Bank of the James Financial (BOTJ) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for Bank of the James Financial Group, Inc Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and equity changes, with detailed notes on accounting policies, fair value, loan portfolio, and COVID-19 impact Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Assets/Liabilities & Equity | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :--------------------------- | :------------------------------- | | Total Assets | $827,098 | $725,394 | | Total Liabilities | $762,633 | $663,949 | | Total Stockholders' Equity | $64,465 | $61,445 | - Total cash and cash equivalents significantly increased from $39,111 thousand at December 31, 2019, to $90,800 thousand at June 30, 2020[7] - Loans, net of allowance for loan losses, increased from $573,274 thousand at December 31, 2019, to $623,564 thousand at June 30, 2020[7] Consolidated Statements of Income This statement details the company's revenues, expenses, and net income over specific reporting periods | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Interest Income | $7,081 | $7,390 | $14,569 | $14,624 | | Total Interest Expense| $1,163 | $1,238 | $2,515 | $2,342 | | Net Interest Income | $5,918 | $6,152 | $12,054 | $12,282 | | Provision for Loan Losses | $760 | $116 | $1,648 | $326 | | Total Noninterest Income | $2,789 | $1,659 | $4,975 | $2,878 | | Total Noninterest Expenses | $6,935 | $5,975 | $13,132 | $11,574 | | Net Income | $821 | $1,377 | $1,816 | $2,611 | | Basic EPS | $0.19 | $0.31 | $0.42 | $0.60 | - Net income decreased by 40.38% for the three months ended June 30, 2020, and by 30.45% for the six months ended June 30, 2020, compared to the same periods in 2019[10] - Provision for loan losses significantly increased by 555.17% for the three months and 405.52% for the six months ended June 30, 2020, primarily due to COVID-19 related uncertainties[10] Consolidated Statements of Comprehensive Income This statement presents net income and other comprehensive income components, reflecting total non-owner changes in equity | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $821 | $1,377 | $1,816 | $2,611 | | Other comprehensive income, net of tax | $619 | $932 | $2,086 | $1,968 | | Comprehensive Income | $1,440 | $2,309 | $3,902 | $4,579 | - Unrealized gains on securities available-for-sale, net of tax, contributed significantly to other comprehensive income, with $998 thousand (before tax effect) for the three months and $3,285 thousand (before tax effect) for the six months ended June 30, 2020[11] Consolidated Statements of Cash Flows This statement categorizes cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $418 | $1,321 | | Net cash (used in) investing activities | $(46,489) | $(24,131) | | Net cash provided by financing activities | $97,760 | $4,615 | | Increase (decrease) in cash and cash equivalents | $51,689 | $(18,195) | | Cash and cash equivalents at end of period | $90,800 | $32,130 | - Net cash provided by financing activities increased substantially in 2020, driven by a $96,527 thousand net increase in deposits and $7,275 thousand from the sale of capital notes[14] - Investing activities saw a significant increase in purchases of available-for-sale securities ($11,334 thousand) and origination of loans, net of principal collected ($51,956 thousand) in 2020[14] Consolidated Statements of Changes in Stockholders' Equity This statement outlines changes in equity components, including common stock, retained earnings, and comprehensive income | Stockholders' Equity (in thousands) | December 31, 2019 | June 30, 2020 | | :---------------------------------- | :---------------- | :------------ | | Common Stock | $9,325 | $9,286 | | Additional Paid-in Capital | $31,225 | $30,989 | | Retained Earnings | $20,900 | $22,109 | | Accumulated Other Comprehensive Income (Loss) | $(5) | $2,081 | | Total Stockholders' Equity | $61,445 | $64,465 | - Total stockholders' equity increased by $3,020 thousand from December 31, 2019, to June 30, 2020, primarily due to net income and a significant increase in accumulated other comprehensive income[15] - The Company repurchased 18,000 shares of common stock for $275 thousand during the six months ended June 30, 2020[15] Notes to Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the consolidated financial statements Note 1 – Basis of Presentation This note describes the accounting principles used and the company's primary market areas - The unaudited consolidated financial statements are prepared in conformity with GAAP, reflecting normal recurring accruals. The Company's primary market area is Region 2000 in Central Virginia, with recent expansion into