Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2010
BANK OF THE JAMES FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Virginia (State or other jurisdiction of incorporation or organization) | 000-50548 (Commission file number) | 20-0500300 (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). ¨ 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: 3,001,272 shares of Common Stock, par value $2.14 per share, were outstanding at May 12, 2010.
Table of Contents
1 | ||||
Item 1. | Consolidated Financial Statements | 1 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 26 | ||
Item 4T. | Controls and Procedures | 26 | ||
26 | ||||
Item 1. | Legal Proceedings | 26 | ||
Item 1A. | Risk Factors | 26 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||
Item 3. | Defaults Upon Senior Securities | 26 | ||
Item 4. | [Removed and Reserved] | 26 | ||
Item 5. | Other Information | 26 | ||
Item 6. | Exhibits | 27 | ||
28 |
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollar amounts in thousands, except per share amounts)
(unaudited) 3/31/2010 | (audited) 12/31/2009 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 15,146 | $ | 10,074 | ||||
Federal funds sold | 1,774 | 21,231 | ||||||
Total cash and cash equivalents | 16,920 | 31,305 | ||||||
Securities held-to-maturity (fair value of $15,576 in 2010 and $15,277 in 2009) | 15,488 | 15,550 | ||||||
Securities available-for-sale, at fair value | 28,726 | 45,239 | ||||||
Restricted stock, at cost | 2,345 | 2,315 | ||||||
Loans, net of allowance for loan losses of $4,644 in 2010 and $4,288 in 2009 | 322,849 | 318,452 | ||||||
Premises and equipment, net | 10,128 | 10,240 | ||||||
Software, net | 184 | 218 | ||||||
Interest receivable | 1,834 | 2,179 | ||||||
Other real estate owned | 781 | 666 | ||||||
Income taxes receivable | 39 | 628 | ||||||
Deferred tax asset | 1,494 | 1,722 | ||||||
Other assets | 9,038 | 9,167 | ||||||
Total assets | $ | 409,826 | $ | 437,681 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | ||||||||
Noninterest bearing demand | 43,055 | 42,112 | ||||||
NOW, money market and savings | 228,952 | 245,066 | ||||||
Time | 86,562 | 88,594 | ||||||
Total deposits | 358,569 | 375,772 | ||||||
Repurchase agreements | 8,942 | 10,710 | ||||||
FHLB borrowings | 10,000 | 20,000 | ||||||
Capital notes | 7,000 | 7,000 | ||||||
Interest payable | 164 | 200 | ||||||
Other liabilities | 643 | 274 | ||||||
Total liabilities | $ | 385,318 | $ | 413,956 | ||||
Stockholders’ equity | ||||||||
Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 2,990,788 as of March 31, 2010 and December 31, 2009 | 6,400 | 6,400 | ||||||
Additional paid-in-capital | 20,766 | 20,765 | ||||||
Accumulated other comprehensive (loss) | (87 | ) | (502 | ) | ||||
Retained earnings (deficit) | (2,571 | ) | (2,938 | ) | ||||
Total stockholders’ equity | $ | 24,508 | $ | 23,725 | ||||
Total liabilities and stockholders’ equity | $ | 409,826 | $ | 437,681 | ||||
See accompanying notes to these consolidated financial statements
1
Table of Contents
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(dollar amounts in thousands, except per share amounts), unaudited
For the Three Months Ended March 31, | |||||||
2010 | 2009 | ||||||
Interest Income | |||||||
Loans | $ | 4,844 | $ | 4,081 | |||
Securities | |||||||
US Government and agency obligations | 415 | 308 | |||||
Mortgage backed securities | 2 | 40 | |||||
Municipals | 52 | 10 | |||||
Dividends | 1 | — | |||||
Other (Corporates) | 47 | 56 | |||||
Federal funds sold | 7 | 6 | |||||
Total interest income | 5,368 | 4,501 | |||||
Interest Expense | |||||||
Deposits | |||||||
NOW, money market savings | 1,224 | 907 | |||||
Time Deposits | 617 | 935 | |||||
FHLB borrowings | 100 | 147 | |||||
Reverse repurchase agreements | 33 | 59 | |||||
Capital notes | 105 | — | |||||
Total interest expense | 2,079 | 2,048 | |||||
Net interest income | 3,289 | 2,453 | |||||
Provision for loan losses | 387 | 322 | |||||
Net interest income after provision for loan losses | 2,902 | 2,131 | |||||
Other operating income | |||||||
Mortgage fee income | 291 | 327 | |||||
Service charges, fees, commissions | 128 | 361 | |||||
Other | 306 | 81 | |||||
Gain on sale of securities | 75 | 116 | |||||
Total other operating income | 800 | 885 | |||||
Other operating expenses | |||||||
Salaries and employee benefits | 1,649 | 1,439 | |||||
Occupancy | 245 | 212 | |||||
Equipment | 260 | 271 | |||||
Supplies | 101 | 99 | |||||
Professional, data processing, and other outside expense | 380 | 336 | |||||
Marketing | 67 | 80 | |||||
Credit expense | 66 | 81 | |||||
(Gain) on sale of assets | (5 | ) | — | ||||
Other | 395 | 210 | |||||
Total other operating expenses | 3,158 | 2,728 | |||||
Income before income taxes | 544 | 288 | |||||
Income tax expense | 178 | 94 | |||||
Net Income | $ | 366 | $ | 194 | |||
Weighted average shares outstanding, basic | 2,990,788 | 2,950,768 | |||||
Weighted average shares outstanding, diluted | 3,019,421 | 3,001,085 | |||||
Income per common share - basic | $ | 0.12 | $ | 0.07 | |||
Income per common share - diluted | $ | 0.12 | $ | 0.07 | |||
