UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form
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(Mark one)
For the Quarterly Period Ended
For the transition period from
(Exact Name of Registrant as Specified in Its Charter)
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(State or other jurisdiction of incorporation or organization) | (Commission file number) | (I.R.S. Employer Identification No.) |
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(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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Emerging growth company |
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Securities registered or to be registered pursuant to Section 12(b) of the Act
Title of each class |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
TABLE OF CONTENTS
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1 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 44 |
44 | |
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44 | |
44 | |
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | 44 |
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46 | |
46 |
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) (2024 unaudited)
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| March 31, |
| December 31, |
Assets | 2024 |
| 2023 |
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Cash and due from banks | $ |
| $ |
Federal funds sold | |
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Total cash and cash equivalents | |
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Securities held-to-maturity, at amortized cost (fair value of $ | |
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Securities available-for-sale, at fair value | |
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Restricted stock, at cost | |
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Loans held for sale | |
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Loans, net of allowance for credit losses of $ | |
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Premises and equipment, net | |
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Interest receivable | |
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Cash value - bank owned life insurance | |
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Customer relationship intangibles | |
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Goodwill | |
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Other assets | |
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Total assets | $ |
| $ |
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Liabilities and Stockholders' Equity |
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Deposits |
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Noninterest bearing demand | $ |
| $ |
NOW, money market and savings | |
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Time deposits | |
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Total deposits | |
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Capital notes, net | |
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Other borrowings | |
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Interest payable | |
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Other liabilities | |
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Total liabilities | $ |
| $ |
Commitments and Contingencies |
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Stockholders' equity |
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Preferred stock; authorized |
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Common stock $ | |
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Additional paid-in-capital | |
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Retained earnings | |
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Accumulated other comprehensive loss | ( |
| ( |
Total stockholders' equity | $ |
| $ |
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Total liabilities and stockholders' equity | $ |
| $ |
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Income
(dollar amounts in thousands, except per share amounts) (unaudited)
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| For the Three Months Ended | ||
| March 31, | ||
Interest Income | 2024 |
| 2023 |
Loans | $ |
| $ |
Securities |
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US Government and agency obligations | |
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Mortgage backed securities | |
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Municipals - taxable | |
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Municipals - tax exempt | |
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Dividends | |
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Corporates | |
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Interest-bearing deposits | |
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Federal Funds sold | |
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Total interest income | |
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Interest Expense |
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Deposits |
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NOW, money market savings | |
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Time deposits | |
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FHLB borrowings | - |
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Finance leases | |
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Other borrowings | |
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Capital notes | |
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Total interest expense | |
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Net interest income | |
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(Recovery of) provision for credit losses | ( |
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Net interest income after (recovery of) provision for credit losses | |
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Noninterest income |
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Gain on sales of loans held for sale | |
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Service charges, fees and commissions | |
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Wealth management fees | |
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Life insurance income | |
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Other | |
| - |
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Total noninterest income | |
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Noninterest expenses |
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Salaries and employee benefits | |
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Occupancy | |
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Equipment | |
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Supplies | |
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Professional and other outside expense | |
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Data processing | |
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Marketing | |
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Credit expense | |
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Other real estate expenses, net | - |
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FDIC insurance expense | |
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Amortization of intangibles | |
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Other | |
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Total noninterest expenses | |
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Income before income taxes | |
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Income tax expense | |
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Net Income | $ |
| $ |
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Weighted average shares outstanding - basic and diluted | |
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Earnings per common share - basic and diluted | $ |
| $ |
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(dollar amounts in thousands) (unaudited)
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| For the Three Months | ||
| Ended March 31, | ||
| 2024 |
| 2023 |
Net Income | $ |
| $ |
Other comprehensive income (loss): |
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Unrealized (loss) gain on securities available-for-sale | ( |
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Tax effect | |
| ( |
Other comprehensive (loss) income, net of tax | ( |
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Comprehensive income | $ |
| $ |
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollar amounts in thousands) (unaudited)
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| For the Three Months Ended March 31, | ||
| 2024 |
| 2023 |
Cash flows from operating activities |
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Net Income | $ |
| $ |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization | |
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Net amortization and accretion of premiums and discounts on securities | |
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Amortization of debt issuance costs | |
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(Gain) on sales of loans held for sale | ( |
| ( |
Proceeds from sales of loans held for sale | |
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Origination of loans held for sale | ( |
| ( |
(Recovery of) provision for credit losses | ( |
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Impairment of other real estate owned | - |
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Amortization of intangibles | |
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Bank owned life insurance income | ( |
| ( |
(Increase) decrease in interest receivable | ( |
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Decrease (increase) in other assets | |
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Increase in interest payable | |
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Increase in other liabilities | ( |
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Net cash (used in) provided by operating activities | $ ( |
| $ |
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Cash flows from investing activities |
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Purchases of securities available-for-sale | $ ( |
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Proceeds from maturities, calls and paydowns of securities available-for-sale | |
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Purchases of bank owned life insurance | ( |
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Origination of loans, net of principal collected | |
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Purchases of premises and equipment | ( |
| ( |
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Net cash provided by (used in) investing activities | $ |
| $ ( |
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Cash flows from financing activities |
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Net increase in deposits | $ |
| $ |
Principal payments on finance lease obligations | ( |
| ( |
Principal payments on other borrowings | ( |
| ( |
Repurchase of common stock | - |
| ( |
Dividends paid to common stockholders | ( |
| ( |
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Net cash provided by financing activities | $ |
| $ |
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Increase in cash and cash equivalents | |
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Cash and cash equivalents at beginning of period | $ |
| $ |
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Cash and cash equivalents at end of period | $ |
| $ |
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Supplemental schedule of noncash investing and financing activities |
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Noncash transactions |
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Fair value adjustment for securities available-for-sale | $ ( |
| $ |
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Supplemental disclosures of cash flow information |
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Cash transactions |
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Cash paid for interest | $ |
| $ |
Cash paid for income taxes | - |
| - |
Bank of the James Financial Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2024 and 2023
(dollars in thousands, except per share amounts) (unaudited)
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| Accumulated |
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| Additional |
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| Common | Paid-in | Retained | Comprehensive |
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| Outstanding |
| Stock | Capital | Earnings | (Loss) | Total |
Balance at December 31, 2022 | |
| $ | $ | $ | $ ( | $ |
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Adoption of | - |
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Net Income | - |
| - | - | | - | |
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Dividends paid on common stock ($ | - |
| - | - | ( | - | ( |
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Repurchase of common stock | ( |
| ( | ( | - | - | ( |
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Other comprehensive income | - |
| - | - | - | | |
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Balance at March 31, 2023 | |
| $ | $ | $ | $ ( | $ |
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Balance at December 31, 2023 | |
| $ | $ | $ | $ ( | $ |
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Net Income | - |
| - | - | | - | |
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Dividends paid on common stock ($ | - |
| - | - | ( | - | ( |
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Other comprehensive loss | - |
| - | - | - | ( | ( |
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Balance at March 31, 2024 | |
| $ | $ | $ | $ ( | $ |
Notes to Consolidated Financial Statements
Bank of the James Financial Group, Inc.’s (“Financial” or the “Company”) primary market area consists of the area commonly referred to as Region 2000 which encompasses the
Significant Accounting Policies and Estimates
The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 2 of the audited financial statements and notes for the year ended December 31, 2023 and are contained in the Company’s 2023 Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2023.
The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit rating, which are influenced by a number of factors including obligor cash flow, geography, seniority, among other factors. Currently, the Company’s held-to-maturity securities consist completely of securities covered by the explicit or implied guarantee of the United States government or one of its agencies.
Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit losses in the Consolidated Statements of Income. The Company did
Note 2 – Significant Accounting Policies and Estimates (continued)
Management evaluates all available-for-sale securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any deficiency is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.
Changes in the allowance for credit loss are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2024, there was
As set forth under “Interest receivable” on the Company’s Consolidated Balance Sheets, accrued interest receivable on available-for-sale securities totaled approximately $
The allowance for loan credit losses represents an amount which, in management’s judgment, is adequate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The allowance for loan credit losses is measured and recorded upon the initial recognition of a financial asset. The allowance for loan credit losses is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statements of Income.
With the exception of loans related to agriculture, the Company is utilizing a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates and/or gross domestic product (“GDP”), to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following four quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversely classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model.
Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
The adoption of CECL did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices or charge-off policy.
Note 2 – Significant Accounting Policies and Estimates (continued)
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for (or recovery of) credit losses in the Consolidated Statements of Income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodology as the loan portfolio, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
All of the Company’s revenue from contracts with customers within the scope of Accounting Standards Codification (ASC) 606 is recognized in non-interest income as presented in its consolidated statements of income. ASC 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, wealth management fees, and annuity and insurance commissions. For a more detailed discussion of noninterest revenue streams within the scope of ASC 606, see “Note 22 – Revenue Recognition” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
The following is a summary of the earnings per share calculation for the three months ended March 31, 2024 and 2023.
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| Three-months Ended | ||
| March 31, | ||
| 2024 |
| 2023 |
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Net income | $ |
| $ |
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Weighted average number of shares outstanding - basic and diluted | |
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Earnings per common share - basic and diluted | $ |
| $ |
There were
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 annual meeting of shareholders held on May 15, 2018, the shareholders approved the Bank of the James Financial Group, Inc. 2018 Equity Incentive Plan (the “2018 Incentive Plan”). The 2018 Incentive Plan permits the issuance of up to
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market and in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Fair Value on a Recurring Basis
Securities Available-for-Sale
Fair values of securities available-for sale are based on quoted prices available in an active market. If quoted prices are available, these securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.
Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.
Note 5 – Fair Value Measurements (continued)
Derivatives Assets/Liabilities – Interest Rate Lock Commitments (IRLCs)
The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 3.
The below tables summarize the Company’s financial assets that were measured at fair value on a recurring basis during the period.
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| Carrying Value at March 31, 2024 (in thousands) | ||||
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| Quoted Prices |
| Significant |
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| in Active |
| Other |
| Significant |
| Balance as of |
| Markets for |
| Observable |
| Unobservable |
| Mar 31, |
| Identical Assets |
| Inputs |
| Inputs |
Description | 2024 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
US agency obligations | $ |
| $ - |
| $ |
| $ - |
Mortgage-backed securities | |
| - |
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| - |
Municipals | |
| - |
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| - |
Corporates | |
| - |
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| - |
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Total available-for-sale securities | $ |
| $ - |
| $ |
| $ - |
IRLCs - | |
| - |
| - |
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Total assets at fair value | $ |
| $ - |
| $ |
| $ |
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| Carrying Value at December 31, 2023 (in thousands) | ||||
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| Quoted Prices |
| Significant |
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| in Active |
| Other |
| Significant |
| Balance as of |
| Markets for |
| Observable |
| Unobservable |
| Dec 31, |
| Identical Assets |
| Inputs |
| Inputs |
Description | 2023 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
US Treasuries | $ |
| $ - |
| $ |
| $ - |
US agency obligations | |
| - |
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| - |
Mortgage-backed securities | |
| - |
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| - |
Municipals | |
| - |
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| - |
Corporates | |
| - |
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| - |
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Total available-for-sale securities | $ |
| $ - |
| $ |
| $ - |
IRLCs - asset | |
| - |
| - |
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Total assets at fair value | $ |
| $ - |
| $ |
| $ |
Note 5 – Fair Value Measurements (continued)
The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:
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| Quantitative information about Level 3 Fair Value Measurements for March 31, 2024 | |||||||
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| Fair Value |
| Valuation Technique(s) |
| Unobservable Input |
| Range (Weighted Average) (1) | |
Assets |
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IRLCs – asset | $ |
| Market approach |
| Range of pull through rate |
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(1) Weighted based on the relative value of the instruments
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| Quantitative information about Level 3 Fair Value Measurements for December 31, 2023 | |||||||
| (dollars in thousands) | |||||||
| Fair Value |
| Valuation Technique(s) |
| Unobservable Input |
| Range (Weighted Average) (1) | |
Assets |
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IRLCs - asset | $ | |
| Market approach |
| Range of pull through rate |
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(1) Weighted based on the relative value of the instruments
Fair Value on a Non-recurring Basis
Collateral Dependent Loans with an ACLL
In accordance with ASC 326, the Company may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The Company reevaluates the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.
Loans Held for Sale
Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis.
Other Real Estate Owned
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. The Company believes that the fair value component in its valuation follows the provisions of ASC 820.
Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO property is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of Bank of the James (the “Bank”) using observable market data (Level 2).
Note 5 – Fair Value Measurements (continued)
Any fair value adjustments are recorded in the period incurred and expensed against current earnings. However, in situations where the collateral is a house or building in the process of construction, the appraisal is more than 12 months old, management has determined the fair value of the collateral is further impaired below the appraised value, or the appraisal is not based solely on market comparables adjusted for observable inputs, the value is considered Level 3.
There was OREO as of both March 31, 2024 and December 31, 2023.
Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following tables whether or not recognized on the Consolidated Balance Sheets at fair value.
Note 5 – Fair Value Measurements (continued)
The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments and their placement in the fair value hierarchy at March 31, 2024 and December 31, 2023 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at March 31, 2024 using | ||||||
|
|
| Quoted Prices |
| Significant |
|
|
|
|
|
|
| in Active |
| Other |
| Significant |
|
|
|
|
| Markets for |
| Observable |
| Unobservable |
|
|
| Carrying |
| Identical Assets |
| Inputs |
| Inputs |
|
|
Assets | Amounts |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Balance |
Cash and due from banks | $ |
| $ |
| $ - |
| $ - |
| $ |
Federal funds sold | |
| |
| - |
| - |
| |
Securities |
|
|
|
|
|
|
|
|
|
Available-for-sale | |
| - |
| |
| - |
| |
Held-to-maturity, net | |
| - |
| |
| - |
| |
Restricted stock | |
| - |
| |
| - |
| |
Loans, net (1) | |
| - |
| - |
| |
| |
Loans held for sale | |
| - |
| |
| - |
| |
Interest receivable | |
| - |
| |
| - |
| |
BOLI | |
| - |
| |
| - |
| |
Derivatives - IRLCs | |
| - |
| - |
| |
| |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Deposits | $ |
| $ - |
| $ |
| $ - |
| $ |
Capital notes | |
| - |
| |
| - |
| |
Other borrowings | |
| - |
| |
| - |
| |
Interest payable | |
| - |
| |
| - |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at December 31, 2023 using | ||||||
|
|
| Quoted Prices |
| Significant |
|
|
|
|
|
|
| in Active |
| Other |
| Significant |
|
|
|
|
| Markets for |
| Observable |
| Unobservable |
|
|
| Carrying |
| Identical Assets |
| Inputs |
| Inputs |
|
|
Assets | Amounts |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Balance |
Cash and due from banks | $ |
| $ |
| $ - |
| $ - |
| $ |
Federal funds sold | |
| |
| - |
| - |
| |
Securities |
|
|
|
|
|
|
|
|
|
Available-for-sale | |
| - |
| |
| - |
| |
Held-to-maturity | |
| - |
| |
| - |
| |
Restricted stock | |
| - |
| |
| - |
| |
Loans, net (1) | |
| - |
| - |
| |
| |
Loans held for sale | |
| - |
| |
| - |
| |
Interest receivable | |
| - |
| |
| - |
| |
BOLI | |
| - |
| |
| - |
| |
Derivatives - IRLCs | |
| - |
| - |
| |
| |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Deposits | $ |
| $ - |
| $ |
| $ - |
| $ |
Capital notes | |
| - |
| |
| - |
| |
Other borrowings | |
| - |
| |
| - |
| |
Interest payable | |
| - |
| |
| - |
| |