Charlottesville, Roanoke, Blacksburg, Harrisonburg, Lexington, and Rustburg[17][19] - Critical accounting policies include the evaluation of the allowance for loan losses and valuation of other real estate owned (OREO), both requiring significant management estimates and subjective judgments[20][21] Note 2 – Use of Estimates This note highlights the reliance on management's estimates and assumptions in financial reporting - The financial statements rely on management's estimates and assumptions, and actual results may differ[23] Note 3 – Earnings Per Common Share (EPS) This note details the calculation of basic and diluted earnings per common share | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (in thousands) | $821 | $1,377 | $1,816 | $2,611 | | Weighted average shares outstanding - basic | 4,339,436 | 4,378,436 | 4,343,738 | 4,378,436 | | Basic EPS | $0.19 | $0.31 | $0.42 | $0.60 | | Diluted EPS | $0.19 | $0.31 | $0.42 | $0.60 | - In 2020, restricted stock units (RSUs) were excluded from diluted EPS calculations as the Company adopted a cash settlement policy for all outstanding RSUs, a change from prior periods where they were presumed to be settled in common stock[25] Note 4 – Stock Based Compensation This note describes the company's equity incentive plan and related compensation expenses - The 2018 Equity Incentive Plan permits issuance of up to 250,000 shares for awards to key employees. On January 2, 2019, 24,500 restricted stock units (RSUs) were granted, vesting over 3 years[27][28] - Stock-based compensation expense for RSUs was approximately $26,000 for both the three months and $53,000 for both the six months ended June 30, 2020 and 2019[29] - Unrecognized stock-based compensation expense related to unvested RSUs was approximately $159,000 at June 30, 2020, to be recognized over 1.50 years[30] Note 5 – Fair Value Measurements This note explains the fair value hierarchy and measurement techniques for financial instruments - The Company classifies financial assets and liabilities into a three-level hierarchy based on the observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[33] Securities Available-for-Sale (in thousands) | Description | June 30, 2020 | December 31, 2019 | | :---------- | :------------ | :---------------- | | US Treasuries | $2,038 | $1,964 | | US agency obligations | $26,102 | $32,108 | | Mortgage-backed securities | $9,424 | $10,264 | | Municipals | $13,247 | $11,222 | | Corporates | $4,261 | $4,097 | | Total | $55,072 | $59,655 | - All of the Company's securities available-for-sale are classified as Level 2. Impaired loans and Other Real Estate Owned (OREO) are measured at fair value on a non-recurring basis, with most classified as Level 3 due to reliance on discounted appraised values and unobservable inputs like selling costs and discounts for lack of marketability/age of appraisal[35][39][46][52][53] Note 6 – Securities This note provides details on the company's held-to-maturity and available-for-sale securities portfolios Securities Holdings (in thousands) | Category | June 30, 2020 Amortized Costs | June 30, 2020 Fair Value | December 31, 2019 Amortized Costs | December 31, 2019 Fair Value | | :------- | :---------------------------- | :----------------------- | :-------------------------------- | :----------------------------- | | Held-to-Maturity | $3,679 | $4,283 | $3,688 | $3,861 | | Available-for-Sale | $52,437 | $55,072 | $59,661 | $59,655 | Unrealized Losses on Available-for-Sale Securities (in thousands) | Description | June 30, 2020 Fair Value | June 30, 2020 Unrealized Losses | December 31, 2019 Fair Value | December 31, 2019 Unrealized Losses | | :---------- | :----------------------- | :------------------------------ | :--------------------------- | :---------------------------------- | | Municipals | $674 | $2 | $2,736 | $13 | | Corporates | $1,047 | $10 | $1,042 | $21 | | Total | $1,721 | $12 | $36,794 | $475 | - Management did not consider unrealized losses on securities as other-than-temporary impairment at June 30, 2020, due to the nature of the securities, minimal default risk, and no intent to sell prior to anticipated recovery[62][63] - Gross gains on sales of available-for-sale securities were $213 thousand and $644 thousand for the three and six months ended June 30, 2020, respectively, compared to $0 in the prior year periods[64] Note 7 – Business Segments This note outlines the financial performance of the company's distinct operating segments - The Company operates two reportable business segments: traditional full-service community banking (Bank of the James) and mortgage loan origination[65] - The mortgage business is a gain-on-sale business, while the Bank's primary revenue source is net interest income[66] Net