See accompanying notes to these consolidated financial statements
2
Table of Contents
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31, 2010 and 2009
(dollar amounts in thousands, except per share amounts) (unaudited)
March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities | ||||||||
Net Income | $ | 366 | $ | 194 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||
Depreciation | 204 | 225 | ||||||
Net amortization and accretion of premiums and discounts on securities | 150 | 47 | ||||||
(Gain) on sale of available for sale securities | (75 | ) | (116 | ) | ||||
(Gain) on sale of assets | (5 | ) | — | |||||
Provision for loan losses | 387 | 322 | ||||||
Stock compensation expense | 2 | 2 | ||||||
(Increase) decrease in interest receivable | 345 | (274 | ) | |||||
(Increase) decrease in other assets | 33 | (1,774 | ) | |||||
Decrease in income taxes receivable | 589 | 93 | ||||||
(Decrease) in interest payable | (36 | ) | (3 | ) | ||||
Increase in other liabilities | 369 | 240 | ||||||
Net cash provided by (used in) operating activities | $ | 2,329 | $ | (1,044 | ) | |||
Cash flows from investing activities | ||||||||
Proceeds from maturities and calls of securities held to maturity | $ | — | $ | 2,000 | ||||
Purchases of securities available for sale | (5,714 | ) | (31,515 | ) | ||||
Proceeds from maturities and calls of securities available for sale | 4,194 | 1,000 | ||||||
Proceeds from sale of securities available for sale | 18,648 | 7,868 | ||||||
Purchase of restricted stock | (30 | ) | (106 | ) | ||||
Origination of loans, net of principal collected | (4,783 | ) | (13,332 | ) | ||||
Purchases of premises and equipment | (58 | ) | (489 | ) | ||||
Net cash provided by (used in) investing activities | $ | 12,257 | $ | (34,574 | ) | |||
Cash flows from financing activities | ||||||||
Net increase (decrease) in deposits | $ | (17,203 | ) | $ | 42,152 | |||
(Decrease) in repurchase agreements | (1,768 | ) | (1,146 | ) | ||||
Net (decrease) in Federal Home Loan Bank advances | (10,000 | ) | — | |||||
Proceeds from sale of senior capital notes | — | 6,180 | ||||||
Net cash provided by (used in) financing activities | $ | (28,971 | ) | $ | 47,186 | |||
Increase (decrease) in cash and cash equivalents | (14,385 | ) | 11,568 | |||||
Cash and cash equivalents at beginning of period | $ | 31,305 | $ | 15,825 | ||||
Cash and cash equivalents at end of period | $ | 16,920 | $ | 27,393 | ||||
Non cash transactions | ||||||||
Transfer of loans to foreclosed assets | $ | 115 | $ | 1,858 | ||||
Fair value adjustment for securities | 628 | (1,002 | ) | |||||
Cash transactions | ||||||||
Cash paid for interest | $ | 2,115 | $ | 2,051 |
See accompanying notes to these consolidated financial statements
3
Table of Contents
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation
The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2010, 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, 2009. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2009 included in Financial’s Annual Report on Form 10-K. Results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
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
All earnings per share amounts have been adjusted to reflect the 5% stock dividend paid by Financial in July 2009 as well as all prior stock dividends.
Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of Financial are considered dilutive. The following is a summary of the earnings per share calculation for the three months ended March 31, 2010 and 2009.
4
Table of Contents
Three months ended March 31, | ||||||
2010 | 2009 | |||||
Net income | $ | 366,000 | $ | 194,000 | ||
Weight average number of shares | 2,990,788 | 2,950,768 | ||||
Options affect of incremental shares | 28,633 | 50,317 | ||||
Weighted average diluted shares | 3,019,421 | 3,001,085 | ||||
Basic EPS (weighted avg shares) | $ | 0.12 | $ | 0.07 | ||
Diluted EPS (Including Option Shares) | $ | 0.12 | $ | 0.07 | ||
The incremental shares associated with option shares, which were 192,094 and 192,728 for the three months ended March 31, 2010 and 2009, respectively, were not included in calculating the diluted earnings per share because their effect was anti-dilutive.
Note 4 – Stock Based Compensation
Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.
The amount of stock-based compensation included within the non-interest expense category for the three months ended March 31, 2010 is $2,000, which had no material impact on basic and diluted earnings per share for the same period.
5
Table of Contents
Stock option plan activity for the three months ended March 31, 2010 is summarized below:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Average Intrinsic Value | |||||||
Options outstanding, January 1, 2010 | 290,496 | $ | 8.76 | |||||||
Granted | — | — | ||||||||
Exercised | — | — | ||||||||
Forfeited | — | $ | — | |||||||
Options outstanding, March 31, 2010 | 290,496 | 8.76 | 3.89 | $ | 258,100 | |||||
Options exercisable, March 31, 2010 | 289,656 | $ | 8.74 | 3.88 | $ | 258,100 | ||||
As of March 31, 2010 there was unrecognized compensation expense related to non-vested option awards in the amount of $1,000.
