processing, and other outside expense |
569 | 518 | 1,130 | 1,016 | ||||||||||||
|
Marketing |
95 | 145 | 181 | 249 | ||||||||||||
|
Credit expense |
64 | 56 | 119 | 112 | ||||||||||||
|
Other real estate expenses |
261 | 274 | 340 | 322 | ||||||||||||
|
FDIC insurance expense |
143 | 144 | 287 | 288 | ||||||||||||
|
Other |
195 | 237 | 369 | 516 | ||||||||||||
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|
|||||||||
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Total other operating expenses |
3,671 | 3,559 | 7,202 | 6,843 | ||||||||||||
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|
|||||||||
|
Income before income taxes |
1,136 | 695 | 2,255 | 1,198 | ||||||||||||
|
Income tax expense |
339 | 209 | 670 | 352 | ||||||||||||
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|
|||||||||
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Net Income |
$ | 797 | $ | 486 | $ | 1,585 | $ | 846 | ||||||||
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|||||||||
|
Weighted average shares outstanding - basic |
3,352,725 | 3,342,415 | 3,352,725 | 3,342,415 | ||||||||||||
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Weighted average shares outstanding - diluted |
3,353,141 | 3,343,250 | 3,353,002 | 3,342,833 | ||||||||||||
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Income per common share - basic |
$ | 0.24 | $ | 0.15 | $ | 0.47 | $ | 0.25 | ||||||||
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Income per common share - diluted |
$ | 0.24 | $ | 0.15 | $ | 0.47 | $ | 0.25 | ||||||||
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See accompanying notes to these consolidated financial statements
2
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Three and Six months ended June 30, 2013 and 2012
(dollar amounts in thousands) (unaudited)
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Net Income |
$ | 797 | $ | 486 | $ | 1,585 | $ | 846 | ||||||||
|
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|
|||||||||
|
Other comprehensive income (loss): |
||||||||||||||||
|
Unrealized (losses) gains on securities available-for-sale net of deferred taxes of $838 and $(444) for the three month periods and $971 and $(389) for the six month periods ended June 30, 2013 and 2012 |
(1,627 | ) | 862 | (1,885 | ) | 760 | ||||||||||
|
Reclassification adjustment for gains included in net income, net of taxes of $46 and $44 for the three month periods and $134 and $58 for the six month periods ended June 30, 2013 and 2012 |
(89 | ) | (85 | ) | (260 | ) | (112 | ) | ||||||||
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|||||||||
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Other comprehensive income (loss), net of tax |
(1,716 | ) | 777 | (2,145 | ) | 648 | ||||||||||
|
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|||||||||
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Comprehensive income (loss) |
$ | (919 | ) | $ | 1,263 | $ | (560 | ) | $ | 1,494 | ||||||
|
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|
|||||||||
See accompanying notes to these consolidated financial statements
3
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months ended June 30, 2013 and 2012
(dollar amounts in thousands) (unaudited)
| Six Months Ended June 30, | ||||||||
| 2013 | 2012 | |||||||
|
Cash flows from operating activities |
||||||||
|
Net Income |
$ | 1,585 | $ | 846 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
|
Depreciation |
354 | 334 | ||||||
|
Net amortization and accretion of premiums and discounts on securities |
183 | 299 | ||||||
|
(Gain) on sale of available for sale securities |
(394 | ) | (170 | ) | ||||
|
Provision for loan losses |
290 | 1,175 | ||||||
|
Loss on sale of other real estate owned |
9 | 81 | ||||||
|
Impairment of other real estate owned |
284 | 200 | ||||||
|
Decrease (increase) in loans held-for-sale |
43 | (730 | ) | |||||
|
(Increase) in cash value of life insurance |
(151 | ) | (164 | ) | ||||
|
Decrease in interest receivable |
114 | 81 | ||||||
|
Decrease in other assets |
132 | 309 | ||||||
|
(Increase) in income taxes payable |
(54 | ) | (22 | ) | ||||
|
(Decrease) in interest payable |
(2 | ) | (4 | ) | ||||
|
Increase (decrease) in other liabilities |
279 | (325 | ) | |||||
|
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|
|||||
|
Net cash provided by operating activities |
$ | 2,672 | $ | 1,910 | ||||
|
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|
|||||
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Cash flows from investing activities |
||||||||
|
Proceeds from maturities and calls of securities held to maturity |
$ | — | $ | 5,000 | ||||
|
Purchases of securities available for sale |
(17,314 | ) | (25,400 | ) | ||||
|
Proceeds from maturities, calls and paydowns of securities available for sale |
2,113 | 10,488 | ||||||
|
Proceeds from sale of securities available for sale |
19,446 | 8,472 | ||||||
|
Redemption of Federal Home Loan Bank stock |
110 | 61 | ||||||
|
Proceeds from sale of other real estate owned |
493 | 2,088 | ||||||
|
Improvements to other real estate owned |
— | (5 | ) | |||||
|
Origination of loans, net of principal collected |
(12,562 | ) | (3,011 | ) | ||||
|
Purchases of premises and equipment |
(262 | ) | (260 | ) | ||||
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|||||
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Net cash (used in) investing activities |
$ | (7,976 | ) | $ | (2,567 | ) | ||
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Cash flows from financing activities |
||||||||
|
Net (decrease) increase in deposits |
$ | (10,227 | ) | $ | 10,355 | |||
|
Net (decrease) in repurchase agreements |
— | (8,379 | ) | |||||
|
Payoff of 6% senior capital notes due 4/1/2012 |
— | (7,000 | ) | |||||
|
Proceeds from issuance of 6% senior capital notes due 4/1/2017 |
— | 9,627 | ||||||
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|
Net cash (used in) provided by financing activities |
$ | (10,227 | ) | $ | 4,603 | |||
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|
|||||
|
(Decrease) increase in cash and cash equivalents |
(15,531 | ) | 3,946 | |||||
|
Cash and cash equivalents at beginning of period |
$ | 40,998 | $ | 23,340 | ||||
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Cash and cash equivalents at end of period |
$ | 25,467 | $ | 27,286 | ||||
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Non cash transactions |
||||||||
|
Transfer of loans to foreclosed assets |
$ | 491 | $ | 1,434 | ||||
|
Fair value adjustment for securities |
(3,250 | ) | 979 | |||||
|
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|
|||||
|
Cash transactions |
||||||||
|
Cash paid for interest |
$ | 1,228 | $ | 1,633 | ||||
|
Cash paid for taxes |
724 | 370 | ||||||
|
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|
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|
|||||
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
(dollars in thousands) (unaudited)
|
Total Shares
Outstanding |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings (Deficit) |
Accumulated
Other Comprehensive Income (Loss) |
Total | |||||||||||||||||||
|
Balance at December 31, 2011 |
3,342,415 | $ | 7,152 | $ | 22,775 | $ | (3,068 | ) | $ | (54 | ) | $ | 26,805 | |||||||||||
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|
|||||||||||||
|
Net Income |
— | — | — | 846 | — | 846 | ||||||||||||||||||
|
Other Comprehensive Income |
— | — | — | — | 648 | 648 | ||||||||||||||||||
|
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|
Balance at June 30, 2012 |
3,342,415 | $ | 7,152 | $ | 22,775 | $ | (2,222 | ) | $ | 594 | $ | 28,299 | ||||||||||||
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|||||||||||||
|
Balance at December 31, 2012 |
3,352,725 | $ | 7,175 | $ | 22,806 | $ | (936 | ) | $ | 568 | 29,613 | |||||||||||||
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|||||||||||||
|
Net Income |
— | — | — | 1,585 | — | 1,585 | ||||||||||||||||||
|
Other Comprehensive Loss |
— | — | — | — | (2,145 | ) | (2,145 | ) | ||||||||||||||||
|
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|
Balance at June 30, 2013 |
3,352,725 | $ | 7,175 | $ | 22,806 | $ | 649 | $ | (1,577 | ) | $ | 29,053 | ||||||||||||
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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 and for the three and six months ended June 30, 2013 and 2012 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, 2012. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2012 included in Financial’s Annual Report on Form 10-K. Results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
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.
Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb loss in the existing 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 loss based on available information including the composition of the loan portfolio, historical loan losses (to the extent available due to limited history), 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 policies with respect to the methodology for determining the allowance for loan losses involve a higher degree of complexity and require management to make subjective judgments that often require assumptions or estimates about uncertain matters. These critical policies and their assumptions are periodically reviewed with the Board of Directors.
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 Share
Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of 1999 Financial (the “1999 Plan”) are considered dilutive. The following is a summary of the earnings per share calculation for the three and six months ended June 30, 2013 and 2012.
6
Note 3 – Earnings Per Share (continued)
| Three months ended | Year to date | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Net income |
$ | 797,000 | $ | 486,000 | $ | 1,585,000 | $ | 846,000 | ||||||||
|
Weight average number of shares |
3,352,725 | 3,342,415 | 3,352,725 | 3,342,415 | ||||||||||||
|
Options affect of incremental shares |
416 | 835 | 277 | 418 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Weighted average diluted shares |
3,353,141 | 3,343,250 | 3,353,002 | 3,342,833 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Basic EPS (weighted avg shares) |
$ | 0.24 | $ | 0.15 | $ | 0.47 | $ | 0.25 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Diluted EPS (Including Option Shares) |
$ | 0.24 | $ | 0.15 | $ | 0.47 | $ | 0.25 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table sets forth the incremental shares associated with option shares that were not included in calculating the diluted earnings because their effect was anti-dilutive:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Incremental shares excluded from calculating diluted EPS because their effect was anti-dilutive |
169,600 | 175,847 | 169,600 | 216,492 | ||||||||||||
Note 4 – Stock Based Compensation
Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.