The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2024 and December 31, 2023 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2024 | ||||||||||
| Amortized |
| Gross Unrealized |
| Fair | ||||||
| Cost |
| Gains |
| Losses |
| Value | ||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
U.S. agency obligations | $ | |
| $ | — |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
U.S. agency obligations | $ | |
| $ | |
| $ | ( |
| $ | |
Mortgage-backed securities |
| |
|
| |
|
| ( |
|
| |
Municipals |
| |
|
| — |
|
| ( |
|
| |
Corporates |
| |
|
| — |
|
| ( |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
| $ | |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2023 | ||||||||||
| Amortized |
| Gross Unrealized |
| Fair | ||||||
| Cost |
| Gains |
| Losses |
| Value | ||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
U.S. agency obligations | $ | |
| $ | — |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries | $ | |
| $ | — |
| $ | ( |
| $ | |
U.S. agency obligations |
| |
|
| — |
|
| ( |
|
| |
Mortgage-backed securities |
| |
|
| |
|
| ( |
|
| |
Municipals |
| |
|
| — |
|
| ( |
|
| |
Corporates |
| |
|
| — |
|
| ( |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
| $ | |
| $ | ( |
| $ | |
Note 6 – Securities (continued)
The following tables summarize the fair value of securities available-for-sale as of March 31, 2024 and as of December 31, 2023 and the corresponding amounts of unrealized losses. Management uses the valuation as of month-end in determining when securities are in an unrealized loss position (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31. 2024 | Less than 12 months |
| More than 12 months |
| Total | ||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency obligations | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Mortgage-backed securities |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Municipals |
| — |
|
| — |
|
| |
|
| |
|
| |
|
| |
Corporates |
| — |
|
| — |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2023 | Less than 12 months |
| More than 12 months |
| Total | ||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
| — |
|
| — |
|
| |
|
| |
|
| |
|
| |
U.S. agency obligations |
| — |
|
| — |
|
| |
|
| |
|
| |
|
| |
Mortgage-backed securities |
| — |
|
| — |
|
| |
|
| |
|
| |
|
| |
Municipals |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Corporates |
| — |
|
| — |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
As of March 31, 2024, the Company owned
The Company has evaluated available-for-sale securities in an unrealized loss position for credit related impairment at March 31, 2024 and concluded
The Company’s held-to-maturity portfolio is covered by the explicit or implied guarantee of the United States government or one of its agencies and rated investment grade or higher. As a result, the Company did
All held-to-maturity and available-for-sale securities were current with
Note 6 – Securities (continued)
There were
The amortized costs and fair values of securities at March 31, 2024, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
| March 31, 2024 | ||
| Amortized |
|
|
| Costs |
| Fair Value |
Held-to-maturity: |
|
|
|
Due in one year or less | $ - |
| $ - |
Due after one year through five years | - |
| - |
Due after five years through ten years | |
| |
Due after ten years | |
| |
|
|
|
|
Total securities Held-to-maturity | $ |
| $ |
|
|
|
|
|
|
|
|
| Amortized |
|
|
| Costs |
| Fair Value |
Available-for-sale: |
|
|
|
Due in one year or less | $ |
| $ |
Due after one year through five years | |
| |
Due after five years through ten years | |
| |
Due after ten years | |
| |
|
|
|
|
Total securities Available-for-sale | $ |
| $ |
The Company has
All of the Company’s reportable segments are service-based. The mortgage business is a gain on sale business and the investment advisory business is fee for service based, while the Bank’s primary source of revenue is net interest income. The Bank also provides a referral network for the mortgage origination business and the investment advisory business. The mortgage business may also be in a position to refer its customers to the Bank for banking services when appropriate.
Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three-months ended March 31, 2024 and 2023 was as follows (dollars in thousands):
Note 7 – Business Segments (continued)
|
|
|
|
|
|
|
|
Business Segments |
|
|
|
|
|
|
|
|
|
|
|
| Investment |
|
|
| Community |
|
|
| Advisory |
|
|
| Banking |
| Mortgage |
| Services |
| Total |
For the three-months ended March 31, 2024 |
|
|
|
|
|
|
|
Net interest income | $ |
| $ - |
| $ - |
| $ |
Recovery of credit losses | ( |
| - |
| - |
| ( |
Net interest income after provision for credit losses | |
| - |
| - |
| |
Noninterest income | |
| |
| |
| |
Noninterest expenses | |
| |
| |
| |
Income before income taxes | |
| |
| |
| |
Income tax expense | |
| |
| |
| |
Net income | $ |
| $ |
| $ |
| $ |
Total assets | $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
For the three-months ended March 31, 2023 |
|
|
|
|
|
|
|
Net interest income | $ |
| $ - |
| $ - |
| $ |
Provision for credit losses | |
| - |
| - |
| |
Net interest income after provision for credit losses | |
| - |
| - |
| |
Noninterest income | |
| |
| |
| |
Noninterest expenses | |
| |
| |
| |
Income before income taxes | |
| |
| |
| |
Income tax expense | |
| |
| |
| |
Net income | $ |
| $ |
| $ |
| $ |
Total assets | $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
Note 8 – Loans and allowance for credit losses
On January 1, 2023, the Company adopted the amendments within ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Accordingly, the Company’s financials results for reporting periods beginning after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts have not been adjusted and continue to be reported with legacy GAAP. For a detailed discussion of the impact of the adoption of ASU 2016-13 and information related to loans and credit quality, including accounting policies and methodologies used to estimate the allowance for credit losses, see Note 1.
The Company’s primary portfolio segments have changed to align with the methodology applied in estimating the allowance for credit losses under CECL and are reflected as such in the disclosures as of and for the period ended March 31, 2024 as provided below. Management determined after the adoption of CECL that the classifications set forth below were 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/Land |
Consumer |
| Consumer Open-End |
|
| Consumer Closed-End |
Residential |
| Residential Mortgages |
|
| Residential Consumer Construction/Land |
Note 8 – Loans and allowance for credit losses (continued)
A summary of loans, net of deferred costs of $
|
|
|
|
| As of |
| As of |
| March 31, 2024 |
| December 31, 2023 |
Commercial | $ |
| $ |
Commercial Real Estate: |
|
|
|
Commercial Mortgages-Owner Occupied | |
| |
Commercial Mortgages-Non-Owner Occupied | |
| |
Commercial Construction/Land | |
| |
Consumer: |
|
|
|
Consumer Open-End | |
| |
Consumer Closed-End | |
| |
Residential: |
|
|
|
Residential Mortgages | |
| |
Residential Consumer Construction/Land | |
| |
|
|
|
|
Total loans | $ |
| $ |
|
|
|
|
Less allowance for credit losses | |
| |
|
|
|
|
Net loans | $ |
| $ |
Note 8 – Loans and allowance for credit losses (continued)
The following table presents the amortized cost basis of collateral dependent loans by loan segment:
|
|
|
|
|
Collateral Dependent Loans |
| March 31, 2024 | ||
(dollars in thousands) |
| Business/Other Assets |
| Real Estate |
Commercial |
| $ |
| $ - |
Commercial Real Estate |
| - |
| |
Consumer |
| - |
| |
Residential |
| - |
| |
Total |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
Collateral Dependent Loans |
| December 31, 2023 | ||
(dollars in thousands) |
| Business/Other Assets |
| Real Estate |
Commercial |
| $ |
| $ - |
Commercial Real Estate |
| - |
| |
Consumer |
| - |
| |
Residential |
| - |
| |
Total |
| $ |
| $ |
The following tables present the activity in the allowance for credit losses for the year-to-date periods ended and the distribution of the allowance by segment as of March 31, 2024 and December 31, 2023.
|
|
|
|
|
|
|
|
|
|
| Allowance for Credit Losses and Recorded Investment in Loans | ||||||||
| (dollars in thousands) | ||||||||
| As of and For the Three Months Ended March 31, 2024 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
|
2024 | Commercial |
| Real Estate |
| Consumer |
| Residential |
| Total |
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, December 31, 2023 | $ |
| $ |
| $ |
| $ |
| $ |
Charge-Offs | ( |
|
|
| ( |
|
|
| ( |
Recoveries | |
| |
| |
| |
| |
Provision for (recovery of) | |
| ( |
| ( |
| ( |
| ( |
Ending Balance, March 31, 2024 | $ |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
| As of and For the Three Months Ended March 31, 2023 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
|
2023 | Commercial |
| Real Estate |
| Consumer |
| Residential |
| Total |
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, December 31, 2022 | $ |
| $ |
| $ |
| $ |
| $ |
Adoption of ASU 2016-13 | ( |
| |
| |
| |
| |
Charge-Offs | ( |
|
|
| ( |
|
|
| ( |
Recoveries | |
| |
| |
| |
| |
Provision for (recovery of) | |
| ( |
| |
| |
| |
Ending Balance, March 31, 2023 | $ |
| $ |
| $ |
| $ |
| $ |
Note 8 – Loans and allowance for credit losses (continued)
Credit Quality Indicators
The Bank’s internal risk rating system is in place to grade commercial and commercial real estate loans. Category ratings are reviewed periodically by lenders and the credit review area of the Bank based on the borrower’s individual situation. Additionally, internal and external monitoring and review of credits are conducted on an annual basis.