Note 5 – Stock Dividend
On May 19, 2009, the Board of Directors of the Company declared a 5% stock dividend. The stock dividend was paid on July 21, 2009 to shareholders of record as of June 16, 2009. Following the stock dividend, the number of outstanding shares increased by approximately 141,000. The dividend required a reclassification of retained earnings effective May 19, 2009 in the amount of $1,519,000. Of this amount, $301,000 was reclassified as common stock and $1,218,000 was reclassified as additional paid-in-capital. The reclassification did not change total stockholders’ equity. All per share amounts have been retroactively adjusted to reflect this dividend.
Note 6 – Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• | 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. |
6
Table of Contents
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.
The following table summarizes the Company’s financial assets that were measured at fair value on a recurring basis during the period:
Carrying Value at March 31, 2010 | ||||||||||||
Description | Balance as of March 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Available-for-sale securities | $ | 28,726 | $ | — | $ | 28,726 | $ | — | ||||
Carrying Value at December 31, 2009 | ||||||||||||
Description | Balance as of December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Available-for-sale securities | $ | 45,239 | $ | — | $ | 45,239 | $ | — |
Loans held for sale
Loans held for sale are required to be measured in a lower of cost or fair value. Under ASC 820, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At March 31, 2010, the Company had no loans held for sale.
Impaired loans
ASC 820 applies to loans measured for impairment using the practical expedients permitted by ASC 310 “Impairment of a Loan”, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.
7
Table of Contents
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.
The following table summarizes the Company’s impaired loans and OREO measured at fair value on a nonrecurring basis during the period.
Carrying Value at March 31, 2010 | ||||||||||||
Description | Balance as of March 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Impaired loans | $ | 11,534 | $ | — | $ | 1,667 | $ | 9,867 | ||||
Other real estate owned | $ | 781 | $ | — | $ | — | $ | 781 |
Carrying Value at December 31, 2009 | ||||||||||||
Description | Balance as of December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Impaired loans | $ | 12,857 | $ | — | $ | 2,636 | $ | 10,221 | ||||
Other real estate owned | $ | 666 | $ | — | $ | — | $ | 666 |
8
Table of Contents
Financial Instruments
The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments are as follows:
March 31, 2010 | December 31, 2009 | |||||||||||
Carrying Amounts | Approximate Fair Values | Carrying Amounts | Approximate Fair Values | |||||||||
Financial assets | ||||||||||||
Cash and due from banks | $ | 15,146 | $ | 15,146 | $ | 10,074 | $ | 10,074 | ||||
Federal funds sold | 1,774 | 1,774 | 21,231 | 21,231 | ||||||||
Securities | ||||||||||||
Available-for-sale | 28,726 | 28,726 | 45,239 | 45,239 | ||||||||
Held-to-maturity | 15,488 | 15,576 | 15,550 | 15,277 | ||||||||
Loans, net | 322,849 | 325,367 | 318,452 | 320,936 | ||||||||
Interest receivable | 1,834 | 1,834 | 2,179 | 2,179 | ||||||||
Financial liabilities | ||||||||||||
Deposits | $ | 358,569 | $ | 357,852 | $ | 375,772 | $ | 375,020 | ||||
FHLB borrowings | 10,000 | 10,125 | 20,000 | 20,250 | ||||||||
Repurchase agreements | 8,942 | 8,942 | 10,710 | 10,710 | ||||||||
Capital notes | 7,000 | 7,000 | 7,000 | 7,000 | ||||||||
Interest payable | 164 | 164 | 200 | 200 |
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.
9
Table of Contents
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 7 – Capital Notes
Financial has issued capital notes in the amount $7,000,000 (the “Notes”). The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first quarterly interest payment on the Notes was paid on July 1, 2009. No principal payments are due until the Notes mature on April 1, 2012. On the maturity date the principal and all accrued but unpaid interest on the Notes will be due and payable. For the three months ended March 31, 2010, Financial accrued interest expense on the Notes of approximately $105,000.