7
Note 4 – Stock Based Compensation (continued)
Stock option plan activity for the six months ended June 30, 2013 is summarized below:
| Shares |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life (in years) |
Average
Intrinsic Value |
|||||||||||||
|
Options outstanding, January 1, 2013 |
175,366 | $ | 9.66 | |||||||||||||
|
Granted |
— | — | ||||||||||||||
|
Exercised |
— | — | ||||||||||||||
|
Forfeited |
— | $ | — | |||||||||||||
|
|
|
|||||||||||||||
|
Options outstanding, June 30, 2013 |
175,366 | 9.66 | 1.5 | $ | 7,092 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Options exercisable, June 30, 2013 |
175,366 | $ | 9.66 | 1.5 | $ | 7,902 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Intrinsic value is calculated by subtracting exercise price of option shares from the market price of underlying shares and multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is greater than the market price on a given date.
All compensation expense related to the foregoing stock option plan has been recognized. The Company’s ability to grant additional options shares under the 1999 Plan has expired.
Note 5 – Fair Value Measurements
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market 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.
8
Note 5 – Fair Value Measurements (continued)
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
| • |
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| • |
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| • |
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Securities
Where quoted prices are available in an active market, 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 June 30, 2013 | ||||||||||||||||
|
Description |
Balance as of
June 30, 2013 |
Quoted Prices
In Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
|
US Treasuries |
$ | 3,736 | $ | — | $ | 3,736 | $ | — | ||||||||
|
US agency obligations |
17,479 | — | 17,479 | |||||||||||||
|
Mortgage-backed securities |
3,745 | — | 3,745 | — | ||||||||||||
|
Municipals |
16,171 | — | 16,171 | — | ||||||||||||
|
Other (corporates) |
1,891 | — | 1,891 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 43,022 | $ | — | $ | 43,022 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Carrying Value at December 31, 2012 | ||||||||||||||||
|
Description |
Balance as
of
December 31, 2012 |
Quoted Prices
In Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
|
US agency obligations |
$ | 23,069 | $ | — | $ | 23,069 | $ | — | ||||||||
|
Mortgage-backed securities |
1,812 | — | 1,812 | — | ||||||||||||
|
Municipals |
22,804 | 22,804 | ||||||||||||||
|
Other (corporates) |
2,609 | — | 2,609 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 50,294 | $ | — | $ | 50,294 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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. 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, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over one year old, then the fair 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 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, 2013. Gains and losses on the sale of loans are recorded within mortgage fee income 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 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.
Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The carrying values of all OREO properties are considered to be Level 3.
The following table summarizes the Company’s impaired loans, loans held for sale, and OREO measured at fair value on a nonrecurring basis during the period (in thousands).
| Carrying Value at June 30, 2013 | ||||||||||||||||
|
Description |
Balance as of
June 30, 2013 |
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
|
Impaired loans* |
$ | 5,730 | $ | — | $ | — | $ | 5,730 | ||||||||
|
Loans held for sale |
861 | — | 861 | — | ||||||||||||
|
Other real estate owned |
1,817 | — | — | 1,817 | ||||||||||||
| * | Includes loans charged down during the quarter to the net realizable value of the collateral. |
| Carrying Value at December 31, 2012 | ||||||||||||||||
|
Description |
Balance as of
December 31, 2012 |
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
|
Impaired loans* |
$ | 6,836 | $ | — | $ | — | $ | 6,836 | ||||||||
|
Loans held for sale |
904 | — | 904 | — | ||||||||||||
|
Other real estate owned |
2,112 | — | — | 2,112 | ||||||||||||
| * | Includes loans charged down during the quarter to the net realizable value of the collateral. |
11
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, 2013
(dollars in thousands) |
||||||||||
|
Fair
Value |
Valuation Technique(s) |
Unobservable Input |
Range (Weighted
Average) |
|||||||
|
Assets |
||||||||||
|
Impaired loans |
$ | 5,730 | Discounted appraised value |
Selling cost |
5% - 10% (6%) | |||||
|
Discount for lack of marketability and age of appraisal |
0% - 25% (15%) | |||||||||
|
OREO |
1,817 | Discounted appraised value |
Selling cost |
5% - 10% (6%) | ||||||
|
Discount for lack of marketability and age of appraisal |
0% - 25% (15%) | |||||||||
|
Quantitative information about Level 3 Fair Value Measurements for
December 31, 2012
(dollars in thousands) |
||||||||||
|
Fair
Value |
Valuation Technique(s) |
Unobservable Input |
Range (Weighted
Average) |
|||||||
|
Assets |
||||||||||
|
Impaired loans |
$ | 6,836 | Discounted appraised value |
Selling cost |
5% - 10% (6%) | |||||
|
Discount for lack of marketability and age of appraisal |
0% - 25% (15%) | |||||||||
|
OREO |
2,112 | Discounted appraised value |
Selling cost |
5% - 10% (6%) | ||||||
|
Discount for lack of marketability and age of appraisal |
0% - 25% (15%) | |||||||||
Financial Instruments
Cash, cash equivalents and Federal Funds sold
The carrying amounts of cash and short-term instruments approximate fair values.
Loans
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain fixed rate loans are based on quoted market prices of similar loans adjusted for differences in loan characteristics. Fair values for other loans such as commercial real estate and commercial and industrial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated as described above. The carrying values of all loans are considered to be Level 3.
Bank Owned Life Insurance (BOLI)
The carrying amount approximates fair value. The carrying values of all BOLI is considered to be Level 2.
12
Note 5 – Fair Value Measurements (continued)
Deposits
Fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed rate certificates of deposit are estimated using discounted cash flow analyses that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying values of all deposits are considered to be Level 2.
FHLB borrowings
The fair value of FHLB borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. The carrying values of all FHLB borrowings are considered to be Level 2.
Short-term borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate fair value. The carrying values of all short term borrowings are considered to be Level 2.
Capital notes
Fair values of capital notes are based on market prices for debt securities having similar maturity and interest rate characteristics. The carrying values of all capital notes are considered to be Level 2.
Accrued interest
The carrying amounts of accrued interest approximate fair value. The carrying values of all accrued interest is considered to be Level 2.
Off-balance sheet credit-related instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Fair value of off-balance sheet credit-related instruments were deemed to be immaterial at June 30, 2013 and December 31, 2012 and therefore are not included in the table below.
13
Note 5 – Fair Value Measurements (continued)
The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments are as follows (in thousands):
| Fair Value Measurements at June 30, 2013 using | ||||||||||||||||||||
|
Carrying
Amounts |
Quoted Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Balance | ||||||||||||||||
|
Assets |
||||||||||||||||||||
|
Cash and due from banks |
$ | 16,165 | $ | 16,165 | $ | — | $ | — | $ | 16,165 | ||||||||||
|
Federal funds sold |
9,302 | 9,302 | — | — | 9,302 | |||||||||||||||
|
Securities |
||||||||||||||||||||
|
Available-for-sale |
43,022 | — | 43,022 | — | 43,022 | |||||||||||||||
|
Held-to-maturity |
3,063 | — | 3,322 | — | 3,322 | |||||||||||||||
|
Loans, net |
331,703 | — | — | 342,550 | 342,550 | |||||||||||||||
|
Loans held for sale |
861 | — | 861 | — | 861 | |||||||||||||||
|
Interest receivable |
1,443 | — | 1,443 | — | 1,443 | |||||||||||||||
|
BOLI |
9,082 | — | 9,082 | — | 9,082 | |||||||||||||||
|
Liabilities |
||||||||||||||||||||
|
Deposits |
$ | 388,788 | $ | — | $ | 386,572 | $ | — | $ | 386,572 | ||||||||||
|
FHLB borrowings |
2,000 | — | 2,024 | — | 2,024 | |||||||||||||||
|
Capital notes |
10,000 | — | 10,122 | — | 10,122 | |||||||||||||||
|
Interest payable |
68 | — | 68 | — | 68 | |||||||||||||||
| Fair Value Measurements at December 31, 2012 using | ||||||||||||||||||||
|
Carrying
Amounts |
Quoted Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Balance | ||||||||||||||||
|
Assets |
||||||||||||||||||||
|
Cash and due from banks |
$ | 16,827 | $ | 16,827 | $ | — | $ | — | $ | 16,827 | ||||||||||
|
Federal funds sold |
24,171 | 24,171 | — | — | 24,171 | |||||||||||||||
|
Securities |
||||||||||||||||||||
|
Available-for-sale |
50,294 | — | 50,294 | — | 50,294 | |||||||||||||||
|
Held-to-maturity |
3,075 | — | 3,417 | — | 3,417 | |||||||||||||||
|
Loans, net |
319,922 | — | — | 330,863 | 330,863 | |||||||||||||||
|
Loans held for sale |
904 | — | 904 | — | 904 | |||||||||||||||
|
Interest receivable |
1,557 | — | 1,557 | — | 1,557 | |||||||||||||||
|
BOLI |
8,931 | — | 8,931 | — | 8,931 | |||||||||||||||
|
Liabilities |
||||||||||||||||||||
|
Deposits |
$ | 399,015 | $ | — | $ | 400,212 | $ | — | $ | 400,212 | ||||||||||
|
FHLB borrowings |
2,000 | — | 2,160 | — | 2,160 | |||||||||||||||
|
Capital notes |
10,000 | — | 10,006 | — | 10,006 | |||||||||||||||
|
Interest payable |
70 | — | 70 | — | 70 | |||||||||||||||
14
Note 5 – Fair Value Measurements (continued)
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-balance-sheet and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment; a significant liability that is not considered a financial liability is accrued post-retirement benefits. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Financial assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of Financial’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Bank. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Bank’s overall interest rate risk.
Note 6 – Capital Notes
During the third quarter of 2012, Financial closed the private placement of unregistered debt securities (the “2012 Offering”) pursuant to which Financial issued $10,000,000 in principal of notes (the “2012 Notes”). The 2012 Notes have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The notes mature on April 1, 2017, but are subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders. Financial used $7,000,000 of the proceeds from the 2012 Offering in April 2012 to pay, on maturity, the principal due on notes issued in 2009.