Income by Segment (in thousands) | Segment | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------ | :----------------------------- | :----------------------------- | | Community Banking | $1,070 | $2,264 | | Mortgage | $746 | $347 | | Total | $1,816 | $2,611 | Note 8 – Loans, allowance for loan losses and OREO This note details the loan portfolio, allowance for loan losses, and other real estate owned Loans, Net (in thousands) | Loan Segment | June 30, 2020 | December 31, 2019 | | :----------- | :------------ | :---------------- | | Commercial | $175,646 | $114,257 | | Commercial Real Estate | $301,700 | $303,900 | | Consumer | $87,155 | $89,945 | | Residential | $65,256 | $70,001 | | Total Loans | $629,757 | $578,103 | | Less allowance for loan losses | $6,193 | $4,829 | | Net Loans | $623,564 | $573,274 | - Nonperforming loans increased from $1,301 thousand at December 31, 2019, to $5,185 thousand at June 30, 2020, primarily due to one large relationship[78] - Other Real Estate Owned (OREO) decreased to $1,616 thousand at June 30, 2020, from $2,339 thousand at December 31, 2019, largely due to the sale of six properties[80][81] - COVID-19 related loan modifications totaled $94,504 thousand across 184 loans (15.01% of the total loan portfolio) as of June 30, 2020, primarily for commercial borrowers, and were not classified as troubled debt restructurings per regulatory guidance[104] Allowance for Credit Losses (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :------- | :------------ | :---------------- | | Beginning Balance | $4,829 | $4,581 | | Provision for loan losses | $1,648 | $523 | | Net (charge-offs) | $(284) | $(363) | | Ending Balance | $6,193 | $4,829 | Note 9 – Revenue Recognition This note describes the company's policies for recognizing various noninterest revenue streams - Topic 606 applies to noninterest revenue streams like deposit-related fees, interchange fees, merchant income, and annuity/insurance commissions, but not to financial instrument revenue[105] - Service charges on deposit accounts and fees, exchange, and other service charges are recognized either over time (e.g., monthly service fees) or at a point in time (e.g., transactional fees) when performance obligations are satisfied[106][108] - Other noninterest income, including commissions from mutual funds and investment sales, and safety deposit box rental fees, are recognized on trade date or over the service period[109] Note 10 – Recent accounting pronouncements and other authoritative guidance This note discusses the impact of new accounting standards and regulatory guidance on the company - The Company is assessing the impact of ASU 2016-13 (CECL) on credit loss measurement, effective for smaller reporting companies after December 15, 2022[110][112] - ASU 2019-12 simplifies income tax accounting, effective for public business entities after December 15, 2020, and ASU 2020-04 provides temporary optional guidance for reference rate reform (LIBOR transition)[114][115] - Regulatory guidance issued in March 2020 (revised April 2020) allows short-term COVID-19 related loan modifications (e.g., payment deferrals) not to be considered troubled debt restructurings (TDRs)[117] Note 11 – COVID-19 and Current Economic Conditions This note assesses the adverse impact of the COVID-19 pandemic on the company's operations and financial condition - The COVID-19 pandemic has adversely impacted the Company's financial condition and operations, with future effects depending on the pandemic's duration and economic recovery[118][121] - Management is evaluating economic conditions to determine the pandemic's impact on customer obligations and asset valuations, noting that significant estimates may be subject to future adjustments[119][121] Note 12 – Subsequent Events This note discloses significant events that occurred after the balance sheet date - The Company completed a private placement of $10,050,000 in 3.25% capital notes due June 30, 2025, with $7,275,000 closed by June 30, 2020, and the remaining $2,775,000 closed by July 8, 2020[122] - Proceeds from the 2020 Offering were used to repay $5,000,000 of previously outstanding 4.00% notes and are intended for general corporate purposes and additional capital contribution to the Bank[123] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operating results, emphasizing COVID-19's impact on assets, liabilities, equity, and income, alongside loan quality and capital adequacy CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This statement warns that the report contains forward-looking information subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including the effects of the COVID-19 pandemic, regulatory changes, economic