Note 8 – Investments
The following table summarizes the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2010 (amounts in thousands):
March 31, 2010 | |||||||||||||
Amortized Costs | Gross Unrealized | Fair Value | |||||||||||
Gains | (Losses) | ||||||||||||
Held to Maturity | |||||||||||||
US Gov’t & Agency obligations | $ | 15,488 | $ | 159 | $ | (71 | ) | $ | 15,576 | ||||
Available for Sale | |||||||||||||
US Gov’t & Agency obligations | 22,342 | 89 | (164 | ) | 22,267 | ||||||||
Mortgage-backed securities | 196 | — | (6 | ) | 190 | ||||||||
Municipals | 3,820 | 28 | (74 | ) | 3,774 | ||||||||
Other | 2,500 | 19 | (24 | ) | 2,495 | ||||||||
$ | 28,858 | $ | 136 | $ | (268 | ) | $ | 28,726 | |||||
10
Table of Contents
December 31, 2009 | |||||||||||||
Amortized Costs | Gross Unrealized | Fair Value | |||||||||||
Gains | (Losses) | ||||||||||||
Held to Maturity | |||||||||||||
US Gov’t & Agency obligations | $ | 15,550 | $ | — | $ | (273 | ) | $ | 15,277 | ||||
Available for Sale | |||||||||||||
US Gov’t & Agency obligations | $ | 38,958 | $ | 37 | $ | (553 | ) | $ | 38,442 | ||||
Mortgage-backed securities | 220 | — | (7 | ) | 213 | ||||||||
Municipals | 3,822 | 11 | (211 | ) | 3,622 | ||||||||
Other | 2,999 | 11 | (48 | ) | 2,962 | ||||||||
$ | 45,999 | $ | 59 | $ | (819 | ) | $ | 45,239 | |||||
The following table shows the gross unrealized losses and fair value of the Bank’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the date indicated (amounts in thousands):
Less than 12 months | More than 12 months | Total | ||||||||||||||||
March 31, 2010 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||
Description of securities | ||||||||||||||||||
U.S. agency obligations | $ | 10,817 | $ | 175 | $ | 10,559 | $ | 60 | $ | 21,376 | $ | 235 | ||||||
Mortgage-backed securities | — | — | 196 | 6 | 196 | 6 | ||||||||||||
Municipals | 239 | 2 | 2,668 | 72 | 2,907 | 74 | ||||||||||||
Other | — | — | 1,034 | 24 | 1,034 | 24 | ||||||||||||
Total temporarily impaired securities | $ | 11,056 | $ | 177 | $ | 14,457 | $ | 162 | $ | 25,513 | $ | 339 | ||||||
Less than 12 months | More than 12 months | Total | ||||||||||||||||
December 31, 2009 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||
Description of securities | ||||||||||||||||||
U.S. agency obligations | $ | 46,851 | $ | 826 | $ | — | $ | — | $ | 46,851 | $ | 826 | ||||||
Mortgage-backed securities | — | — | 213 | 7 | 213 | 7 | ||||||||||||
Municipals | 2,910 | 194 | 222 | 17 | 3,132 | 211 | ||||||||||||
Other | 1,454 | 12 | 997 | 36 | 2,451 | 48 | ||||||||||||
Total temporarily impaired securities | $ | 51,215 | $ | 1,032 | $ | 1,432 | $ | 60 | $ | 52,647 | $ | 1,092 | ||||||
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 March 31, 2010, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of March 31, 2010, the Bank owned 23 securities that were being evaluated for other than temporary impairment. 18 of these securities were S&P rated AAA,
11
Table of Contents
three were S&P rated AA, and two were S&P rated A. As of March 31, 2010, 17 of these securities were obligations of government sponsored entities, five were municipal bank-qualified issues, and one was issued by a publicly traded United States corporation. The securities issued by publicly traded corporations are classified as “Other” in the tables set forth above.
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.
Note 9 – Subsequent Event
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 10 – Recent Accounting Pronouncements
In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140”, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (“ASU”) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued ASU 2010-04,Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements—subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures
12
Table of Contents
about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update No. 2010-08, “Technical Corrections to Various Topics.” ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Company’s 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. Bank of the James Financial Group, Inc. undertakes 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 (which changes from time to time and over which we have no control); changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.
GENERAL
Critical Accounting Policies
Bank of the James Financial Group, Inc.’s (“Financial”) financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss ratios as one factor in determining the inherent loss that may be
13
Table of Contents
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 with its headquarters in Lynchburg, Virginia. Financial was incorporated at the direction of Bank of the James (the “Bank”) on October 3, 2003 to serve as a bank holding company of the Bank. Financial had no business until January 1, 2004 when it acquired the common stock of the Bank through a statutory share exchange on a one-for-one basis. The Bank, through its BOTJ Investment Services Division, offers brokerage, fixed and variable annuity products, and related services to the public through a third-party broker-dealer and, through its BOTJ Mortgage, division originates residential mortgages. The Bank also wholly-owns BOTJ Insurance, Inc. (“BOTJ Insurance”) through which we act as an agent for insurance and annuity products. The Bank (and BOTJ Insurance) are our only subsidiaries and primary assets. Financial conducts its business through the following lines: community banking through the Bank, insurance agency services through BOTJ Insurance, mortgage origination through the Mortgage Division of the Bank, and securities brokerage services through the Investment Services Division.
Financial declared a 5% stock dividend on May 19, 2009 which was paid on July 21, 2009 to shareholders of record on June 16, 2009.
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 City 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.
In April 2006, we began providing securities brokerage services to Bank customers and others. We provide the services through an agreement with a third party, registered broker-dealer. Under this agreement, the broker-dealer will operate service centers in one or more branches of the Bank. As of the
14
Table of Contents
date hereof, the Investment Services Division’s only center is located in the Church Street office. Each center will be staffed by a dual employee of the Bank and the broker-dealer. The Bank receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. As of the date hereof, we have been providing these services and conducting business for approximately four years and the financial impact on the consolidated financials of the Company has been minimal.
BOTJ Insurance was incorporated under the laws of the Commonwealth of Virginia in 2008. In September 2008, BOTJ Insurance began offering its services to the public from space in the Main Street Branch. Currently BOTJ Insurance is a stand-alone agency with no employees.
Our operating results depend primarily upon the Bank’s net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.