15
Note 7 – Investments
The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of June 30, 2013 and December 31, 2012 (amounts in thousands):
| June 30, 2013 | ||||||||||||||||
| Amortized | Gross Unrealized | |||||||||||||||
| Costs | Gains | (Losses) | Fair Value | |||||||||||||
|
Held-to-Maturity |
||||||||||||||||
|
US agency obligations |
$ | 3,063 | $ | 259 | $ | — | $ | 3,322 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Available-for-Sale |
||||||||||||||||
|
US Treasuries |
$ | 3,903 | $ | — | $ | (167 | ) | $ | 3,736 | |||||||
|
US agency obligations |
18,897 | — | (1,418 | ) | 17,479 | |||||||||||
|
Mortgage-backed securities |
3,734 | 11 | — | 3,745 | ||||||||||||
|
Municipals |
16,864 | 72 | (765 | ) | 16,171 | |||||||||||
|
Other |
2,012 | — | (121 | ) | 1,891 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 45,410 | $ | 83 | $ | (2,471 | ) | $ | 43,022 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2012 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair Value | ||||||||||||||
| Costs | Gains | (Losses) | ||||||||||||||
|
Held-to-Maturity |
||||||||||||||||
|
US agency obligations |
$ | 3,075 | $ | 342 | $ | — | $ | 3,417 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Available-for-Sale |
||||||||||||||||
|
US agency obligations |
$ | 22,980 | $ | 184 | $ | (95 | ) | $ | 23,069 | |||||||
|
Mortgage-backed securities |
1,805 | 7 | — | 1,812 | ||||||||||||
|
Municipals |
22,099 | 780 | (75 | ) | 22,804 | |||||||||||
|
Other |
2,548 | 61 | — | 2,609 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 49,432 | $ | 1,032 | $ | (170 | ) | $ | 50,294 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
16
Note 7 – Investments (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, 2013 and December 31, 2012 (amounts in thousands):
| Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||
|
June 30, 2013 |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
|
Description of securities |
||||||||||||||||||||||||
|
US Treasuries |
$ | 3,736 | $ | 167 | $ | — | $ | — | $ | 3,736 | $ | 167 | ||||||||||||
|
U.S. agency obligations |
15,480 | 1,418 | — | — | 15,480 | 1,418 | ||||||||||||||||||
|
Municipals |
12,211 | 765 | — | — | 12,211 | 765 | ||||||||||||||||||
|
Other |
1,891 | 121 | — | — | 1,891 | 121 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 33,318 | $ | 2,471 | $ | — | $ | — | $ | 33,318 | $ | 2,471 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||
|
December 31, 2012 |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
|
Description of securities |
||||||||||||||||||||||||
|
U.S. agency obligations |
$ | 9,116 | $ | 95 | $ | — | $ | — | $ | 9,116 | $ | 95 | ||||||||||||
|
Municipals |
1,879 | 75 | — | — | 1,879 | 75 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 10,995 | $ | 170 | $ | — | $ | — | $ | 10,995 | $ | 170 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent of Financial, if any, to sell the security; (4) whether Financial more likely than not will be required to sell the security before recovering its cost; and (5) whether Financial does not expect to recover the security’s entire amortized cost basis (even if Financial does not intend to sell the security).
At June 30, 2013, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of June 30, 2013, the Bank owned 37 securities that were being evaluated for other than temporary impairment. Ten of these securities were S&P rated AAA, 26 were S&P rated AA, and one was S&P rated A. As of June 30, 2013, 12 of these securities were direct obligations of the U.S. government or government sponsored entities, 22 were municipal issues, and three were publicly traded U.S. corporations.
Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because the Bank expects to recover the entire amortized cost basis, no declines currently are deemed to be other-than-temporary.
17
Note 8 – Business Segments
The Company has two reportable business segments: (i) a traditional full service community banking segment and, (ii) a mortgage loan origination business. The community banking business segment includes Bank of the James which provides loans, deposits, investments and insurance to retail and commercial customers throughout Region 2000. 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. 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 fee-based 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.
18
Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2013 and 2012 was as follows (dollars in thousands):
Business Segments
|
Community
Banking |
Mortgage | Total | ||||||||||
|
Six months ended June 30, 2013 |
||||||||||||
|
Net interest income |
$ | 7,878 | $ | — | $ | 7,878 | ||||||
|
Provision for loan losses |
290 | — | 290 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net interest income after provision for loan losses |
7,588 | — | 7,588 | |||||||||
|
Noninterest income |
1,210 | 659 | 1,869 | |||||||||
|
Noninterest expenses |
6,683 | 519 | 7,202 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income before income taxes |
2,115 | 140 | 2,255 | |||||||||
|
Income tax expense |
623 | 47 | 670 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net income |
$ | 1,492 | $ | 93 | $ | 1,585 | ||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
$ | 429,937 | $ | 934 | $ | 430,871 | ||||||
|
|
|
|
|
|
|
|||||||
|
Six months ended June 30, 2012 |
||||||||||||
|
Net interest income |
$ | 7,702 | $ | — | $ | 7,702 | ||||||
|
Provision for loan losses |
1,175 | — | 1,175 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net interest income after provision for loan losses |
6,527 | — | 6,527 | |||||||||
|
Noninterest income |
999 | 515 | 1,514 | |||||||||
|
Noninterest expenses |
6,407 | 436 | 6,843 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income before income taxes |
1,119 | 79 | 1,198 | |||||||||
|
Income tax expense |
325 | 27 | 352 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net income |
$ | 794 | $ | 52 | $ | 846 | ||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
$ | 431,967 | $ | 1,237 | $ | 433,204 | ||||||
|
|
|
|
|
|
|
|||||||
|
Community
Banking |
Mortgage | Total | ||||||||||
|
Three months ended June 30, 2013 |
||||||||||||
|
Net interest income |
$ | 3,957 | $ | — | $ | 3,957 | ||||||
|
Provision for loan losses |
55 | — | 55 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net interest income after provision for loan losses |
3,902 | — | 3,902 | |||||||||
|
Noninterest income |
565 | 340 | 905 | |||||||||
|
Noninterest expenses |
3,405 | 266 | 3,671 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income before income taxes |
1,062 | 74 | 1,136 | |||||||||
|
Income tax expense |
314 | 25 | 339 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net income |
$ | 748 | $ | 49 | $ | 797 | ||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
$ | 429,937 | $ | 934 | $ | 430,871 | ||||||
|
|
|
|
|
|
|
|||||||
|
Three months ended June 30, 2012 |
||||||||||||
|
Net interest income |
$ | 3,836 | $ | — | $ | 3,836 | ||||||
|
Provision for loan losses |
425 | — | 425 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net interest income after provision for loan losses |
3,411 | — | 3,411 | |||||||||
|
Noninterest income |
554 | 289 | 843 | |||||||||
|
Noninterest expenses |
3,318 | 241 | 3,559 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income before income taxes |
647 | 48 | 695 | |||||||||
|
Income tax expense |
193 | 16 | 209 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net income |
$ | 454 | $ | 32 | $ | 486 | ||||||
|
|
|
|
|
|
|
|||||||
|
Total assets |
$ | 431,967 | $ | 1,237 | $ | 433,204 | ||||||
|
|
|
|
|
|
|
|||||||
19
Note 9 – Loans, allowance for loan losses and OREO
Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes. 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: | ||||||||
|
June 30,
2013 |
December 31,
2012 |
|||||||
|
Commercial |
$ | 59,623 | $ | 55,084 | ||||
|
Commercial real estate |
161,495 | 153,416 | ||||||
|
Consumer |
70,567 | 70,639 | ||||||
|
Residential |
45,493 | 46,318 | ||||||
|
|
|
|
|
|||||
|
Total loans |
337,178 | 325,457 | ||||||
|
Less allowance for loan losses |
5,475 | 5,535 | ||||||
|
|
|
|
|
|||||
|
Net loans |
$ | 331,703 | $ | 319,922 | ||||
|
|
|
|
|
|||||
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.
20
Note 9 – Loans, allowance for loan losses and OREO (continued)
Below is a summary and definition of the Bank’s risk rating categories:
| RATING 1 | Excellent | |
| RATING 2 | Above Average | |
| RATING 3 | Satisfactory | |
| RATING 4 | Acceptable / Low Satisfactory | |
| RATING 5 | Monitor | |
| RATING 6 | Special Mention | |
| RATING 7 | Substandard | |
| RATING 8 | Doubtful | |
| RATING 9 | Loss |
We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:
| • |
“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan. |
| • |
“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable. |
| • |
“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events. |
| • |
“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due. |
| • |
“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high. |
| • |
“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off. |
21
Note 9 – Loans, allowance for loan losses and OREO (continued)
|
Financing Receivables on Non-Accrual Status (dollars in thousands) |
||||||||
| As of | ||||||||
| June 30, 2013 | December 31, 2012 | |||||||
|
Commercial |
$ | 1,876 | $ | 2,100 | ||||
|
Commercial Real Estate: |
||||||||
|
Commercial Mortgages-Owner Occupied |
1,431 | 1,431 | ||||||
|
Commercial Mortgages-Non-Owner Occupied |
866 | 853 | ||||||
|
Commercial Construction |
726 | 849 | ||||||
|
Consumer |
||||||||
|
Consumer Unsecured |
— | — | ||||||
|
Consumer Secured |
— | — | ||||||
|
Residential: |
||||||||
|
Residential Mortgages |
115 | 1,113 | ||||||
|
Residential Consumer Construction |
— | — | ||||||
|
|
|
|
|
|||||
|
Totals |
$ | 5,014 | $ | 6,346 | ||||
|
|
|
|
|
|||||
We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO decreased to $1,817,000 on June 30, 2013 from $2,112,000 on December 31, 2012. The following table represents the changes in OREO balance during the six months ended June 30, 2013.