Below is a summary and definition of the Bank’s risk rating categories:
|
|
|
RATING 1 |
| Excellent |
RATING 2 |
| Above Average |
RATING 3 |
| Satisfactory |
RATING 4 |
| Acceptable / Low Satisfactory |
RATING 5 |
| Monitor |
RATING 6 |
| Special Mention |
RATING 7 |
| Substandard |
RATING 8 |
| Doubtful |
RATING 9 |
| Loss |
We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:
“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.
“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.
Note 8 – Loans and allowance for credit losses (continued)
The table below details the amortized cost of the classes of loans by credit quality indicator and year of origination as of March 31, 2024.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
| ||||||||||
| 2024 |
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| Prior |
| Revolving Loans Amortized Cost Basis |
| Total |
| Revolving Loans Converted to Term |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Special Mention | |
| - |
| - |
| - |
| |
| - |
| |
| |
| - |
Substandard | - |
| |
| |
| |
| - |
| |
| |
| |
| |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mort. - Owner Occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Special Mention | - |
| - |
| - |
| - |
| - |
| |
| - |
| |
| - |
Substandard | - |
| |
| - |
| |
| |
| |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mort. - Non-Owner Occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| - |
| - |
| - |
|
|
| - |
Substandard | - |
| - |
| - |
| - |
| |
| - |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Construction/Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| - |
| - |
| - |
|
|
| - |
Substandard | - |
| - |
| |
| |
| - |
| - |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer - Open-End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ |
| $ |
| $ |
Special Mention | - |
| - |
| - |
| - |
| - |
| - |
| - |
|
|
| - |
Substandard | - |
| - |
| - |
| - |
| - |
| - |
| |
| |
| - |
Total | $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer - Closed-End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| |
| - |
| - |
| |
| - |
Substandard | - |
| - |
| - |
| - |
| - |
| |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| - |
| |
| - |
| |
| - |
Substandard | - |
| - |
| - |
| - |
| |
| |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Consumer Constr./Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| - |
| - |
| - |
|
|
| - |
Substandard | - |
| - |
| - |
| - |
| - |
| - |
| - |
|
|
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Special Mention | |
| - |
| - |
| - |
| |
| |
| |
| |
| - |
Substandard | - |
| |
| |
| |
| |
| |
| |
| |
| |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Note 8 – Loans and allowance for credit losses (continued)
The table below details the amortized cost of the classes of loans by credit quality indicator and year of origination as of December 31 31, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
| ||||||||||
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| Prior |
| Revolving Loans Amortized Cost Basis |
| Total |
| Revolving Loans Converted to Term |
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Special Mention | |
| - |
| - |
| |
| - |
| - |
| |
| |
| - |
Substandard | - |
| |
| |
| - |
| |
| |
| - |
| |
| |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mort. - Owner Occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Special Mention | - |
| - |
| - |
| - |
| - |
| |
| - |
| |
| - |
Substandard | |
| - |
| - |
| |
| |
| |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mort. - Non-Owner Occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Substandard | - |
| - |
| - |
| |
| - |
| - |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Construction/Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Substandard | - |
| - |
| |
| - |
| - |
| - |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer - Open-End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ |
| $ |
| $ |
Special Mention | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Substandard | - |
| - |
| - |
| - |
| - |
| - |
| |
| |
| - |
Total | $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer - Closed-End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| |
| - |
| - |
| - |
| |
| - |
Substandard | - |
| - |
| - |
| - |
| |
| |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
Special Mention | - |
| - |
| - |
| - |
| - |
| |
| - |
| |
| - |
Substandard | - |
| - |
| - |
| |
| |
| |
| - |
| |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Consumer Construction/Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
Special Mention | - |
| - |
| |
| - |
| - |
| - |
| - |
| |
| - |
Substandard | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ - |
| $ |
| $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Special Mention | |
| - |
| |
| |
| - |
| |
| |
| |
| - |
Substandard | |
| |
| |
| |
| |
| |
| |
| |
| |
Total | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
Note 8 – Loans and allowance for credit losses (continued)
The following table details the current period gross charge-offs of loans by year of origination as of March 31, 2024 and December 31, 2023.
|
|
|
|
|
|
|
|
|
|
Current Period Gross Charge-Offs by Origination Year (in thousands) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans Amortized Cost Basis | Total | Revolving Loans Converted to Term |
Commercial |
| $ |
|
|
|
|
| $ |
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
Commercial Mortgages-Owner Occupied | - | - | - | - | - | - | - |
| - |
Commercial Mortgages-Non-Owner Occupied | - | - | - | - | - | - | - |
| - |
Commercial Construction/Land | - | - | - | - | - | - | - |
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
Consumer Open-End | - | - | - | - | - | | - | | - |
Consumer Closed-End | - | - | | - | - | - | - | | - |
Residential: |
|
|
|
|
|
|
|
|
|
Residential Mortgages | - | - | - | - | - | - | - |
| - |
Residential Consumer Construction/Land | - | - | - | - | - | - | - |
| - |
|
|
|
|
|
|
|
|
|
|
Total | $ - | $ | $ | $ - | $ - | $ | $ - | $ | $ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total | Revolving Loans Converted to Term |
Commercial | $ - | $ - | $ - | $ | $ - | $ | $ - | $ | $ - |
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
Commercial Mortgages-Owner Occupied | - | - | - | - | - | - | - |
| - |
Commercial Mortgages-Non-Owner Occupied | - | - | - | - | - | - | - |
| - |
Commercial Construction/Land | - | - | - | - | - | - | - |
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
Consumer Open-End | - | - | - | - | - | | | | - |
Consumer Closed-End | | | | - | - | - | - | | - |
Residential: |
|
|
|
|
|
|
|
|
|
Residential Mortgages | - | - | - | - | - | | - | | - |
Residential Consumer Construction/Land | - | - | - | - | - | - | - |
| - |
|
|
|
|
|
|
|
|
|
|
Total | $ | $ | $ | $ | $ - | $ | $ | $ | $ - |
Note 8 – Loans and allowance for credit losses (continued)
The following tables present nonaccrual information by class of loans as of March 31, 2024 and December 31, 2023.
Loans on Nonaccrual Status
(dollars in thousands)
|
|
|
|
| CECL | ||
| March 31, 2024 | ||
| Nonaccrual Loans | ||
| With No Allowance | With an Allowance | Total |
Commercial Real Estate: |
|
|
|
Commercial Construction/Land | $ |
| $ |
Consumer |
|
|
|
Consumer Open-End | | - | |
Consumer Closed-End | | - | |
Total | $ | $ - | $ |
|
|
|
|
|
|
|
|
| CECL | ||
| December 31, 2023 | ||
| Nonaccrual Loans | ||
| With No Allowance | With an Allowance | Total |
Commercial Real Estate: |
|
|
|
Commercial Construction/Land | $ | - | $ |
Note 8 – Loans and allowance for credit losses (continued)
The following tables present an aging analysis of the loan portfolio by class and past due as of March 31, 2024 and December 31, 2023.
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age Analysis of Past Due Loans as of March 31, 2024 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recorded |
|
|
|
|
|
|
|
| Greater |
|
|
|
|
|
|
|
|
|
|
| Investment |
2024 |
| 30-59 Days |
|
| 60-89 Days |
|
| than |
|
| Total Past |
|
|
|
|
| Total |
|
| > 90 Days & |
|
| Past Due |
|
| Past Due |
|
| 90 Days |
|
| Due |
|
| Current |
|
| Loans |
|
| Accruing |
Commercial | $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ | |
| $ | |
| $ |
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgages-Owner Occupied |
| |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
Commercial Mortgages-Non-Owner Occupied |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Commercial Construction/Land |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Open-End |
| |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
Consumer Closed-End |
| |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgages |
| |
|
| |
|
|
|
|
| |
|
| |
|
| |
|
|
|
Residential Consumer Construction/Land |
| |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
Total | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age Analysis of Past Due Loans as of December 31, 2023 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
| Greater |
|
|
|
|
|
|
|
|
|
|
| Investment |
|
| 30-59 Days |
|
| 60-89 Days |
|
| than |
|
| Total Past |
|
|
|
|
| Total |
|
| > 90 Days & |
|
| Past Due |
|
| Past Due |
|
| 90 Days |
|
| Due |
|
| Current |
|
| Loans |
|
| Accruing |
Commercial | $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ | |
| $ | |
| $ |
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgages-Owner Occupied |
| |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
Commercial Mortgages-Non-Owner Occupied |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Commercial Construction/Land |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Open-End |
| |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
Consumer Closed-End |
| |
|
| |
|
|
|
|
| |
|
| |
|
| |
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgages |
| |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
Residential Consumer Construction/Land |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Total | $ | |
| $ | |
| $ |
|
| $ | |
| $ | |
| $ | |
| $ |
|
Note 8 – Loans and allowance for credit losses (continued)
Occasionally, the Bank modifies loans to borrowers experiencing financial difficulties by providing principal forgiveness, term extensions, interest rate reductions or payment deferrals. As the effect of most modifications is already included in the allowance for credit losses due to the measurement methodologies used in its estimate, the allowance for credit losses is typically not adjusted upon modification. When principal forgiveness is provided at modification, the amount forgiven is charged against the allowance for credit losses.