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”), and |
• | A branch located at 1405 Ole Dominion Boulevard in the City of Bedford, Virginia, located off of Independence Boulevard (opened October 2008) (the “Bedford Branch”). |
• | A branch located at 1110 Main Street, Altavista, Virginia (relolcated from temporary branch in June 2009) (the “Altavista Branch”). |
15
Table of Contents
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 Services 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.
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 Bank intends to open a location on property that it previously purchased at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank has determined that the existing structures on the Timberlake site are insufficient for use as a bank branch. The Bank does not anticipate requesting approval to open a branch at this location prior to 2011. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit this property will be between $1,300,000 and $1,700,000.
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.
Subject to terms acceptable to the Bank, the Bank may consider entering into sale-leaseback arrangements for one or more of its branches.
Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept and or use these commitments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:
March 31, 2010 (in thousands) | |||
Commitments to extend credit | $ | 46,565 | |
Letters of Credit | 1,324 | ||
Total | $ | 47,889 | |
16
Table of Contents
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 March 31, 2010 and December 31, 2009 and the results of operations of Financial for the three months ended March 31, 2010 and 2009. This discussion should be read in conjunction with the financial statements included elsewhere herein and should be read in the context of the length of time for which the Bank has been operating.
All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Financial Condition Summary
March 31, 2010 as Compared to December 31, 2009
Total assets were $409,826,000 on March 31, 2010 compared with $437,681,000 at December 31, 2009, a decrease of 6.36%. The decrease in total assets is due primarily to a decrease in cash resulting from a decrease in deposits, as explained in the following paragraph and the repayment of a Federal Home Loan Bank of Atlanta (FHLBA) advance in the amount of $10,000,000.
Total deposits decreased from $375,772,000 as of December 31, 2009 to $358,569,000 on March 31, 2010, a decrease of 4.58%. Total deposits began to decrease shortly after March 1, 2010, the date on which the Bank reduced the rate paid on its “2010 Savings Account” from a guaranteed minimum of 3.00% APY to the current 1.25% APY. The balance of non-FDIC insured sweep accounts (repurchase agreements) decreased to $8,942,000 on March 31, 2010 from $10,710,000 on December 31, 2009 in large part because of a decrease in interest rates paid on these accounts.
To complement deposits in funding asset growth and due to the attractive rates on these funds, the Bank has funded past asset growth with short to medium term advances from the FHLBA. As of March 31, 2010, the principal balance of FHLBA borrowings was $10,000,000 as compared to $20,000,000 on December 31, 2009. On February 5, 2010, a $10,000,000 advance matured and was repaid to FHLBA, which accounts for the decrease. The remaining $10,000,000 in FHLBA advances begin to mature in 2013.
17
Table of Contents
Total loans increased to $327,493,000 on March 31, 2010 from $322,740,000 on December 31, 2009. Loans, net of unearned income and allowance, increased to $322,849,000 on March 31, 2010 from $318,452,000 on December 31, 2009, an increase of 1.38%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):
March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||
Amount | Percentage | Amount | Percentage | Amount | Percentage | |||||||||||||
Commercial | $ | 65,440 | 19.98 | % | $ | 60,045 | 18.60 | % | $ | 56,339 | 19.37 | % | ||||||
Real estate construction | 32,763 | 10.00 | % | 32,149 | 9.96 | % | 41,379 | 14.22 | % | |||||||||
Real estate mortgage | 172,894 | 52.79 | % | 169,220 | 52.43 | % | 144,423 | 49.65 | % | |||||||||
Consumer | 55,257 | 16.87 | % | 58,756 | 18.21 | % | 45,462 | 15.63 | % | |||||||||
Other | 1,139 | 0.35 | % | 2,570 | 0.80 | % | 3,301 | 1.13 | % | |||||||||
Total loans | $ | 327,493 | 100.00 | % | $ | 322,740 | 100.00 | % | $ | 290,904 | 100.00 | % | ||||||
Total nonperforming assets, which consist of non-accrual loans and other real estate owned (“OREO”) increased to $8,322,000 on March 31, 2010 from $6,353,000 on December 31, 2009. Non-accrual loans increased to $7,541,000 on March 31, 2010 from $5,637,000 on December 31, 2009. 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 and consequently does not anticipate that the increase in non-accrual loans will have a material impact on the financial condition of the Bank.
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. On December 31, 2009, the Bank was carrying 4 OREO properties on its books at a value of $666,000. During the quarter ended, the Bank purchased three additional properties at foreclosure and as of March 31, 2010, the Bank was carrying OREO properties on its books at a value of $781,000. The Bank has since reduced this amount by approximately $86,000. Because of economic conditions, although the remaining OREO properties are not actively being marketed, they are available for sale.