|
OREO Changes (dollars in thousands) |
||||
|
Six Months ended
June 30, 2013 |
||||
|
Balance at the beginning of the year (net) |
$ | 2,112 | ||
|
Transfers from loans |
491 | |||
|
Capitalized costs |
— | |||
|
Writedowns |
(284 | ) | ||
|
Sales proceeds |
(493 | ) | ||
|
(Loss) on disposition |
(9 | ) | ||
|
|
|
|||
|
Balance at the end of the period (net) |
$ | 1,817 | ||
|
|
|
|||
22
Note 9 – Loans, allowance for loan losses and OREO (continued)
|
Impaired Loans (dollars in thousands) |
||||||||||||||||||||
| For the Six Months Ended June 30, 2013 | ||||||||||||||||||||
| 2013 |
Recorded Investment |
Unpaid
Principal Balance |
Related Allowance |
Average
Recorded Investment |
Interest Income Recognized |
|||||||||||||||
|
With No Related Allowance Recorded: |
||||||||||||||||||||
|
Commercial |
$ | 1,528 | $ | 1,677 | $ | — | $ | 2,029 | $ | 21 | ||||||||||
|
Commercial Real Estate |
||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
2,781 | 2,832 | — | 2,687 | 57 | |||||||||||||||
|
Commercial Mortgage Non-Owner Occupied |
3,290 | 3,291 | — | 4,830 | 81 | |||||||||||||||
|
Commercial Construction |
627 | 627 | — | 684 | 18 | |||||||||||||||
|
Consumer |
||||||||||||||||||||
|
Consumer Unsecured |
— | — | — | — | — | |||||||||||||||
|
Consumer Secured |
741 | 740 | — | 605 | 3 | |||||||||||||||
|
Residential |
||||||||||||||||||||
|
Residential Mortgages |
738 | 776 | — | 1,438 | 22 | |||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | — | |||||||||||||||
|
With An Allowance Recorded: |
||||||||||||||||||||
|
Commercial |
$ | 2,520 | $ | 2,723 | $ | 628 | $ | 1,570 | $ | 38 | ||||||||||
|
Commercial Real Estate |
||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
1,032 | 1,353 | 196 | 2,352 | 27 | |||||||||||||||
|
Commercial Mortgage Non-Owner Occupied |
768 | 768 | 139 | 804 | 21 | |||||||||||||||
|
Commercial Construction |
726 | 994 | 265 | 775 | — | |||||||||||||||
|
Consumer |
||||||||||||||||||||
|
Consumer Unsecured |
1 | 1 | 1 | 1 | — | |||||||||||||||
|
Consumer Secured |
166 | 166 | 162 | 348 | 6 | |||||||||||||||
|
Residential |
||||||||||||||||||||
|
Residential Mortgages |
1,282 | 1,282 | 166 | 1,149 | 44 | |||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | — | |||||||||||||||
|
Totals: |
||||||||||||||||||||
|
Commercial |
$ | 4,048 | $ | 4,400 | $ | 628 | $ | 3,599 | $ | 59 | ||||||||||
|
Commercial Real Estate |
||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
3,813 | 4,185 | 196 | 5,039 | 84 | |||||||||||||||
|
Commercial Mortgage Non-Owner Occupied |
4,058 | 4,059 | 139 | 5,634 | 102 | |||||||||||||||
|
Commercial Construction |
1,353 | 1,621 | 265 | 1,459 | 18 | |||||||||||||||
|
Consumer |
||||||||||||||||||||
|
Consumer Unsecured |
1 | 1 | 1 | 1 | — | |||||||||||||||
|
Consumer Secured |
907 | 906 | 162 | 953 | 9 | |||||||||||||||
|
Residential |
||||||||||||||||||||
|
Residential Mortgages |
2,020 | 2,058 | 166 | 2,587 | 66 | |||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 16,200 | $ | 17,230 | $ | 1,557 | $ | 19,272 | $ | 338 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
23
Note 9 – Loans, allowance for loan losses and OREO (continued)
|
Impaired Loans (dollars in thousands) |
||||||||||||||||||||
| For the Year Ended December 31, 2012 | ||||||||||||||||||||
| 2012 |
Recorded Investment |
Unpaid
Principal Balance |
Related Allowance |
Average
Recorded Investment |
Interest Income Recognized |
|||||||||||||||
|
With No Related Allowance Recorded: |
||||||||||||||||||||
|
Commercial |
$ | 2,530 | $ | 2,683 | $ | — | $ | 2,944 | $ | 30 | ||||||||||
|
Commercial Real Estate |
||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
2,592 | 2,754 | — | 2,402 | 167 | |||||||||||||||
|
Commercial Mortgage Non-Owner Occupied |
6,369 | 6,528 | — | 5,625 | 330 | |||||||||||||||
|
Commercial Construction |
740 | 742 | — | 922 | 52 | |||||||||||||||
|
Consumer |
||||||||||||||||||||
|
Consumer Unsecured |
— | — | — | — | — | |||||||||||||||
|
Consumer Secured |
469 | 554 | — | 381 | 34 | |||||||||||||||
|
Residential |
||||||||||||||||||||
|
Residential Mortgages |
2,138 | 2,263 | — | 1,500 | 112 | |||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | — | |||||||||||||||
|
With An Allowance Recorded: |
||||||||||||||||||||
|
Commercial |
$ | 620 | $ | 780 | $ | 373 | $ | 1,794 | $ | 42 | ||||||||||
|
Commercial Real Estate |
||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
3,671 | 3,869 | 525 | 3,094 | 226 | |||||||||||||||
|
Commercial Mortgage Non-Owner Occupied |
840 | 842 | 189 | 1,715 | 42 | |||||||||||||||
|
Commercial Construction |
823 | 1,048 | 94 | 1,262 | 2 | |||||||||||||||
|
Consumer |
||||||||||||||||||||
|
Consumer Unsecured |
1 | 1 | 1 | 1 | — | |||||||||||||||
|
Consumer Secured |
530 | 530 | 195 | 736 | 35 | |||||||||||||||
|
Residential |
||||||||||||||||||||
|
Residential Mortgages |
1,015 | 1,303 | 160 | 1,469 | 42 | |||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | — | |||||||||||||||
|
Totals: |
||||||||||||||||||||
|
Commercial |
$ | 3,150 | $ | 3,463 | $ | 373 | $ | 4,738 | $ | 72 | ||||||||||
|
Commercial Real Estate |
||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
6,263 | 6,623 | 525 | 5,496 | 393 | |||||||||||||||
|
Commercial Mortgage Non-Owner Occupied |
7,209 | 7,370 | 189 | 7,340 | 372 | |||||||||||||||
|
Commercial Construction |
1,563 | 1,790 | 94 | 2,184 | 54 | |||||||||||||||
|
Consumer |
||||||||||||||||||||
|
Consumer Unsecured |
1 | 1 | 1 | 1 | — | |||||||||||||||
|
Consumer Secured |
999 | 1,084 | 195 | 1,117 | 69 | |||||||||||||||
|
Residential |
||||||||||||||||||||
|
Residential Mortgages |
3,153 | 3,566 | 160 | 2,969 | 154 | |||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 22,338 | $ | 23,897 | $ | 1,537 | $ | 23,845 | $ | 1,114 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
24
Note 9 – Loans, allowance for loan losses and OREO (continued)
|
Allowance for Credit Losses and Recorded Investment in Financing Receivables |
||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| For the Six Months Ended June 30, 2013 | ||||||||||||||||||||
| 2013 | Commercial |
Commercial
Real Estate |
Consumer | Residential | Total | |||||||||||||||
|
Allowance for Credit Losses: |
||||||||||||||||||||
|
Beginning Balance |
$ | 987 | $ | 2,849 | $ | 1,057 | $ | 642 | $ | 5,535 | ||||||||||
|
Charge-offs |
(19 | ) | (321 | ) | (89 | ) | (28 | ) | (457 | ) | ||||||||||
|
Recoveries |
18 | 39 | 50 | — | 107 | |||||||||||||||
|
Provision |
303 | 10 | 42 | (65 | ) | 290 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance |
1,289 | 2,577 | 1,060 | 549 | 5,475 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Individually evaluated for impairment |
$ | 628 | $ | 600 | $ | 163 | $ | 166 | $ | 1,557 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
661 | 1,977 | 897 | 383 | 3,918 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 1,289 | $ | 2,577 | $ | 1,060 | $ | 549 | $ | 5,475 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Financing Receivables: |
||||||||||||||||||||
|
Ending Balance: Individually evaluated for impairment |
4,048 | 9,224 | 908 | 2,020 | 16,200 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
55,575 | 152,271 | 69,659 | 43,473 | 320,978 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 59,623 | $ | 161,495 | $ | 70,567 | $ | 45,493 | $ | 337,178 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
25
Note 9 – Loans, allowance for loan losses and OREO (continued)
|
Allowance for Credit Losses and Recorded Investment in
Financing Receivables (dollars in thousands) For the Year Ended December 31, 2012 |
||||||||||||||||||||
| 2012 | Commercial |
Commercial
Real Estate |
Consumer | Residential | Total | |||||||||||||||
|
Allowance for Credit Losses: |
||||||||||||||||||||
|
Beginning Balance |
$ | 892 | $ | 2,677 | $ | 1,486 | $ | 557 | $ | 5,612 | ||||||||||
|
Charge-offs |
(739 | ) | (1,061 | ) | (697 | ) | (102 | ) | (2,599 | ) | ||||||||||
|
Recoveries |
18 | 129 | 77 | 9 | 233 | |||||||||||||||
|
Provision |
816 | 1,104 | 191 | 178 | 2,289 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance |
$ | 987 | $ | 2,849 | $ | 1,057 | $ | 642 | $ | 5,535 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Individually evaluated for impairment |
$ | 373 | $ | 808 | $ | 196 | $ | 160 | $ | 1,537 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
614 | 2,041 | 861 | 482 | 3,998 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 987 | $ | 2,849 | $ | 1,057 | $ | 642 | $ | 5,535 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Financing Receivables: |
||||||||||||||||||||
|
Ending Balance: Individually evaluated for impairment |
$ | 3,150 | $ | 15,035 | $ | 1,000 | $ | 3,153 | $ | 22,338 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
51,934 | 138,381 | 69,639 | 43,165 | 303,119 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 55,084 | $ | 153,416 | $ | 70,639 | $ | 46,318 | $ | 325,457 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
26
Note 9 – Loans, allowance for loan losses and OREO (continued)
|
Age Analysis of Past Due Financing Receivables as of
June 30, 2013 (dollars in thousands) |
||||||||||||||||||||||||||||
| 2013 |