There were
ACL on Unfunded Commitments
The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable by the Company. The allowance for off-balance sheet credit exposures is adjusted as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for loan credit losses. The allowance for credit losses for unfunded loan commitments of $
The following table presents the balance and activity in the ACL for unfunded commitments for the three-months ended March 31, 2024 and March 31, 2023:
|
|
Allowance for Credit Losses on Unfunded Commitments |
|
Balance, December 31, 2023 | $ |
Recovery of credit losses | ( |
Balance March 31, 2024 | $ |
|
|
Balance, December 31, 2022 | |
Adoption of ASU 2016-13 | |
Provision for credit losses | |
Balance March 31, 2023 | $ |
Note 8 – Loans and allowance for credit losses (continued)
Other Real Estate Owned
We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank which was acquired through purchase at foreclosure or from the borrower through a deed in lieu of foreclosure. There were
OREO Changes
(dollars in thousands)
|
|
|
|
|
|
| Three-months Ended Year Ended | ||||
| March 31, 2024 |
| December 31, 2023 | ||
Balance at the beginning of the year (net) | $ |
|
| $ | |
Transfers from loans |
|
|
|
|
|
Capitalized costs |
|
|
|
|
|
Valuation adjustments |
| — |
|
| ( |
Sales proceeds |
|
|
| ( | |
Loss on disposition |
|
|
| ( | |
Balance at the end of the period (net) | $ |
| $ |
Note 9 – Recent accounting pronouncements and other authoritative guidance
In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.
In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
In December 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company continues to assess the impact on the Company’s transition away from LIBOR for its loan and other financial instruments and has determined that there is minimal exposure.
In November 2023, the FASB amended the Segment Reporting topic in the Accounting Standards Codification to improve disclosures about a public entity’s reportable segments and provide more detailed information about a reportable segment’s expenses. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Upon adoption, the Company will apply the amendments retrospectively to all prior periods presented in the financial statements. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In December 2023, the FASB amended the Income Taxes topic in the Accounting Standards Codification to improve the transparency of income tax disclosures. The amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company does not expect these amendments to have a material effect on its 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. Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Financial and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Financial’s control, include, but are not necessarily limited to the following:
the effects of a resurgence of COVID-19 or other pandemic on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets;
problems with technology utilized by us;
potential exposure to fraud, negligence, computer theft and cyber-crime, and the Company's ability to maintain the security of its data processing and information technology systems
operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Financial specifically;
government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations);
economic, market, political and competitive forces affecting Financial’s banking and other businesses;
competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act;
reliance on our management team, including our ability to attract and retain key personnel
changes in interest rates, monetary policy and general economic conditions, which may impact Financial’s net interest income;
changes in the value of real estate securing loans made by the Bank;
adoption of new accounting standards or changes in existing standards;
compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Financial may pursue or implement;
the risk that Financial’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful;
the stability of the overall banking industry in the United States;
liquidity and perceived liquidity in the banking industry in the United States;
economic and political tensions with China, the ongoing war between Russia and Ukraine and potential expansion of combatants, and the sanctions imposed on Russia by numerous countries and private companies, all of which may have a destabilizing effect on financial markets and economic activity; and
other risks and uncertainties set forth in this Annual Report on Form 10-K and, from time to time, in our other filings with the Securities and Exchanges Commission (“SEC”).
Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Financial specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the most recently filed Form 10-K.
GENERAL
Critical Accounting Policies
Bank of the James Financial Group, Inc.’s (“Financial” or the “Company”)) 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. 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 credit losses (ACLL) is management’s estimate of the probable losses expected in our loan portfolio. With the exception of loans related to agriculture, the Company is utilizing a discounted cash flow model to estimate its current expected credit losses in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. For information on the Company's policies on the ACLL please refer to Note 2 – “Allowance for Credit Losses - Loans” in the Company’s Form 10-K for the year ended December 31, 2023. See “Management Discussion and Analysis Results of Operations – Allowance and Provision for Credit losses” below for further discussion of the allowance for credit losses.
Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected September 1 of each year as the date to perform the annual impairment test. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of their net assets, including goodwill. If the fair value of a reporting unit is less than its carrying value, an expense may be required to write down the related goodwill to record an impairment loss. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Intangible assets with finite useful lives are amortized over their estimated useful lives to their estimated residual values, if any. Goodwill is the only intangible asset with an indefinite life on our consolidated balance sheet.
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 four 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 Division”), insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance business”), and as of December 31, 2021, investment advisory services through the Company’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc. (which we refer to as “PWW”).
The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state-chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns. Historically, our primary market area has been the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Recently, the Bank has begun to expand to other areas in Virginia, specifically Roanoke, Charlottesville, Harrisonburg, Blacksburg, Lexington and Rustburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market areas.
We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that had approximately $650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. PWW generates revenue primarily through investment advisory fees.
The Bank’s principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.bank.
Our operating results depend primarily upon the Bank’s net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for credit losses, as well as the level of its noninterest income, including gains on sales of loans held for sale and service charges, and investment advisory fees, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with regulatory requirements, miscellaneous other expenses, franchise taxes, and income taxes.
The Bank intends to enhance its profitability by increasing its market share in our service areas, providing additional services to its customers, and controlling costs.
The Bank services its banking customers through the following locations in Virginia:
Full-Service Branches
The main office located at 828 Main Street in Lynchburg (the “Main Street Office”),
A branch located at 5204 Fort Avenue in Lynchburg (the “Fort Avenue Branch”),
A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the “Boonsboro Branch”),
A branch located at 4105 Boonsboro Road in Lynchburg (the “Peakland Branch”),
A branch located at 4698 South Amherst Highway in Amherst County (the “Madison Heights Branch”),
A branch located at 17000 Forest Road in Forest (the “Forest Branch”),
A branch located at 164 South Main Street, Amherst, Virginia (the “Amherst Branch”),
A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford, Virginia, located off of Independence Boulevard (the “Bedford Branch”),
A branch located at 1110 Main Street, Altavista, Virginia (the “Altavista Branch”),
A branch located at 1391 South High Street, Harrisonburg, Virginia (the “Harrisonburg Branch”),
A branch located at 1745 Confederate Blvd, Appomattox, Virginia (the “Appomattox Branch”),
A branch located at 225 Merchant Walk Avenue, Charlottesville, Virginia (the “5th Street Station Branch”),
A branch located at 3562 Electric Road, Roanoke, Virginia (the “Roanoke Branch”),
A branch located at 45 South Main St., Lexington, Virginia (the “Lexington Branch”),
A branch located at 550 Water St., Charlottesville, Virginia (the “Water Street Branch”),
A branch located at 2101 Electric Rd, Roanoke, Virginia (the “Oak Grove Branch”), and
A branch located at 13 Village Highway, Rustburg, Virginia (the “Rustburg Branch”).
Limited Service Branches
Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia, and
Westminster-Canterbury facilities located at 250 Pantops Mountain Road, Charlottesville, Virginia.
Loan Production Offices
Residential mortgage loan production office located at the Forest Branch,
Residential mortgage loan production office located at 570 West Main St., Wytheville, Virginia,
Residential mortgage loan production office located at 2001 South Main Street, Blacksburg, Virginia, and
Commercial, consumer and residential mortgage loan production office located at the Water Street Branch.