The following tables set forth information regarding impaired and non-accrual loans as of March 31, 2010 and December 31, 2009:
Impaired & Non-Accrual Loans (dollars in thousands) | ||||||
March 31, 2010 | December 31, 2009 | |||||
Impaired loans without a valuation allowance | $ | 29,807 | $ | 28,689 | ||
Impaired loans with a valuation allowance | 13,665 | 14,938 | ||||
Total impaired loans | $ | 43,472 | $ | 43,627 | ||
Valuation allowance related to impaired loans | $ | 2,131 | $ | 2,081 | ||
Total non-accrual loans | $ | 7,541 | $ | 5,687 | ||
Total loans past due ninety days or more and still accruing | $ | 53 | $ | 854 |
18
Table of Contents
Average Investment in Impaired Loans (dollars in thousands) Period Ended | ||||||
March 31, 2010 | December 31, 2009 | |||||
Average investment in impaired loans | $ | 35,034 | $ | 30,642 | ||
Interest income recognized on impaired loans | $ | 162 | $ | 2,039 | ||
Interest income recognized on a cash basis on impaired loans | $ | 285 | $ | 1,932 | ||
The increases in impaired loans as reflected in the above table was a result of the continual evaluation of the loan portfolio in light of current economic conditions and the value of the underlying collateral securing loans. The result of the evaluation led management to downgrade certain relationships. Some of these downgrades required an increase to the allowance for loan losses which was funded through the $387,000 provision in the first quarter. The allowance for loan losses is discussed in more detail below.
No non-accrual loans were excluded from impaired loan disclosure under current accounting rules at March 31, 2010 and December 31, 2009. If interest on these loans had been accrued, such income would have approximated $733,000 and $641,000, through March 31, 2010 and December 31, 2009, 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.
Cash and cash equivalents decreased to $16,920,000 on March 31, 2010 from $31,305,000 on December 31, 2009. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease is due in part to a decrease in the balance in 2010 Savings Accounts, routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents.
Securities held-to-maturity decreased slightly to $15,488,000 on March 31, 2010 from $15,550,000 on December 31, 2009. Securities available-for-sale decreased to $28,726,000 on March 31, 2010 from $45,239,000 on December 31, 2009. During the three months ended March 31, 2009 the Bank has received proceeds from maturities and/or calls of securities-available-for sale totaling $4,194,000 and has received proceeds from sale of securities available-for sale totaling $5,714,000. The Bank purchased $18,648,000 in securities available-for sale during the same period. The decrease from December��31, 2009 in securities available-for-sale was primarily due to the liquidation of those securities to accommodate potential withdrawals from the 2010 Savings Accounts expected following the reduction in the rate paid on those accounts.
Financial’s investment in FHLBA stock totaled $1,537,000 at March 31, 2010. FLHBA 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. Despite the FHLBA’s temporary suspension of repurchase of excess capital stock in 2009, Financial does not consider this investment to be other-than-temporarily impaired at March 31, 2010 and no impairment has been recognized.
19
Table of Contents
At March 31, 2010, Financial had liquid assets of approximately $45,646,000 in the form of cash and available-for-sale investments. Management believes that liquid assets were adequate at March 31, 2010. Management 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.
In connection with a private placement of unregistered debt securities, Financial issued capital notes in the amount $7,000,000 (the “Notes”) in 2009. The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. No principal payments are due until the Notes mature on April 1, 2012, the date on which the Notes mature and the principal and all accrued but unpaid interest on the Notes will be due and payable. During the three months ended March 31, 2010, Financial made an interest payment on the Notes totaling $105,000.
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 March 31, 2010, the Bank had a leverage ratio of 7.18%, a Tier 1 risk-based capital ratio of 9.52% and a total risk-based capital ratio of 10.77%. As of March 31, 2010 and December 31, 2009 the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of March 31, 2010 and December 31, 2009:
Bank Level Only Capital Ratios | ||||||
March 31, 2010 | December 31, 2009 | |||||
Analysis of Capital (in 000’s) | ||||||
Tier 1 Capital: | ||||||
Common stock | $ | 3,743 | $ | 3,742 | ||
Surplus | 19,324 | 19,323 | ||||
Retained earnings | 7,285 | 6,825 | ||||
Total Tier 1 capital | $ | 30,352 | $ | 29,890 | ||
Tier 2 Capital: | ||||||
Allowance for loan losses | 3,993 | 4,036 | ||||
Total Tier 2 Capital: | 3,993 | 4,036 | ||||
Total risk-based capital | $ | 34,345 | $ | 33,926 | ||
Risk weighted assets | $ | 318,786 | $ | 322,662 | ||
Average total assets | $ | 422,982 | $ | 434,110 |
20
Table of Contents
Actual | Regulatory Benchmarks | |||||||||||
March 31, 2010 | December 31, 2009 | For Capital Adequacy Purposes | For Well Capitalized Purposes | |||||||||
Capital Ratios: | ||||||||||||
Tier 1 capital to average total assets ratio (leverage ratio) | 7.18 | % | 6.89 | % | 4.00 | % | 5.00 | % | ||||
Tier 1 risk based capital ratio | 9.52 | % | 9.26 | % | 4.00 | % | 6.00 | % | ||||
Total risk-based capital ratio | 10.77 | % | 10.51 | % | 8.00 | % | 10.00 | % |
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 would no longer be comparable to the capital ratios of the Bank because the proceeds of the private placement do not qualify as equity capital on a consolidated basis.
Results of Operations
Comparison of the Three Months Ended March 31, 2010 and 2009
Earnings Summary
Financial had net income of $366,000 for the three months ended March 31, 2010 compared to a net income of $194,000 for the comparable period in 2009. The basic and diluted earnings per common share for the three months ended March 31, 2010 was $0.12 compared with $0.07 for the same period in 2009. All earnings per share amounts have been adjusted to reflect the 5% stock dividend paid by Financial in July 2009 as well as all prior stock dividends.