30-59
Days Past Due |
60-89
Days Past Due |
Greater
than 90 Days |
Total
Past Due |
Current |
Total
Financing Receivables |
Recorded
Investment > 90 Days & Accruing |
|||||||||||||||||||||
|
Commercial |
$ | 1,808 | $ | — | $ | 1,877 | $ | 3,685 | $ | 55,938 | $ | 59,623 | $ | — | ||||||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
780 | — | 1,431 | 2,211 | 59,870 | 62,081 | — | |||||||||||||||||||||
|
Commercial Mortgages-Non-Owner Occupied |
957 | 402 | — | 1,359 | 87,785 | 89,144 | — | |||||||||||||||||||||
|
Commercial Construction |
— | — | 726 | 726 | 9,544 | 10,270 | — | |||||||||||||||||||||
|
Consumer: |
||||||||||||||||||||||||||||
|
Consumer Unsecured |
2 | — | — | 2 | 3,814 | 3,816 | — | |||||||||||||||||||||
|
Consumer Secured |
101 | 87 | — | 188 | 66,563 | 66,751 | — | |||||||||||||||||||||
|
Residential: |
||||||||||||||||||||||||||||
|
Residential Mortgages |
299 | 115 | — | 414 | 39,483 | 39,897 | — | |||||||||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | 5,596 | 5,596 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total |
$ | 3,947 | $ | 604 | $ | 4,034 | $ | 8,585 | $ | 328,593 | $ | 337,178 | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Age Analysis of Past Due Financing Receivables as of
December 31, 2012 (dollars in thousands) |
||||||||||||||||||||||||||||
| 2012 |
30-59
Days Past Due |
60-89
Days Past Due |
Greater
than 90 Days |
Total
Past Due |
Current |
Total
Financing Receivables |
Recorded
Investment > 90 Days & Accruing |
|||||||||||||||||||||
|
Commercial |
$ | 223 | $ | 14 | $ | 2,100 | $ | 2,337 | $ | 52,747 | $ | 55,084 | $ | — | ||||||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
351 | — | 168 | 519 | 59,412 | 59,931 | — | |||||||||||||||||||||
|
Commercial Mortgages-Non-Owner Occupied |
559 | 50 | 853 | 1,462 | 82,654 | 84,116 | — | |||||||||||||||||||||
|
Commercial Construction |
547 | — | 849 | 1,396 | 7,973 | 9,369 | — | |||||||||||||||||||||
|
Consumer: |
||||||||||||||||||||||||||||
|
Consumer Unsecured |
2 | 8 | — | 10 | 3,494 | 3,504 | — | |||||||||||||||||||||
|
Consumer Secured |
193 | — | — | 193 | 66,942 | 67,135 | — | |||||||||||||||||||||
|
Residential: |
||||||||||||||||||||||||||||
|
Residential Mortgages |
590 | 68 | 472 | 1,130 | 40,290 | 41,420 | — | |||||||||||||||||||||
|
Residential Consumer Construction |
— | — | — | — | 4,898 | 4,898 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total |
$ | 2,465 | $ | 140 | $ | 4,442 | $ | 7,047 | $ | 318,410 | $ | 325,457 | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
27
Note 9 – Loans, allowance for loan losses and OREO (continued)
|
Credit Loss
Disclosures
Credit Quality Information - by Class June 30, 2013 (dollars in thousands) |
||||||||||||||||||||||||
| 2013 | Pass | Monitor |
Special
Mention |
Substandard | Doubtful | Totals | ||||||||||||||||||
|
Commercial |
$ | 52,761 | $ | 2,514 | $ | 240 | $ | 4,108 | $ | — | $ | 59,623 | ||||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
54,184 | 3,959 | 100 | 3,662 | 176 | 62,081 | ||||||||||||||||||
|
Commercial Mortgages-Non Owner Occupied |
80,814 | 2,667 | 1,256 | 4,369 | 38 | 89,144 | ||||||||||||||||||
|
Commercial Construction |
8,375 | 542 | — | 1,353 | — | 10,270 | ||||||||||||||||||
|
Consumer |
||||||||||||||||||||||||
|
Consumer Unsecured |
3,815 | — | — | 1 | — | 3,816 | ||||||||||||||||||
|
Consumer Secured |
64,186 | 1,145 | 227 | 1,193 | — | 66,751 | ||||||||||||||||||
|
Residential: |
||||||||||||||||||||||||
|
Residential Mortgages |
36,530 | 603 | 373 | 2,391 | — | 39,897 | ||||||||||||||||||
|
Residential Consumer Construction |
5,596 | — | — | — | — | 5,596 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Totals |
$ | 306,261 | $ | 11,430 | $ | 2,196 | $ | 17,077 | $ | 214 | $ | 337,178 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Credit Loss
Disclosures
Credit Quality Information - by Class December 31, 2012 (dollars in thousands) |
||||||||||||||||||||||||
| 2012 | Pass | Monitor |
Special
Mention |
Substandard | Doubtful | Totals | ||||||||||||||||||
|
Commercial |
$ | 49,162 | $ | 1,422 | $ | 1,350 | $ | 3,150 | $ | — | $ | 55,084 | ||||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||||||
|
Commercial Mortgages-Owner Occupied |
49,717 | 2,952 | 1,000 | 6,262 | — | 59,931 | ||||||||||||||||||
|
Commercial Mortgages-Non Owner Occupied |
72,120 | 2,212 | 2,576 | 7,208 | — | 84,116 | ||||||||||||||||||
|
Commercial Construction |
7,806 | — | — | 1,563 | — | 9,369 | ||||||||||||||||||
|
Consumer |
||||||||||||||||||||||||
|
Consumer Unsecured |
3,503 | — | — | 1 | — | 3,504 | ||||||||||||||||||
|
Consumer Secured |
63,948 | 1,343 | 867 | 977 | — | 67,135 | ||||||||||||||||||
|
Residential: |
||||||||||||||||||||||||
|
Residential Mortgages |
37,784 | — | 483 | 3,153 | — | 41,420 | ||||||||||||||||||
|
Residential Consumer Construction |
4,898 | — | — | — | — | 4,898 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Totals |
$ | 288,938 | $ | 7,929 | $ | 6,276 | $ | 22,314 | $ | — | $ | 325,457 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
28
Note 9 – Loans, allowance for loan losses and OREO (continued)
There were no loan modifications that would have been classified as Troubled Debt Restructurings (TDR) during the three and six months ended June 30, 2013 and 2012.
There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and six months ended June 30, 2013.
The following table describes TDRs that defaulted within 12 months of the modification during the three and six months ended June 30, 2012.
| For the Three Months Ended June 30, 2012 | ||||||
| (dollars in thousands) | ||||||
|
Troubled Debt Restructurings That Subsequently Defaulted |
Number of
Contracts |
Recorded
Investment |
||||
|
Commercial |
2 | $ | 208 | |||
| For the Six Months Ended June 30, 2012 | ||||||
| (dollars in thousands) | ||||||
|
Troubled Debt Restructurings That Subsequently Defaulted |
Number of
Contracts |
Recorded
Investment |
||||
|
Commercial |
4 | $ | 798 | |||
Note 10 – Subsequent Events
In preparing these financial statements, Financial has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
Note 11 – Recent accounting pronouncements
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived
29
Note 11 – Recent accounting pronouncements (continued)
intangible asset for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the consolidated financial statements.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.
30
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.
The allowance for loan losses is management’s estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 “Contingencies”, which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) ASC 310 “Impairment of a Loan”, which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Guidelines for determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102 – “Selected Loan Loss Allowance 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”). See “Management Discussion and Analysis Results of Operations – Allowance for Loan Losses and Loan Loss Reserve” below for further discussion of the allowance for loan losses.
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”), investment services through the Bank’s Investment division (which we refer to as “Investment”), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance”).
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 in 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. 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 area.
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.com.
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
31
loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.
The Bank intends to enhance its profitability by increasing its market share in the Region 2000 area, providing additional services to its customers, and controlling costs.
The Bank now services its banking customers through the following nine full service branch locations in the Region 2000 area.
| • |
The main office located at 828 Main Street in Lynchburg (opened October 2004) (the “Main Street Office”), |
| • |
A branch located at 615 Church Street in Lynchburg (opened July 1999) (the “Church Street Branch”), |
| • |
A branch located at 5204 Fort Avenue in Lynchburg (opened November 2000) (the “Fort Avenue Branch”), |
| • |
A branch located on South Amherst Highway in Amherst County (opened June 2002) (the “Madison Heights Branch”), |
| • |
A branch located at 17000 Forest Road in Forest (opened February 2005) (the “Forest Branch”), |
| • |
A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (opened April 2006) (the “Boonsboro Branch”), |
| • |
A branch located at 164 South Main Street, Amherst, Virginia (opened January 2007) (the “Amherst Branch”), |
| • |
A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford, Virginia, located off of Independence Boulevard (opened October 2008) (the “Bedford Branch”), and |
| • |
A branch located at 1110 Main Street, Altavista, Virginia (relocated from temporary branch in June 2009) (the “Altavista Branch”). |
The Bank also has opened a limited-service branch located in the Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia 24503.