The Investment division and the Insurance business operate primarily out of offices located at the Main Street Office. PWW operates our investment advisory business primarily from its offices at 1925 Atherholt Road in Lynchburg.
The Bank continuously evaluates areas located within our service areas to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.
Subject to regulatory approval, the Bank may open additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the following discussion provides a general overview of the additional branch locations that the Bank currently is considering, including the following properties that we own and are holding for expansion.
The Bank recently acquired the following two properties in which it intends to open branches in 2024:
Real property located at 19792 Main Street, Buchanan, Virginia. On August 7, 2023, the Bank purchased real property located at 19792 Main Street, Buchanan, Virginia. The building on the property previously served as a bank branch for another financial institution. The Bank anticipates that that it will open a branch at this location during the second quarter of 2024.
Real Property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. On September 18, 2023, the Bank purchased real property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. The building on the property previously served as a bank branch for another financial institution. The Bank anticipates that the cost to upfit the building will be minimal. The property is a subject to a restrictive covenant that prohibits the Bank from using the property for any banking-related activity until the covenant expires in September 2025. We anticipate that we will open a temporary location in the vicinity of this property in the second quarter of 2024.
In addition to the facilities set forth above, the Bank owns the following properties which are being held for possible expansion:
Real property located in the Timberlake Road area of Campbell County (Lynchburg), Virginia. The structure on Timberlake property was not suitable for its intended use as a branch bank and the Bank removed the structure. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to construct and upfit a branch at this location could be between $900,000 and $1,500,000.
Real property located at 1925 Atherholt Road, Lynchburg, Virginia. On December 31, 2021, the Bank purchased real property located at 1925 Atherholt Road, Lynchburg, Virginia. The building currently serves as the offices for Financial’s wholly-owned subsidiary, PWW. PWW is currently leasing the space from the Bank on a month-to-month basis. While the Bank currently does not have a timeline for a branch at this location, the space is attractive for a branch due to its close proximity to Centra’s Lynchburg General Hospital. The investment needed to upfit the property will be minimal.
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.
The Bank continues to evaluate suitable branch locations and may acquire one or more properties for expansion in the next 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:
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| March 31, 2024 |
| December 31, 2023 |
| (in thousands) | ||
Commitments to extend credit | $ 164,497 |
| $ 173,148 |
Letters of Credit | 3,569 |
| 2,636 |
Total | $ 168,066 |
| $ 175,784 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.
The Bank has rate lock commitments to originate mortgage loans through its Mortgage Division. The Bank has entered into corresponding commitments with third party investors to sell each of these loans that close. No other obligation exists. As a result of these contractual relationships with these investors, the Bank is not exposed to losses nor will it ultimately realize gains related to its rate lock commitments due to changes in interest rates.
SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion represents management’s discussion and analysis of the financial condition of Financial as of March 31, 2024 and December 31, 2023 and the results of operations of Financial for the three-month periods ended March 31, 2024 and 2023. This discussion should be read in conjunction with the financial statements included elsewhere herein.
All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Financial Condition Summary
March 31, 2024 as Compared to December 31, 2023
Total assets were $984,891,000 on March 31, 2024 compared with $969,371,000 at December 31, 2023, an increase of 1.60%. The increase in total assets was primarily due to increases in cash and cash equivalents (primarily Federal funds sold) and, to a lesser extent, loans held for sale and the cash value of bank-owned life insurance.
Total deposits increased from $878,459,000 as of December 31, 2023 to $893,494,000 on March 31, 2024, an increase of 1.71%. The increase resulted in large part from increases in noninterest-bearing demand and time deposits and was offset in part by a decrease in NOW, money market and savings deposits. The increase in time deposits generally was driven by our customers’ decisions to lock in higher rates.
Total loans, excluding loans held for sale, decreased to $608,035,000 on March 31, 2024 from $609,333,000 on December 31, 2023. The decrease was due to payoff and normal amortization of loans combined with decreased loan demand due to increased interest rates. Loans, excluding loans held for sale and net of deferred fees and costs and including the allowance for credit losses, decreased to $601,115,000 on March 31, 2024 from $601,921,000 on December 31, 2023, a decrease of 0.13%. 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):
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| March 31, 2024 |
| December 31, 2023 | ||||
| Amount |
| Percentage |
| Amount |
| Percentage |
Commerical | $ 68,257 |
| 11.23% |
| $ 65,324 |
| 10.72% |
Commerical Real Estate | 327,888 |
| 53.92% |
| 328,829 |
| 53.96% |
Consumer | 74,764 |
| 12.30% |
| 76,517 |
| 12.56% |
Residential | 137,126 |
| 22.55% |
| 138,663 |
| 22.76% |
Total loans | $ 608,035 |
| 100.00% |
| $ 609,333 |
| 100.00% |
Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days or more and still accruing, and OREO increased to $558,000 on March 31, 2024 from $391,000 on December 31, 2023. Because we had no OREO on either March 31, 2024 or December 31, 2023, the nonperforming assets consist entirely of nonperforming loans.
As discussed in more detail below under “Results of Operations—Allowance and Provision for Credit Losses,” management has provided for the anticipated losses on these loans in the allowance for credit losses. Loan payments received on nonaccrual loans are first applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is 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.
OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. We had no OREO as on both March 31, 2024 and December 31, 2023. The Bank neither acquired nor disposed of any during the three-months ended March 31, 2024. As a result, the OREO balance remained $0.
Cash and cash equivalents increased to $88,072,000 on March 31, 2024 from $74,838,000 on December 31, 2023. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including Federal funds sold). This increase was due to an increase in Federal funds sold. In addition, cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.
Securities held-to-maturity were essentially flat, decreasing slightly to $3,618,000 on March 31, 2024 from $3,622,000 on December 31, 2023. This decrease is a result of normal net amortization of premiums within the held-to-maturity portfolio.
Securities available-for-sale, which are carried on the balance sheet at fair market value, decreased slightly to $214,822,000 on March 31, 2024, from $216,510,000 on December 31, 2023. During the three-months ended March 31, 2024, the Bank purchased $8,162,000 in available-for-sale securities. During the three-months ended March 31, 2024 the Bank did not sell any securities available-for-sale and received $8,058,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale. The market value of the securities available-for-sale decreased slightly. As of March 31, 2024, we have an unrealized tax-effected loss of $22,951,000 (or $29,052,000 prior to the tax benefit). Financial does not expect to realize the losses as it has the intent and ability to hold the securities until their recovery, which may be at maturity.
Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $643,000 at March 31, 2024 as compared to $643,000 at December 31, 2023. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Liquidity and Capital
At March 31, 2024, Financial, on a consolidated basis, had liquid assets of $302,894,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. The Bank has pledged:
approximately $30,700,000 (market value) of our available-for-sale securities as collateral with correspondent banks, including the FHLBA, for collateralized lines of credit;
approximately $37,100,000 (market value) of our available-for-sale securities as security for public deposits; and
approximately $34,500,000 (par value) of our available-for-sale securities as collateral for advances at the Federal Reserve Bank’s discount window.
Further, if additional liquidity is needed, the Bank has the ability to purchase up to $53,000,000 of Fed funds through the Bank’s correspondent relationships and borrow from the FHLBA using investments within the Bank’s portfolio as collateral. In addition to the above, the Bank has borrowing capacity with the FHLBA of approximately $21,000,000 related to loans it has pledged to the FHLBA.
As of March 31, 2024, the Bank has no borrowings from any of these sources. Immediately following the failure of Silicon Valley Bank in the spring of 2023, out of an abundance of caution the Bank borrowed $14,000,000 from the FHLBA to test its contingency funding plan. Approximately two weeks later, the Bank repaid the advance. During the first three-months of 2024, the Bank did not experience any unusual inflows or outflows of deposits.
Management believes that liquid assets were adequate at March 31, 2024. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments from customers.