The increase in net income was due in large part to an increase in the net interest margin resulting from the decrease in interest paid on 2010 Savings Accounts.
These operating results represent an annualized return on stockholders’ equity of 6.13% for the three months ended March 31, 2010, compared with an annualized return of 3.16% in the same period in 2009. The Company had an annualized return on average assets for the three months ended March 31, 2010 of 0.35% compared with an annualized return of 0.22% for the same period in 2009.
Interest Income, Interest Expense, and Net Interest Income
Interest income increased to $5,368,000 for the three months ended March 31, 2010 from $4,501,000 for the same period in 2009, an increase of 19.26% from the same period in 2009. The rate on total average earning assets increased slightly from 5.51% for the three month period ended March 31, 2009 to 5.55% for the three months ended March 31, 2010 in part because of the increase in the balance of interest earning assets. Although management cannot be certain, management expects that interest rates will remain near historic lows for the remainder of 2010 and may continue to negatively impact our interest income.
Despite a decrease in interest rates, interest expense increased slightly to $2,079,000 for the three months ended March 31, 2010 from $2,048,000 from the same period in 2009, an increase of 1.51%. The increase for the three months ended March 31, 2010 was primarily attributable to the increase in the balance of interest bearing liabilities.
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
21
Table of Contents
loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three months ended March 31, 2010 was $3,289,000 compared with $2,453,000 for the same period in 2009. The net interest margin increased to 3.40% for the three months ended March 31, 2010 from 3.00% in the same period a year ago. The increase in net interest income for the three months ended March 31, 2010 as compared with the comparable three months in 2009 was due to a decrease in the average rate paid on deposit accounts, primarily the 2010 Savings Account.
Financial’s net interest margin analysis and average balance sheets are shown in Schedule I on page 26.
Non-Interest Income
Non-interest income, which 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, decreased to $725,000 (exclusive of a gain of $75,000 on the sale of securities) for the three months ended March 31, 2010 from $769,000 (exclusive of $116,000 on the gain on sale of securities) for the comparable period in 2009. This decrease for the three months ended March 31, 2010 as compared to the same period last year was due primarily to lower volume of sales of investments and mortgage originations.
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.
Management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2010. Management expects that low rates coupled with the Mortgage Division’s reputation in Region 2000 will allow us to continue to grow revenue at the Mortgage Division. In addition, loan origination has increased in part due to the temporary tax credit available to qualified first-time home buyers. The credit expired on April 30, 2010. Management believes the loss of this credit could have a negative impact on loan volume.
We anticipate that Investment Services Division and the Mortgage Division will continue to contribute additional non-interest income in the remainder of 2010.
In September, 2008, the Company began operating BOTJ Insurance, Inc. (“BOTJ Insurance”), a wholly-owned subsidiary of the Bank. Currently BOTJ Insurance is a stand-alone agency with no employees. Management does not expect BOTJ Insurance to have a material impact on non-interest income in the foreseeable future.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 2010 increased to $3,158,000 from $2,728,000 for the comparable period in 2009. This 15.76% increases in non-interest expense from the comparable period in 2009 can be attributed to increased compensation and occupancy expenses and an increase in the FDIC assessment.
Total personnel expense was $1,649,000 for the three month period ended March 31, 2010 as compared to $1,439,000 for the same period in 2009. Compensation for some employees of the Mortgage Division and Investment Division is commission-based and therefore subject to fluctuation. In addition, the application of current accounting rules had the effect of reducing personnel expense. Current accounting rules require the incremental direct costs of originating and closing a loan to be deferred and
22
Table of Contents
amortized over the life of the loan adjusting the net yield. This deferral of loan costs had the effect of deferring approximately $99,000 in salary expense during the three months ended March 31, 2010 as compared with a deferred salary expense of $226,000 for the same period in 2009. After adding back the cost deferral under current accounting rules, our total salary and benefit expense increased by $83,000 for the three month period ended March 31, 2010 from the comparable period in 2009.
The Bank also had increases in depreciation expense and other operating expenses, all of which are related to the growth of the Bank’s fixed asset based and increased market coverage in Region 2000.
During the quarter ended March 31, 2010, the regular FDIC Assessment expense increased to $192,000 from $90,000 for the three months ended March 31, 2010. FDIC Assessment payments have increased in large part because of i) FDIC coverage on accounts has increased from $100,000 to $250,000; ii) the FDIC is charging additional premiums for participation in the Transactional Account Guarantee Program (TAGP); and iii) an increase in the total base assessment rates.
Allowance for Loan Losses
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 $387,000 to the allowance for loan loss for the three months ended March 31, 2010 compared to provision of $322,000 for the comparable period in 2009.
The increase in the loan loss reserve was due to the following two factors:
• | Management adjusted the unallocated portion of the loan loss reserve to account for current economic factors. The results of the adjustment required management to increase the loan loss provision. |
• | In light of the current economic environment, management continued its ongoing assessment of specific impairment in the Bank’s loan portfolio. The results of this assessment required management to increase the loan loss provision. |
Management believes that the current allowance for loan loss of $4,644,000 (or 1.42% of total loans) at March 31, 2010 is adequate.