In addition, the Bank, through its Mortgage division, originates residential mortgage loans through two offices—one located at the Forest Branch and the other located at 1152 Hendricks Store Road, Moneta, Virginia.
The Investment division operates primarily out of its office located at the Church Street Branch.
The Bank continuously evaluates areas located within Region 2000 to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.
32
Subject to regulatory approval, the Bank anticipates opening additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the following discussion provides a general overview of the additional branch locations that the Bank currently is considering.
Timberlake Road Area, Campbell County (Lynchburg), Virginia. As previously disclosed, the Bank has purchased certain real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank does not anticipate opening a branch at this location prior to 2014. The Bank has determined that the existing structure is not suitable for use as a bank branch.
Rustburg, Virginia . In March, 2011 the Bank purchased certain real property near the intersection of Routes 501 and 24 in Rustburg, Virginia. The structure on the property is being demolished and removed. The Bank does not anticipate opening a branch at this location prior to 2014.
Appomattox, Virginia . In July, 2013 the Bank purchased certain real property located near the intersection of Confederate Boulevard and Moses Avenue for future branch expansion. The Bank has not determined when it will open a branch at this location.
The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit the property will be between $900,000 and $1,500,000 per location.
Although the Bank cannot predict with certainty the financial impact of each new branch, management generally anticipates that each new branch will become profitable within 12 to 18 months of operation.
Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept and/or use these commitments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:
|
June 30,
2013
( in thousands ) |
||||
|
Commitments to extend credit |
$ | 62,229 | ||
|
Letters of Credit |
2,230 | |||
|
|
|
|||
|
Total |
$ | 64,459 | ||
|
|
|
|||
33
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. Collateral is required in instances that the Bank deems necessary.
SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion represents management’s discussion and analysis of the financial condition of Financial as of June 30, 2013 and December 31, 2012 and the results of operations of Financial for the three and six month periods ended June 30, 2013 and 2012. This discussion should be read in conjunction with the financial statements included elsewhere herein.
All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Financial Condition Summary
June 30, 2013 as Compared to December 31, 2012
Total assets were $430,871,000 on June 30, 2013 compared with $441,381,000 at December 31, 2012, a decrease of 2.38%. Total assets as of December 31, 2012 temporarily increased because of several deposits to professional settlement accounts related to end-of-the-year real estate and business closings. The decrease as of June 30, 2013 reflects the expected disbursements from these accounts, which reflects the primary reason for the decrease. This led to a decrease in deposits and a corresponding decrease in Federal Funds sold. The Bank also had a slight decrease in its securities portfolio.
Total deposits decreased from $399,015,000 as of December 31, 2012 to $388,788,000 on June 30, 2013, a decrease of 2.56%. Total deposits decreased for the reasons set forth in the prior paragraph.
Total loans, excluding loans held for sale, increased to $337,178,000 on June 30, 2013 from $325,457,000 on December 31, 2012. Loans, net of unearned income and allowance, increased to $331,703,000 on June 30, 2013 from $319,922,000 on December 31, 2012, an increase of 3.68%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):
| June 30, 2013 | December 31, 2012 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
|
Commercial |
$ | 59,623 | 17.69 | % | $ | 55,084 | 16.93 | % | ||||||||
|
Commercial Real Estate |
161,495 | 47.89 | % | 153,416 | 47.13 | % | ||||||||||
|
Consumer |
70,567 | 20.92 | % | 70,639 | 21.71 | % | ||||||||||
|
Residential |
45,493 | 13.50 | % | 46,318 | 14.23 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total loans |
$ | 337,178 | 100.00 | % | $ | 325,457 | 100.00 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (“OREO”) decreased to $6,831,000 on June 30, 2013 from
34
$8,458,000 on December 31, 2012. This decrease was due to a decrease in both non-accrual (or nonperforming) loans and a slight decrease in OREO. Non-accrual loans decreased 20.99% to $5,014,000 on June 30, 2013 from $6,346,000 on December 31, 2012. As discussed in more detail below under “Results of Operations—Allowance for Loan Losses”, management has provided for the anticipated losses on these loans in the loan loss reserve. If interest on non-accrual loans had been accrued, such interest on a cumulative basis would have approximated $1,067,000 and $862,000 as of June 30, 2013 and December 31, 2012, respectively. 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 credit losses charged against earnings. These loans were included in the non-performing loan totals listed above.
OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure, deeds in lieu of foreclosure or repossession. On December 31, 2012, the Bank was carrying 17 OREO properties on its books at a value of $2,112,000. During the six months ended June 30, 2013, the Bank acquired 9 additional OREO properties and disposed of 5 OREO properties, and as of June 30, 2013 the Bank is carrying 21 OREO properties at a value of $1,817,000. The OREO properties are available for sale and are being actively marketed on the Bank’s website and through other means.
The Bank had loans in the amount of $567,000 at June 30, 2013 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $572,000 at December 31, 2012. None of these TDRs were included in non-accrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year.
Cash and cash equivalents decreased to $25,467,000 on June 30, 2013 from $40,998,000 on December 31, 2012. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease is in large part due to the decrease in Federal funds sold resulting from the decrease in deposits as explained above. Cash and cash equivalents can vary due to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations.
Securities held-to-maturity decreased to $3,063,000 on June 30, 2013 from $3,075,000 on December 31, 2012. Securities available-for-sale decreased to $43,022,000 on June 30, 2013, from $50,294,000 December 31, 2012. During the six months ended June 30, 2013 the Bank received $2,113,000 in proceeds from maturities and/or calls of securities available-for-sale and $19,446,000 in proceeds from the sale of securities available-for-sale. The Bank purchased $17,314,000 in securities available-for sale during the same period. The decrease from December 31, 2012 in securities available-for-sale was primarily due to the liquidation of securities in anticipation of funding loan growth.
Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $620,000 at June 30, 2013 and $730,000 at December 31, 2012, a decrease of $110,000. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Liquidity and Capital
At June 30, 2013, Financial, on a consolidated basis, had liquid assets of $68,489,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold and available-for-sale investments. Management believes that liquid assets were adequate at June 30, 2013. Management
35
anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary.
Financial has $12,000,000 categorized as “Other borrowings” which consists of the following: i) $2,000,000, on which the Bank pays a fixed rate of 3.785%, from a Federal Home Loan Bank Advance that matures in April 2015; and ii) $10,000,000 from the private placement of unregistered debt securities as previously disclosed (the “2012 Notes”). The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The notes mature on April 1, 2017, but are subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders.
Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material negative impact on Financial’s short-term or long-term liquidity.
At June 30, 2013, the Bank had a leverage ratio of 8.88%, a Tier 1 risk-based capital ratio of 11.58% and a total risk-based capital ratio of 12.83%. As of June 30, 2013 and December 31, 2012 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 June 30, 2013 and December 31, 2012:
Bank Level Only Capital Ratios
| Analysis of Capital (in 000’s) |
June 30,
2013 |
December 31,
2012 |
||||||
|
Tier 1 capital |
||||||||
|
Common Stock |
$ | 3,742 | $ | 3,742 | ||||
|
Surplus |
19,325 | 19,325 | ||||||
|
Retained earnings |
14,855 | 13,006 | ||||||
|
|
|
|
|
|||||
|
Total Tier 1 capital |
$ | 37,922 | $ | 36,073 | ||||
|
|
|
|
|
|||||
|
Tier 2 capital |
||||||||
|
Allowance for loan losses |
$ | 4,111 | $ | 4,064 | ||||
|
Total Tier 2 capital: |
$ | 4,111 | $ | 4,064 | ||||
|
|
|
|
|
|||||
|
Total risk-based capital |
$ | 42,033 | $ | 40,137 | ||||
|
|
|
|
|
|||||
|
Risk weighted assets |
$ | 327,524 | $ | 323,655 | ||||
|
Average total assets |
$ | 427,039 | $ | 428,851 | ||||
| Actual | Regulatory Benchmarks | |||||||||||||||
|
June 30,
2013 |
December 31,
2012 |
For Capital
Adequacy Purposes |
For Well
Capitalized Purposes |
|||||||||||||
|
Capital Ratios: |
||||||||||||||||
|
Tier 1 capital to average total assets |
8.88 | % | 8.41 | % | 4.00 | % | 5.00 | % | ||||||||
|
Tier 1 risk-based capital ratio |
11.58 | % | 11.15 | % | 4.00 | % | 6.00 | % | ||||||||
|
Total risk-based capital ratio |
12.83 | % | 12.40 | % | 8.00 | % | 10.00 | % | ||||||||
36
The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $500,000,000, 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, while remaining “well capitalized,” would be lower than the comparable capital ratios of the Bank because the proceeds from the private placement of the 6% capital notes due on April 1, 2017 do not qualify as equity capital on a consolidated basis.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2013 and 2012
Earnings Summary
Financial had net income including all operating segments of $797,000 and $1,585,000 for the three and six months ended June 30, 2013 compared to $486,000 and $846,000 for the comparable periods in 2012. The basic and diluted earnings per common share for the three and six months ended June 30, 2013 were $0.24 and $0.47, compared to basic and diluted earnings per share of $0.15 and $0.25 for the three and six months ended June 30, 2012.
The increase in net income was due in large part to a decreased provision to the allowance for loan loss reserve as discussed in more detail below (See “Allowance for Loan Losses”) and a decrease in interest expense. The increase was partially offset by an increase in non-interest expense, which included a write-down in OREO properties in the amount of $284,000.
These operating results represent an annualized return on stockholders’ equity of 10.74% and 10.88% for the three and six months ended June 30, 2013, compared with 7.18% and 6.28% for the same periods in 2012. The Company had an annualized return on average assets for the three and six months ended June 30, 2013 of 0.75% and 0.74% compared with 0.45% and 0.40% for the three and six months ended June 30, 2012.
See “ Non-Interest Income” below for mortgage business segment discussion.