conditions, interest rate fluctuations, and real estate values[126][127] - Shareholders are cautioned not to place undue reliance on these statements, and the Company disclaims any obligation to update them[129] IMPACT OF COVID-19 This section details the adverse effects of the COVID-19 pandemic on the company's financial condition and operations - The COVID-19 pandemic has adversely impacted financial condition and operations, with management anticipating a significant adverse impact on the economy, banking industry, and the Company in future periods[131][136] - Policy responses include Federal Reserve rate cuts, the CARES Act (establishing the PPP program), and interagency guidance encouraging loan modifications without TDR classification for COVID-19 affected borrowers[133][135] - The Company implemented its Business Continuity Plan, kept branches open with limited access, and adopted flexible work practices to protect employees and clients[137][138][139] GENERAL This section outlines critical accounting policies, the company's business model, and key drivers of operating results - Critical accounting policies, such as the allowance for loan losses and OREO valuation, involve significant management estimates and subjective judgments, which are periodically reviewed with the Board of Directors[142][144][147] - Financial is a bank holding company operating primarily through its wholly-owned subsidiary, Bank of the James, offering retail banking, mortgage banking, investment services, and insurance activities[148] - The Bank's primary market area is Central Virginia, with recent expansion into new areas. Operating results are driven by net interest income, provision for loan losses, non-interest income, and non-interest expenses[149][151] OFF-BALANCE SHEET ARRANGEMENTS This section describes the company's commitments to extend credit and letters of credit not recorded on the balance sheet Off-Balance Sheet Commitments (in thousands) | Commitment Type | June 30, 2020 | | :-------------- | :------------ | | Commitments to extend credit | $149,268 | | Letters of Credit | $3,535 | | Total | $152,803 | - The Bank uses the same credit policies for off-balance sheet commitments as for on-balance sheet instruments, with exposure to credit loss represented by the contractual amount[163][164] - Rate lock commitments for mortgage loans are offset by corresponding commitments with third-party investors, minimizing interest rate risk[165] SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section summarizes the company's financial position and performance, including asset, liability, and income changes Financial Condition Summary This summary highlights key changes in assets, liabilities, and equity, including loan portfolio and capital ratios - Total assets increased by 14.02% to $827,098 thousand at June 30, 2020, from $725,394 thousand at December 31, 2019, primarily funded by deposit growth[171] - Total deposits increased by 14.86% to $745,986 thousand, driven by increases in non-interest-bearing demand, NOW, money market, and savings accounts, partly due to PPP loan funds[172] Loan Portfolio Composition (in thousands) | Loan Segment | June 30, 2020 Amount | June 30, 2020 Percentage | December 31, 2019 Amount | December 31, 2019 Percentage | | :----------- | :------------------- | :----------------------- | :----------------------- | :--------------------------- | | Commercial | $175,646 | 27.89% | $114,257 | 19.76% | | Commercial Real Estate | $301,700 | 47.91% | $303,900 | 52.57% | | Consumer | $87,155 | 13.84% | $89,945 | 15.56% | | Residential | $65,256 | 10.36% | $70,001 | 12.11% | | Total Loans | $629,757 | 100.00% | $578,103 | 100.00% | - Total nonperforming assets increased to $6,801 thousand at June 30, 2020, from $3,640 thousand at December 31, 2019, with non-performing loans rising to $5,185 thousand[173] Bank Level Capital Ratios | Capital Ratio | June 30, 2020 | December 31, 2019 | Regulatory Minimum | Well Capitalized Minimum | | :------------ | :------------ | :---------------- | :----------------- | :----------------------- | | Tier 1 capital to average total assets | 8.30% | 9.13% | 4.000% | 5.000% | | Common Equity Tier 1 capital | 10.99% | 10.75% | 7.000% | 6.500% | | Tier 1 risk-based capital ratio | 10.99% | 10.75% | 8.500% | 8.000% | | Total risk-based capital ratio | 12.00% | 11.54% | 10.500% | 10.000% | Results of Operations This summary analyzes changes in net income, interest income, non-interest income, and expenses over the periods Earnings Summary | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (in thousands) | $821 | $1,377 | $1,816 | $2,611 | | Basic EPS | $0.19 | $0.31 | $0.42 | $0.60 | | Return on Average Stockholders' Equity (annualized) | 5.33% | 9.47% | 5.95% | 9.11% | | Return on Average Assets (annualized) | 0.41% | 0.80% | 0.47% | 0.77% | - Net interest income decreased by 3.80% for the three months and 1.86% for the six months ended June 30, 2020, primarily due to lower interest rates on earning assets outweighing reduced interest expense on liabilities[202] - Non-interest income increased significantly, by 68.11% for the three months and 72.86% for the six months ended June 30, 2020, driven by higher gains on sales of mortgage loans held for sale and available-for-sale securities[205][206] - Non-interest expense increased by 16.07% for the three months and 13.46% for the six months ended June 30, 2020, due to higher personnel expenses (including PPP loan program compensation and early retirement plan costs) and credit expenses[213] - The provision for loan losses increased by 555.17% for the three months and 405.52% for the six months ended June 30, 2020, largely due to adjustments to qualitative factors related to the COVID-19 pandemic and a specific reserve for a large loan relationship[214][215][217] - The allowance for loan losses as a percent of total loans increased to 0.98% at June 30, 2020 (1.11% excluding PPP loans), from 0.84% at December 31, 2019, reflecting management's assessment of increased risk due to COVID-19[218][226] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that the Company has no applicable quantitative and qualitative disclosures about market risk for the reported period - The Company has no applicable quantitative and qualitative disclosures about market risk[244] Item 4. Controls and Procedures Management, including the principal executive and financial officers, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020. No significant changes in internal controls over financial reporting occurred during the quarter - Financial's disclosure controls and procedures were effective as of June 30, 2020, ensuring timely and accurate reporting of required information[245] - No significant changes occurred in the Company's internal controls over financial reporting during the quarter ended June 30, 2020[246] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other miscellaneous disclosures Item 1. Legal Proceedings The Company is not currently involved in any material legal proceedings beyond routine litigation incidental to its business - The Company is not involved in any pending legal proceedings other than routine litigation incidental to its business[248] Item 1A. Risk Factors This section refers to the Company's Annual Report on Form 10-K for a comprehensive discussion of risk factors, with no material changes noted except as supplemented in a Current Report on Form 8-K - For risk factors, refer to Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, and the Current Report on Form 8-K filed April 24, 2020[249] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company's board approved a share repurchase program for up to 65,000 shares. While 18,000 shares were repurchased in Q1 2020, the program was temporarily suspended on April 21, 2020, resulting in no repurchases during Q2 2020 - The board approved a share repurchase program for up to 65,000 shares of common stock on January 21, 2020[250] - The Company repurchased 18,000 shares during the quarter ended March 31, 2020, but temporarily suspended repurchases on April 21, 2020, with no repurchases in the quarter ended June 30, 2020[251][252] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company for the reported period - This item is not applicable[252] Item 4. Mine Safety Disclosures This item is not applicable to the Company for the reported period - This item is not applicable[252] Item 5. Other Information This item is not applicable to the Company for the reported period - This item is not applicable[252] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications under the Sarbanes-Oxley Act and XBRL-formatted financial statements - Exhibits include certifications by Robert R. Chapman III and J. Todd Scruggs pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[254] - XBRL-formatted financial statements, including Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Cash Flows, and Changes in Stockholders' Equity, are filed as Exhibit 101[254] SIGNATURES The report is signed by the registrant's authorized officers, Robert R. Chapman III (President and Principal Executive Officer) and J. Todd Scruggs (Secretary, Treasurer, Principal Financial Officer, and Principal Accounting Officer), on August 12, 2020 - The report was signed on August 12, 2020, by Robert R. Chapman III, President (Principal Executive Officer), and J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)[257][258][259]