While we have not experienced any unusual pressure on our deposit balances or our liquidity position, management continues to closely monitor our sources and uses of funds in order to meet our cash flow requirements while attempting to maximize profits. The Company’s total uninsured deposits, which are the amount of deposits, subject to the aggregation rules, that exceed the FDIC insurance limit (currently $250,000) were approximately $252,000,000, approximately 28% of our total deposits, at March 31, 2024. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
At March 31, 2024, the Bank had a leverage ratio of approximately 9.60%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 12.62% and a total risk-based capital ratio of approximately 13.56%. As of March 31, 2024 and December 31,
2023, 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, 2024 and December 31, 2023:
Bank Level Only Capital Ratios
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Analysis of Capital for Bank of the James (Bank only) | |||||||
(dollars in thousands) | |||||||
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| March 31, |
| December 31, |
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Analysis of Capital | 2024 |
| 2023 |
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Tier 1 capital |
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Common Stock | $ 3,742 |
| $ 3,742 |
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Surplus | 22,325 |
| 22,325 |
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Retained earnings | 66,633 |
| 65,172 |
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Total Tier 1 capital | $ 92,700 |
| $ 91,239 |
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Common Equity Tier 1 Capital (CET1) | $ 92,700 |
| $ 91,239 |
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Tier 2 capital |
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Allowance for credit losses | $ 6,920 |
| $ 7,412 |
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Total Tier 2 capital: | $ 6,920 |
| $ 7,412 |
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Total risk-based capital | $ 99,620 |
| $ 98,651 |
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Risk weighted assets | $ 734,801 |
| $ 737,505 |
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Average total assets | $ 965,296 |
| $ 953,757 |
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| Actual |
| Regulatory Benchmarks | ||||
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| For Capital |
| For Well |
| March 31, |
| December 31, |
| Adequacy |
| Capitalized |
| 2024 |
| 2023 |
| Purposes (1) |
| Purposes |
Capital Ratios: |
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Tier 1 capital to average total assets | 9.60% |
| 9.57% |
| 4.000% |
| 5.000% |
Common Equity Tier 1 capital | 12.62% |
| 12.37% |
| 7.000% |
| 6.500% |
Tier 1 risk-based capital ratio | 12.62% |
| 12.37% |
| 8.500% |
| 8.000% |
Total risk-based capital ratio | 13.56% |
| 13.38% |
| 10.500% |
| 10.000% |
(1)Includes the capital conservation buffer of 2.50% for all ratios, excluding the Tier 1 capital to average total assets ratio.
The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis at March 31, 2024 would be lower than those of the Bank because a portion of proceeds from the sale of notes previously issued by the holding company were contributed to the Bank as equity.
In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule was fully implemented on January 1, 2019 and implemented a capital conservation buffer of 2.5%. As a result, the Bank is required to have a minimum ratio of Tier 1 capital to average total assets of 4.00% (exclusive of the capital conservation buffer), a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% (inclusive of the capital conservation buffer), and a Tier 1 risk-based capital ratio of 8.5% (inclusive of the capital conservation buffer). Failure to maintain the capital conservation buffer will limit the ability of the Bank and Financial to pay dividends, repurchase shares or pay discretionary bonuses. The rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.
Results of Operations
Comparison of the Three-months Ended March 31, 2024 and 2023
Earnings Summary
Financial had net income including all operating segments of $2,187,000 for the three-months ended March 31, 2024, compared to $1,984,000 for the comparable period in 2023. Basic and diluted earnings per common share for the three-months ended March 31, 2024 were $0.48, compared to basic and diluted earnings per share of $0.43 for the three-months ended March 31, 2023.
The increase in net income for the three-months ended March 31, 2024, as compared to the prior year period was due primarily to an increase in both interest and noninterest income, a significant recovery of ACLL, and was offset in part by a significant increase in interest expense of $2,103,000 in the three-months ended March 31, 2024 from the comparable period in 2023.
These operating results represent an annualized return on average stockholders’ equity of 14.69% for the three-month period ended March 31, 2024, compared with 16.25% for the three-months ended March 31, 2023. The decrease for the three-month period ended March 31, 2024 from the same period in 2023 was due to an increase in average equity, which resulted in large part from an increase in the market value of the available-for-sale securities portfolio when compared to last year. This increase was caused by an application of the mark-to-market accounting rules. In addition, between January and April 2023, the Company repurchased 85,319 shares of its common stock pursuant to a stock repurchase plan, 68,619 of which were purchased in first quarter of 2023. In addition to having a positive impact on earnings per share, these repurchases decreased stockholders’ equity and average stockholders’ equity, leading to a positive impact to the return on stockholders’ equity ratio. The Company had an annualized return on average assets of 0.90% for the three-month period ended March 31, 2024 compared with 0.85% for the three-month period ended March 31, 2023. The increase largely resulted from an increase in net income. The increase was partially offset by an increase in average assets, which was caused in part by an increase in deposits and in the value of the securities available-for-sale as discussed above.
See “Noninterest Income” below for mortgage business and wealth management segment discussions.
Interest Income, Interest Expense, and Net Interest Income
For the three-months ended March 31, 2024, interest income increased to $10,509,000 from $9,098,000 for the same period in 2023, due primarily to an increase in interest rates received on our interest-earning assets. The average rate on loans was 5.28% for the three-months ended March 31, 2024, as compared to 4.85% for the same period in 2023. The rate on total average earning assets increased during the three-months ended March 31, 2024 because of a general increase in market rates. The average rate on average earning assets was 4.60% for the three-months ended March 31, 2024 as compared to 4.14% for the three-months ended March 31, 2023.
Interest expense increased significantly to $3,559,000 for the three-months ended March 31, 2024 from $1,456,000 for the three-months ended March 31, 2023. The increase for the three-months resulted primarily from an increase in deposit balances and an increase in interest rates paid on deposits during the first three-months of the year. The Company’s average rate paid on interest-bearing deposits was 1.82% for the three-months ended March 31, 2024 as compared to 0.71% for the same period in 2023. The Company’s average rate paid on interest-bearing liabilities was 1.87% for the three-months ended March 31, 2024 as compared to 0.81% for the same period in 2023.
The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest-earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three-months ended March 31, 2024 was $6,950,000 as compared to $7,642,000 for the same period in 2023. The net interest margin was 3.02% for the three-months ended March 31, 2024 as compared to 3.48% for the comparable period in 2023. The decrease for the three-month period ended March 31, 2024, was in large part due to interest rates on interest-bearing liabilities increasing more rapidly than the rates received on interest-earning assets during the first quarter of the year. This was exacerbated by a change in deposit mix, with the balance of time deposits, which generally pay a higher rate than demand deposits, increasing year over year while the average balance of interest-bearing demand deposits decreased over the same period. Due to continued inflation, economic uncertainties have arisen that are likely to impact net interest margin. Over the past several years, the FOMC has implemented a series of interest rate increases that has negatively impacted our net interest margin and is likely to continue to cause long-term uncertainty. Other financial impacts could occur, though such potential impacts are unknown at this time. Because of the interest rate environment, the Bank may need to continue to raise deposit rates, which would have an adverse impact on our margin and profitability. Management expects the Company’s interest rate margin to remain the same or compress in near to mid-term.
Financial’s net interest margin analysis and average balance sheets are shown in Schedule I below.
Noninterest Income
Noninterest income is comprised primarily of fees and charges on transactional deposit accounts, gains on sales of mortgage loans held for sale, commissions on sales of investments, fees generated from treasury management services, fees generated from our investment advisory business, and bank-owned life insurance income.
Noninterest income increased to $3,307,000 for the three-month period ended March 31, 2024 from $3,044,000 for same periods in 2023. The increase was due to an increase in wealth management fees, life insurance income, and income received from an investment in a Small Business investment company, which is reflected in other income.
The Bank, through its Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the markets we serve. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage division are presold to major national mortgage banking or financial institutions. The Mortgage division assumes, except in limited circumstances such as first payment default, no credit or interest rate risk on these mortgages.
Purchase mortgage originations totaled $31,016,000, or 84.98%, of the total mortgage loans originated in the three-months ended March 31, 2024, as compared to $26,868,000, or 82.30%, respectively, of the total mortgage loans originated in the same period in 2023. Because of a relatively higher mortgage interest rate environment, management anticipates that in the short-term purchase mortgage originations will continue to represent a significant percentage of mortgage originations. Management also believes that a continued increase in long-term market interest rates could limit refinancing activity.
Mortgage rates increased dramatically in 2022 and 2023 and remain elevated compared to recent history. These increases continue to have a negative impact on mortgage origination volume. Because of uncertainty surrounding current and near-term economic conditions arising from inflation, and geopolitical and economic concerns, management cannot predict future mortgage rates. Management also believes that the relatively high interest rates could cause revenue from the mortgage segment to remain under additional pressure.
Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by two dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and, in some cases, ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been minimal. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s revenue as a percentage of our overall noninterest income will remain minimal in 2024.
We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that has approximately $680 million in assets under management and advisement as of March 31, 2024. PWW operates as a subsidiary of Financial. PWW generates revenue primarily through investment advisory fees. The investment advisory fees will vary based on the value of assets under management. Assets under management may fluctuate due to both client action and fluctuations in the equity and debt markets. Despite the potential for fluctuation, we anticipate that PWW will continue to contribute meaningfully to the Company’s consolidated net income.
The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three employees that are licensed to sell insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial for the remainder of 2024.
Noninterest Expense
Noninterest expense for the three-months ended March 31, 2024 increased slightly by $13,000 to $8,088,000 from $8,075,000 for the same periods in 2023, an increase of 0.16%. This slight increase resulted primarily from increases in salaries and employee benefits and professional, data processing and other outside expenses. These increases were largely offset by a decrease in marketing, equipment and other expenses. Total personnel expense was $4,445,000 for the three-month period ended March 31, 2024 as compared to $4,268,000 for the same period in 2023. Personnel expense increased largely because of increases in salaries and compensation related accruals.
Allowance and Provision for Credit Losses
The allowance for credit losses represents an amount that, in our judgment, will be adequate to absorb probable losses expected in the loan portfolio. The provision for credit losses increases the allowance, and loans charged-off, net of recoveries, reduce the allowance. The provision for the allowance for credit losses is charged to earnings to bring the total allowance to a level deemed appropriate by management. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the credit loss calculation, the Bank recovered $553,000 ($52,000 of which is related to unfunded commitments and not included in the allowance) for the three-months ended March 31, 2024 as compared with a provision of $140,000 for the same period in 2023. The recovery in 2024 was driven in part by a decline in loans and continuing evaluation of risks inherent within the loan portfolio.
At March 31, 2024, the allowance for credit losses was 1.14% of total loans outstanding, versus 1.22% and 1.23% of total loans outstanding at December 31, 2023 and March 31, 2023, respectively. The decrease in the allowance for credit losses was largely driven by the adoption of CECL and its requirement for continuing evaluation of risks inherent within the loan portfolio. The allowance for credit losses for individually evaluated loans was $0 at both March 31, 2024 and December 31, 2023. As shown in Note 8, the total balance in the allowance decreased, from $7,412,000 as of December 31, 2023 to $6,920,000 on March 31, 2024.
Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for credit losses and constitute a realized loss. We had charged-off loans of $65,000 for the three-month period ended March 31, 2024 as compared to $33,000 for the same period in 2023. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. We had recoveries of $74,000 for the three-month periods ended March 31, 2024 as compared to a recovery of 104,000 for the same period in 2023.
No nonaccrual loans were excluded from the individually evaluated loan disclosures at March 31, 2024 and December 31, 2023. If interest on these loans had been accrued, such income cumulatively would have approximated $38,000 and $37,000 on March 31, 2024 and December 31, 2023, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.
Income Taxes
For the three-months ended March 31, 2024, Financial had an income tax expense of $535,000 as compared to $487,000 for the same period in 2023. This represents an effective tax rate of 19.65% for the three-months ended March 31, 2024 as compared with 19.71% for the three-months ended March 31, 2023. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance, and interest earned on tax free municipal bonds.
Schedule I
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Net Interest Margin Analysis |
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Average Balance Sheets |
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For the Three-months Ended March 31, 2024 and 2023 |
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(dollars in thousands) |
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| 2024 |
| 2023 | ||||||||||||
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| Average |
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| Average |
| Average |
| Interest |
| Rates |
| Average |
| Interest |
| Rates | ||||
| Balance |
| Income/ |
| Earned/ |
| Balance |
| Income/ |
| Earned/ | ||||
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| Expense |
| Paid |
| Sheet |
| Expense |
| Paid | ||||
ASSETS |
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Loans, including fees (1)(2) | $ | 608,172 |
| $ | 7,982 |
| 5.28% |
| $ | 617,548 |
| $ | 7,384 |
| 4.85% |
Loans held for sale |
| 2,481 |
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| 42 |
| 6.81% |
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| 2,434 |
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| 42 |
| 7.00% |
Federal funds sold |
| 56,024 |
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| 754 |
| 5.41% |
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| 29,548 |
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| 339 |
| 4.65% |
Interest-bearing bank balances |
| 9,388 |
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| 133 |
| 5.70% |
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| 15,578 |
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| 148 |
| 3.85% |
Securities (3) |
| 248,748 |
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| 1,591 |
| 2.57% |
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| 224,541 |
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| 1,182 |
| 2.13% |
Federal agency equities |
| 1,425 |
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| 12 |
| 3.39% |
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| 1,377 |
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| 8 |
| 2.36% |
CBB equity |
| 116 |
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| — |
| - % |
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| 116 |
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| — |
| - % |
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Total earning assets |
| 926,354 |
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| 10,514 |
| 4.60% |
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| 891,142 |
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| 9,103 |
| 4.14% |
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Allowance for loan losses |
| (7,371) |
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| (7,531) |
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Non-earning assets |
| 59,884 |
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|
|
|
|
| 58,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets | $ | 978,867 |
|
|
|
|
|
| $ | 941,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand interest-bearing |
| 397,229 |
|
| 879 |
| 0.89% |
|
| 419,609 |
|
| 339 |
| 0.33% |
Savings |
| 131,629 |
|
| 396 |
| 1.21% |
|
| 126,859 |
|
| 21 |
| 0.07% |
Time deposits |
| 213,993 |
|
| 2,090 |
| 3.93% |
|
| 152,582 |
|
| 861 |
| 2.29% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
| 742,851 |
|
| 3,365 |
| 1.82% |
|
| 699,050 |
|
| 1,221 |
| 0.71% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB borrowings |
| — |
|
| — |
| - % |
|
| 2,489 |
|
| 31 |
| 5.05% |
Other borrowings |
| 9,827 |
|
| 92 |
| 3.77% |
|
| 10,399 |
|
| 99 |
| 3.86% |
Financing leases |
| 3,007 |
|
| 20 |
| 2.68% |
|
| 3,372 |
|
| 23 |
| 2.77% |
Capital Notes |
| 10,043 |
|
| 82 |
| 3.28% |
|
| 10,038 |
|
| 82 |
| 3.31% |
Total interest-bearing liabilities |
| 765,728 |
|
| 3,559 |
| 1.87% |
|
| 725,348 |
|
| 1,456 |
| 0.81% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
| 141,704 |
|
|
|
|
|
|
| 155,850 |
|
|
|
|
|
Other liabilities |
| 11,544 |
|
|
|
|
|
|
| 10,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
| 918,976 |
|
|
|
|
|
|
| 892,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity |
| 59,891 |
|
|
|
|
|
|
| 49,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity | $ | 978,867 |
|
|
|
|
|
| $ | 941,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings |
|
|
| $ | 6,955 |
|
|
|
|
|
| $ | 7,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
| 3.02% |
|
|
|
|
|
|
| 3.48% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread |
|
|
|
|
|
| 2.73% |
|
|
|
|
|
|
| 3.33% |
(1)Net accretion or amortization of deferred loan fees and costs are included in interest income.
(2)Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with nonaccrual loans.
(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities. Assumed income tax rates of 21% were used for the periods presented.
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) and 15d-15 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, 2024, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15 and 15d-15 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.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.
Item 1A. Risk Factors
For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 31, 2023. There have been no material changes from risk factors as previously disclosed in Part 1 Item 1A of the Company’s Form 10-K for the year ended December 31, 2023.
(a)Not applicable.
(b)Not applicable.
(c)Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
|
|
Exhibit No. | Description of Exhibit |
31.1 | |
31.2 | |
32.1 | |
101 | The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of March 31, 2024 and December 31, 2023; (ii) Consolidated Statements of Income (unaudited) for the Three-months ended March 31, 2024 and 2023; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three-months ended March 31, 2024 and 2023 (iv) Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2024 and 2023 (v) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three-months ended March 31, 2024 and 2023; (vi) Notes to Unaudited Consolidated Financial Statements. |
SIGNATURES
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 17, 2024 | By /S/ Robert R. Chapman III Robert R. Chapman III, President (Principal Executive Officer)
|
Date: May 17, 2024 | By /S/ J. Todd Scruggs J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer) |