Interest Income, Interest Expense, and Net Interest Income
Interest income decreased to $4,567,000 and $9,104,000 for the three and six months ended June 30, 2013 from $4,645,000 and $9,331,000 for the same periods in 2012, decreases of 1.68% and 2.43%, respectively. Interest income decreased primarily because the average rate received on earning assets decreased to 4.66% and 4.67% for the three and six months ended June 30, 2013 as compared with 4.73% and 4.76% for the comparable periods in 2012. The rate on total average earning assets decreased largely because of a decrease in market rates of interest. Although market interest rates recently have increased slightly, management expects that interest rates will remain near historic lows for the remainder of 2013 and may continue to negatively impact our interest income.
Interest expense decreased to $610,000 and $1,226,000 for the three and six months ended June 30, 2013 from $809,000 and $1,629,000 for the same periods in 2012, decreases of 24.60% and 24.74%, respectively. This significant decrease in interest expense resulted in large part from a decrease in the rate paid on balances on deposits. The Bank’s average rate paid on deposits was 0.55% and 0.55% during the three and six month periods ended June 30, 2013 as compared to 0.74% and 0.76% for the same periods in 2012. This resulted from management’s efforts to minimize the Bank’s interest expense and maximize its net interest margin.
37
The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and six months ended June 30, 2013 was $3,957,000 and $7,878,000 compared with $3,836,000 and $7,702,000 for the same periods in 2012. The increase in net interest income for the three and six months ended June 30, 2013 as compared with the comparable periods in 2012 was due to a decrease in the rate paid on average interest-bearing liabilities as compared to 2012. The net interest margin was 4.10% for the both three and six months ended June 30, 2013, up from 3.91% and 3.95% for the same periods a year ago.
Financial’s net interest margin analysis and average balance sheets are shown in Schedule I on page 44.
Non-Interest Income
Non-interest income is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income exclusive of gains on sales of securities increased to $770,000 and $1,475,000 for the three and six months ended June 30, 2013 from $714,000 and $1,344,000 for the three and six months ended June 30, 2013. This increase for the three and six months ended June 30, 2013 as compared to the same periods last year was due primarily to increases in mortgage origination fees and service charges, fees, and commissions. Gain on sales of securities increased to $135,000 and $394,000 for the three and six months ended June 30, 2013 from $129,000 and $170,000 for the comparable periods in 2012.
The Bank, through the Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the Region 2000 area. 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 no credit or interest rate risk on these mortgages.
Despite the recent increase in rates, management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2013. Management expects that low rates and government-assisted programs such as Home Affordable Refinance Program (HARP) coupled with the Mortgage division’s reputation in Region 2000 will allow us to maintain revenue at the Mortgage division. Because many people able to refinance mortgages have already done so, management expects refinancing activity to decrease. As a result of the rising interest rates, management expects that loans for home purchases (as opposed to refinances) will constitute the majority of mortgage originations.
Revenue from mortgage origination fees increased in the three and six month periods ended June 30, 2013 as compared to the same periods for 2012. Management believes that regulatory pressure may result in a decreased number of competitors to the Mortgage division and this could result in an increase in market share.
Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s impact on noninterest income will remain immaterial in 2013.
38
In the third quarter of 2008, we began providing insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has one full-time and one part-time employee that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2013.
Non-Interest Expense
Non-interest expense for the three and six months ended June 30, 2013 increased to $3,671,000 and $7,202,000, or 3.15% and 5.25%, from $3,559,000 and $6,843,000 for the comparable periods in 2012. This increase in non-interest expense from the comparable period in 2012 can be attributed in large part to an increase in compensation expense, discussed in more detail in the following paragraph, and professional data and outside expenses. Other real estate expenses consist primarily of insurance, maintenance, real estate taxes, and other expenses related to property ownership.
Total personnel expense was $1,726,000 and $3,502,000 for the three and six month periods ended June 30, 2013 as compared to $1,546,000 and $3,049,000 for the same periods in 2012. Compensation for some employees of the Mortgage division and the Investment division is commission-based and therefore subject to fluctuation.
Allowance for Loan Losses
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision to 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 many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $55,000 and $290,000 to the allowance for loan loss for the three and six months ended June 30, 2013 compared to provisions of $425,000 and $1,175,000 for the comparable period in 2012, representing decreases of 87.06% and 75.32%, respectively.
The decrease in the loan loss provision for the three months ended June 30, 2013 as compared to the same periods in 2012 was due to the following factors:
| • |
The Bank’s asset quality has improved as problem assets, including certain commercial loans and residential speculative housing construction loans have decreased as the collateral for those loans has been liquidated or the loans have been paid off. Management’s evaluation of these asset classes resulted in the decreased provision in the quarter ended June 30, 2013. |
| • |
In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. The analysis resulted in a decrease in the provision for the quarter ended June 30, 2013 as compared to the same quarter in 2012. |
| • |
General reserves related to consumer loans collectively evaluated for impairment have also increased, but this increase has been offset by a dramatic decline in charge-offs from $847,000 and $1,231,000 for the three and six month periods ended June 30, 2012 to $271,000 and $457,000 for the comparable periods in 2013. |
39
Management believes that the current allowance for loan loss of $5,475,000 (or 1.62% of total loans) at June 30, 2013, as compared to $5,535,000 (or 1.70% of total loans) as of December 31, 2012, is adequate.
The following tables summarize the allowance activity for the periods indicated:
|
Allowance for Credit Losses and Recorded Investment in Financing
Receivables |
||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| For the Six Months Ended June 30, 2013 | ||||||||||||||||||||
| 2013 | Commercial |
Commercial
Real Estate |
Consumer | Residential | Total | |||||||||||||||
|
Allowance for Credit Losses: |
||||||||||||||||||||
|
Beginning Balance |
$ | 987 | $ | 2,849 | $ | 1,057 | $ | 642 | $ | 5,535 | ||||||||||
|
Charge-offs |
(19 | ) | (321 | ) | (89 | ) | (28 | ) | (457 | ) | ||||||||||
|
Recoveries |
18 | 39 | 50 | — | 107 | |||||||||||||||
|
Provision |
303 | 10 | 42 | (65 | ) | 290 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance |
1,289 | 2,577 | 1,060 | 549 | 5,475 | |||||||||||||||
|
Ending Balance: Individually evaluated for impairment |
$ | 628 | $ | 600 | $ | 163 | $ | 166 | $ | 1,557 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
661 | 1,977 | 897 | 383 | 3,918 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 1,289 | $ | 2,577 | $ | 1,060 | $ | 549 | $ | 5,475 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Financing Receivables: |
||||||||||||||||||||
|
Ending Balance: Individually evaluated for impairment |
4,048 | 9,224 | 908 | 2,020 | 16,200 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
55,575 | 152,271 | 69,659 | 43,473 | 320,978 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 59,623 | $ | 161,495 | $ | 70,567 | $ | 45,493 | $ | 337,178 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
40
|
Allowance for Credit Losses and Recorded Investment in Financing
Receivables |
||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| For the Year Ended December 31, 2012 | ||||||||||||||||||||
| 2012 | Commercial |
Commercial
Real Estate |
Consumer | Residential | Total | |||||||||||||||
|
Allowance for Credit Losses: |
||||||||||||||||||||
|
Beginning Balance |
$ | 892 | $ | 2,677 | $ | 1,486 | $ | 557 | $ | 5,612 | ||||||||||
|
Charge-offs |
(739 | ) | (1,061 | ) | (697 | ) | (102 | ) | (2,599 | ) | ||||||||||
|
Recoveries |
18 | 129 | 77 | 9 | 233 | |||||||||||||||
|
Provision |
816 | 1,104 | 191 | 178 | 2,289 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance |
987 | 2,849 | 1,057 | 642 | 5,535 | |||||||||||||||
|
Ending Balance: Individually evaluated for impairment |
$ | 373 | $ | 808 | $ | 196 | $ | 160 | $ | 1,537 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
614 | 2,041 | 861 | 482 | 3,998 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 987 | $ | 2,849 | $ | 1,057 | $ | 642 | $ | 5,535 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Financing Receivables: |
||||||||||||||||||||
|
Ending Balance: Individually evaluated for impairment |
3,150 | 15,035 | 1,000 | 3,153 | 22,338 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Ending Balance: Collectively evaluated for impairment |
51,934 | 138,381 | 69,639 | 43,165 | 303,119 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Totals: |
$ | 55,084 | $ | 153,416 | $ | 70,639 | $ | 46,318 | $ | 325,457 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
The following sets forth the reconciliation of the allowance for loan loss:
|
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
|
Balance, beginning of period |
$ | 5,606 | $ | 6,006 | $ | 5,535 | $ | 5,612 | ||||||||
|
Provision for loan losses |
55 | 425 | 290 | 1,175 | ||||||||||||
|
Loans charged off |
(271 | ) | (847 | ) | (457 | ) | (1,231 | ) | ||||||||
|
Recoveries of loans charged off |
85 | 109 | 107 | 137 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net charge offs |
(186 | ) | (738 | ) | (350 | ) | (1,094 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Balance, end of period |
$ | 5,475 | $ | 5,693 | $ | 5,475 | $ | 5,693 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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.
41
Below is a summary and definition of the Bank’s risk rating categories:
| RATING 1 | Excellent | |
| RATING 2 | Above Average | |
| RATING 3 | Satisfactory | |
| RATING 4 | Acceptable / Low Satisfactory | |
| RATING 5 | Monitor | |
| RATING 6 | Special Mention | |
| RATING 7 | Substandard | |
| RATING 8 | Doubtful | |
| RATING 9 | Loss |
We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:
| • |
“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan. |
| • |
“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable. |
| • |
“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events. |
| • |
“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due. |
| • |
“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high. |
| • |
“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off. |
42
The decrease in the balance in the allowance for loan loss reserve as of June 30, 2013 as compared to December 31, 2012 resulted from provisions being lower than the net charge-offs during the first six months of 2013. Charge-offs realized during the first six months of 2013 had been provided for in the reserve in previous fiscal years. The loan loss reserve is determined as discussed above.