The following sets forth the reconciliation of the allowance for loan loss:
Three months ended March 31, (in thousands) | ||||||||
2010 | 2009 | |||||||
Balance, beginning of period | $ | 4,288 | $ | 2,859 | ||||
Provision for loan losses | 387 | 322 | ||||||
Loans charged off | (226 | ) | (191 | ) | ||||
Recoveries of loans charged off | 195 | 14 | ||||||
Net Charge Offs | (31 | ) | (177 | ) | ||||
Balance, end of period | $ | 4,644 | $ | 3,004 | ||||
23
Table of Contents
Net charge offs decreased from $177,000 for three months ended March 31, 2009 to $31,000 for the same period in 2010. 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 months ended March 31, 2010, Financial had an income tax expense of $178,000.
Legislation
The FDIC imposed an emergency special assessment of 5 basis points on all insured financial institutions, based on assets minus Tier 1 capital as of September 30, 2009. This special assessment of $184,000 was accrued and expensed in the second quarter of 2009 but paid by us on September 30, 2009. Subsequently, the FDIC required insured financial institutions to prepay three years of regular FDIC premiums to recapitalize the insurance fund. We made this payment in December 2009, but are amortizing the prepayment over a three year period.
24
Table of Contents
Schedule I
Net Interest Margin Analysis
Average Balance Sheets
For the Quarter Ended March 31, 2010 and 2009
2010 | 2009 | |||||||||||||||||||
Average Balance Sheet | Interest Income/ Expense | Average Rates Earned/Paid | Average Balance Sheet | Interest Income/ Expense | Average Rates Earned/Paid | |||||||||||||||
ASSETS | ||||||||||||||||||||
Loans, including fees | $ | 325,956 | $ | 4,844 | 6.03 | % | $ | 283,148 | $ | 4,081 | 5.85 | % | ||||||||
Federal funds sold | 12,196 | 7 | 0.23 | % | 11,003 | 6 | 0.22 | % | ||||||||||||
Securities | 52,076 | 517 | 4.03 | % | 35,316 | 414 | 4.75 | % | ||||||||||||
Federal agency equities | 2,218 | — | 0.00 | % | 1,945 | — | 0.00 | % | ||||||||||||
CBB equity | 116 | — | — | 116 | — | — | ||||||||||||||
Total earning assets | 392,562 | 5,368 | 5.55 | % | 331,528 | 4,501 | 5.51 | % | ||||||||||||
Allowance for loan losses | (4,368 | ) | (2,905 | ) | ||||||||||||||||
Non-earning assets | 36,073 | 25,221 | ||||||||||||||||||
Total assets | $ | 424,267 | $ | 353,844 | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
Deposits | ||||||||||||||||||||
Demand interest bearing | $ | 49,520 | $ | 137 | 1.12 | % | $ | 45,885 | $ | 129 | 1.14 | % | ||||||||
Savings | 190,488 | 1,087 | 2.31 | % | 110,793 | 779 | 2.85 | % | ||||||||||||
Time deposits | 86,324 | 617 | 2.90 | % | 102,728 | 934 | 3.69 | % | ||||||||||||
Total interest bearing deposits | 326,332 | 1,841 | 2.29 | % | 259,406 | 1,842 | 2.88 | % | ||||||||||||
Other borrowed funds | ||||||||||||||||||||
Repurchase agreements | 9,553 | 33 | 1.40 | % | 13,337 | 59 | 1.82 | % | ||||||||||||
Other borrowings | 13,889 | 100 | 2.92 | % | 21,000 | 147 | 2.84 | % | ||||||||||||
Capital Notes | 7,000 | 105 | 6.00 | % | — | — | — | |||||||||||||
Total interest-bearing liabilities | 356,774 | 2,079 | 2.36 | % | 293,743 | 2,048 | 2.83 | % | ||||||||||||
Non-interest bearing deposits | 42,296 | 35,894 | ||||||||||||||||||
Other liabilities | 999 | (150 | ) | |||||||||||||||||
Total liabilities | 400,069 | 329,486 | ||||||||||||||||||
Stockholders’ equity | 24,198 | 24,358 | ||||||||||||||||||
Total liabilities and Stockholders’ equity | $ | 424,267 | $ | 353,844 | ||||||||||||||||
Net interest earnings | $ | 3,289 | $ | 2,453 | ||||||||||||||||
Net interest margin | 3.40 | % | 3.00 | % | ||||||||||||||||
Interest spread | 3.19 | % | 2.68 | % | ||||||||||||||||
25
Table of Contents
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
Item 4T. | 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 March 31, 2010, 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.
Item 1. | Legal Proceedings |
The Bank is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 26, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
Not applicable
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
Not applicable.
26
Table of Contents
Item 6. | Exhibits |
The following are filed as Exhibits to this Form 10-Q:
Exhibit No. | Description of Exhibit | |
31.1 | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 12, 2010 | |
31.2 | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 12, 2010 | |
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 May 12, 2010 |
27
Table of Contents
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: May 12, 2010 | By | /S/ Robert R. Chapman III | ||||
Robert R. Chapman III, President (Principal Executive Officer) | ||||||
Date: May 12, 2010 | By | /S/ J. Todd Scruggs | ||||
J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
28
Table of Contents
Index of Exhibits
Exhibit No. | Description of Exhibit | |
31.1 | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 12, 2010 | |
31.2 | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 12, 2010 | |
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 May 12, 2010 |
29