Net charge offs decreased to $186,000 and $350,000 for the three and six months ended June 30, 2013 from $738,000 and $1,094,000 for the same periods in 2012. Charged off loans, which are loans that management deems uncollectible, are written against the loan loss reserve and constitute a realized loss. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time.
Income Taxes
For the three and months ended June 30, 2013, Financial had an income tax expense of $339,000 and $670,000, respectively, as compared to $209,000 and $352,000 for the three and six months ended June 30, 2013. This represents an effective tax rate of 29.84% and 29.71% for the for the three and six month periods ended June 30, 2013 and 30.07% and 29.38% for the three and six month periods ended June 30, 2012.
Legislation
Expiration of the FDIC’s Transaction Account Guarantee Program (“TAG”). Temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts under the Dodd-Frank Act expired on December 31, 2012. TAG, which was originally part of the Temporary Liquidity Guarantee Program of 2008, added unlimited insurance coverage to noninterest bearing accounts, regardless of balance. This temporary unlimited coverage was in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. Depending on the perceptions by depositors of the safety and soundness of banking institutions, the termination of the TAG program could result in deposit disintermediation in individual banks and in the banking industry as a whole. As of the date hereof, we have not experienced any material disintermediation.
43
Schedule I
Net Interest Margin Analysis
Average Balance Sheets
For the Quarter Ended June 30, 2013 and 2012
| 2013 | 2012 | |||||||||||||||||||||||
|
Average Balance Sheet |
Interest Income/ Expense |
Average
Rates
Paid |
Average Balance Sheet |
Interest Income/ Expense |
Average Rates Earned/ Paid |
|||||||||||||||||||
|
ASSETS |
||||||||||||||||||||||||
|
Loans, including fees (1) (2) |
$ | 332,227 | $ | 4,191 | 5.06 | % | $ | 320,588 | $ | 4,170 | 5.22 | % | ||||||||||||
|
Loans held for sale |
915 | 8 | 3.51 | % | 878 | 8 | 3.65 | % | ||||||||||||||||
|
Federal funds sold |
7,052 | 8 | 0.46 | % | 10,497 | 6 | 0.23 | % | ||||||||||||||||
|
Securities (3) |
48,426 | 367 | 3.04 | % | 59,741 | 432 | 2.90 | % | ||||||||||||||||
|
Federal agency equities |
1,312 | 25 | 7.64 | % | 1,829 | 29 | 6.36 | % | ||||||||||||||||
|
CBB equity |
116 | — | — | 116 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total earning assets |
390,048 | 4,599 | 4.73 | % | 393,649 | 4,645 | 4.73 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Allowance for loan losses |
(5,555 | ) | (5,901 | ) | ||||||||||||||||||||
|
Non-earning assets |
44,453 | 44,499 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Total assets |
$ | 428,946 | $ | 432,247 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||||||||||||
|
Deposits |
||||||||||||||||||||||||
|
Demand interest bearing |
$ | 90,948 | $ | 52 | 0.23 | % | $ | 81,765 | $ | 65 | 0.32 | % | ||||||||||||
|
Savings |
135,132 | 72 | 0.21 | % | 153,241 | 144 | 0.38 | % | ||||||||||||||||
|
Time deposits |
94,664 | 317 | 1.34 | % | 92,196 | 392 | 1.71 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total interest bearing deposits |
320,744 | 441 | 0.55 | % | 327,202 | 601 | 0.74 | % | ||||||||||||||||
|
Other borrowed funds |
||||||||||||||||||||||||
|
Repurchase agreements |
— | — | — | 28 | — | — | ||||||||||||||||||
|
Other borrowings |
2,000 | 19 | 3.81 | % | 10,000 | 75 | 3.01 | % | ||||||||||||||||
|
Capital Notes |
10,000 | 150 | 6.00 | % | 8,865 | 133 | 6.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total interest-bearing liabilities |
332,744 | 610 | 0.74 | % | 346,095 | 809 | 0.94 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Non-interest bearing deposits |
66,034 | 57,593 | ||||||||||||||||||||||
|
Other liabilities |
412 | 1,393 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Total liabilities |
399,190 | 405,081 | ||||||||||||||||||||||
|
Stockholders’ equity |
29,756 | 27,166 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Total liabilities and Stockholders’ equity |
$ | 428,946 | $ | 432,247 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Net interest income |
$ | 3,989 | $ | 3,836 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Net interest margin |
4.10 | % | 3.91 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Interest spread |
3.99 | % | 3.79 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| (1) | Net 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. |
44
Net Interest Margin Analysis
Average Balance Sheets
For the Six Months Ended June 30, 2013 and 2012
| 2013 | 2012 | |||||||||||||||||||||||
|
Average Balance Sheet |
Interest Income/ Expense |
Average
Rates
Paid |
Average Balance Sheet |
Interest Income/ Expense |
Average Rates Earned/ Paid |
|||||||||||||||||||
|
ASSETS |
||||||||||||||||||||||||
|
Loans, including fees (1) (2) |
$ | 329,624 | $ | 8,345 | 5.08 | % | $ | 321,295 | $ | 8,388 | 5.24 | % | ||||||||||||
|
Loans held for sale |
936 | 17 | 3.64 | % | 825 | 14 | 3.40 | % | ||||||||||||||||
|
Federal funds sold |
7,838 | 15 | 0.38 | % | 8,960 | 11 | 0.25 | % | ||||||||||||||||
|
Securities (3) |
50,702 | 765 | 3.03 | % | 60,379 | 889 | 2.95 | % | ||||||||||||||||
|
Federal agency equities |
1,361 | 30 | 4.42 | % | 1,845 | 29 | 3.15 | |||||||||||||||||
|
CBB equity |
116 | — | — | 116 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total earning assets |
390,577 | 9,172 | 4.71 | % | 393,420 | 9,331 | 4.76 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Allowance for loan losses |
(5,558 | ) | (5,825 | ) | ||||||||||||||||||||
|
Non-earning assets |
44,211 | 41,582 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Total assets |
$ | 429,230 | $ | 429,177 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||||||||||||
|
Deposits |
||||||||||||||||||||||||
|
Demand interest bearing |
$ | 90,988 | $ | 105 | 0.23 | % | $ | 76,051 | $ | 125 | 0.33 | % | ||||||||||||
|
Savings |
136,219 | 143 | 0.21 | % | 156,318 | 289 | 0.37 | % | ||||||||||||||||
|
Time deposits |
93,845 | 640 | 1.37 | % | 91,549 | 813 | 1.78 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total interest bearing deposits |
321,052 | 888 | 0.55 | % | 323,918 | 1,227 | 0.76 | % | ||||||||||||||||
|
Other borrowed funds |
||||||||||||||||||||||||
|
Fed funds purchased |
25 | — | — | — | — | — | ||||||||||||||||||
|
Repurchase agreements |
— | — | — | 3,294 | 15 | 0.91 | % | |||||||||||||||||
|
Other borrowings |
2,000 | 38 | 3.81 | % | 10,000 | 149 | 2.99 | % | ||||||||||||||||
|
Capital Notes |
10,000 | 300 | 6.00 | % | 7,950 | 238 | 6.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total interest-bearing liabilities |
333,077 | 1,226 | 0.74 | % | 345,162 | 1,629 | 0.95 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Non-interest bearing deposits |
66,333 | 56,197 | ||||||||||||||||||||||
|
Other liabilities |
431 | 821 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Total liabilities |
399,841 | 402,180 | ||||||||||||||||||||||
|
Stockholders’ equity |
29,389 | 26,997 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Total liabilities and Stockholders’ equity |
$ | 429,230 | $ | 429,177 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Net interest income |
$ | 7,946 | $ | 7,702 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Net interest margin |
4.10 | % | 3.95 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Interest spread |
3.97 | % | 3.81 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| (1) | Net 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. |
45
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Financial’s management, including Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes during the quarter ended June 30, 2013, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those controls subsequent to the date of our most recent evaluation of internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.
The Company is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.
Not applicable
46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Not applicable
47
|
Exhibit
|
Description of Exhibit |
|
| 31.1 | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 8, 2013 | |
| 31.2 | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 8, 2013 | |
| 32.1 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 8, 2013 | |
| 101 | The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of June 30, 2013 and December 31, 2012; (ii) Consolidated Statements of Income (unaudited) for the Three and Six Months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six months ended June 30, 2013 and 2012 (iv) Consolidated Statements of Cash Flows (unaudited) for the Six Months ended June 30, 2013 and 2012 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Six Months ended June 30, 2012 and the Six Months Ended June 30, 2013; (vi) Notes to Unaudited Consolidated Financial Statements.* | |
| * | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
48
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BANK OF THE JAMES FINANCIAL GROUP, INC. | ||||||
| Date: August 8, 2013 | By |
/S/ Robert R. Chapman III |
||||
| Robert R. Chapman III, President | ||||||
| (Principal Executive Officer) | ||||||
| Date: August 8, 2013 | By |
/S/ J. Todd Scruggs |
||||
| J. Todd Scruggs, Secretary and Treasurer | ||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||
49
Index of Exhibits
|
Exhibit
|
Description of Exhibit |
|
| 31.1 | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 8, 2013 | |
| 31.2 | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 8, 2013 | |
| 32.1 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 8, 2013 | |
| 101 | The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of June 30, 2013 and December 31, 2012; (ii) Consolidated Statements of Income (unaudited) for the Three and Six Months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six months ended June 30, 2013 and 2012 (iv) Consolidated Statements of Cash Flows (unaudited) for the Six Months ended June 30, 2013 and 2012 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Six Months ended June 30, 2012 and the Six Months Ended June 30, 2013; (vi) Notes to Unaudited Consolidated Financial Statements.* | |
| * | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
50
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|