Bank of the James Financial (BOTJ) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for the periods ended June 30, 2022 Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, with detailed notes on accounting policies and key financial items Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :------------------ | | Total Assets | $959,577 | $987,634 | | Total Liabilities | $906,259 | $918,205 | | Total Stockholders' Equity | $53,318 | $69,429 | | Loans, net | $607,322 | $576,469 | | Securities available-for-sale | $201,429 | $161,267 | | Total Deposits | $875,346 | $887,056 | Consolidated Statements of Income This section reports the company's financial performance over specific periods, detailing revenues, expenses, and net income Net Income and EPS (in thousands, except per share amounts) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | $2,292 | $2,014 | $4,431 | $3,849 | | Earnings per common share - basic and diluted | $0.48 | $0.42 | $0.93 | $0.81 | Key Income Statement Figures (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total interest income | $7,598 | $7,234 | $14,513 | $14,599 | | Total interest expense | $474 | $524 | $999 | $1,141 | | Net interest income | $7,124 | $6,710 | $13,514 | $13,458 | | Recovery of loan losses | $(300) | $- | $(600) | $- | | Total noninterest income | $3,034 | $3,049 | $6,665 | $5,483 | | Total noninterest expenses | $7,592 | $7,237 | $15,240 | $14,126 | | Income before income taxes | $2,866 | $2,522 | $5,539 | $4,815 | | Income tax expense | $574 | $508 | $1,108 | $966 | Consolidated Statements of Comprehensive (Loss) Income This section presents net income and other comprehensive income items, reflecting changes in equity from non-owner sources Comprehensive (Loss) Income (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | $2,292 | $2,014 | $4,431 | $3,849 | | Unrealized (loss) gain on securities available-for-sale (net of tax) | $(9,221) | $1,261 | $(19,878) | $(1,456) | | Comprehensive (loss) income | $(6,929) | $3,275 | $(15,447) | $2,393 | Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities over specific periods Cash Flow Summary (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $1,127 | $8,035 | | Net cash (used in) investing activities | $(96,611) | $(38,865) | | Net cash (used in) provided by financing activities | $(12,815) | $53,233 | | (Decrease) increase in cash and cash equivalents | $(108,299) | $22,403 | | Cash and cash equivalents at end of period | $74,854 | $123,289 | Consolidated Statements of Changes in Stockholders' Equity This section outlines the changes in each component of stockholders' equity over specific reporting periods Stockholders' Equity Changes (in thousands) | Metric | Balance at December 31, 2021 | Net Income (3M 2022) | Dividends Paid (3M 2022) | Other Comprehensive (Loss) (3M 2022) | Balance at June 30, 2022 | | :----------------------------------- | :--------------------------- | :------------------- | :----------------------- | :----------------------------------- | :----------------------- | | Total Stockholders' Equity | $69,429 | $2,292 | $(332) | $(9,221) | $53,318 | | Retained Earnings | $23,440 | $2,292 | $(332) | - | $27,207 | | Accumulated Other Comprehensive (Loss) | $(1,386) | - | - | $(9,221) | $(21,264) | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements Note 1 – Basis of Presentation This note describes the foundational principles and scope used in preparing the financial statements - The Company's primary market area has expanded from Region 2000 to include Charlottesville, Roanoke, Blacksburg, Harrisonburg, Lexington, and Rustburg[20] - Critical accounting policies include the evaluation of the allowance for loan losses, goodwill impairment assessment, and valuation of other real estate owned (OREO)[21][22][24] Note 2 – Use of Estimates This note explains that financial statements rely on management's estimates and assumptions, which may differ from actual results - The consolidated financial statements are prepared using management's estimates and assumptions, which may differ from actual results[26] Note 3 – Earnings Per Common Share (EPS) This note details the calculation of basic and diluted earnings per common share for the reporting periods Earnings Per Common Share Calculation | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $2,292,000 | $2,014,000 | $4,431,000 | $3,849,000 | | Weighted average number of shares | 4,740,657 | 4,748,356 | 4,740,657 | 4,757,480 | | Basic and Diluted EPS | $0.48 | $0.42 | $0.93 | $0.81 | - All restricted stock units (RSUs) were excluded from diluted EPS calculation as they were settled in cash, resulting in identical weighted average shares and diluted shares[28] Note 4 – Stock Based Compensation This note outlines the company's stock-based compensation plans and related expenses - The 2018 Equity Incentive Plan permits the issuance of up to 250,000 shares of common stock for awards to key employees[30] - 24,500 restricted stock units (RSUs) granted in 2019 vested over 3 years and were settled with cash payments, with no shares issued[31] Stock-Based Compensation Expense (in thousands) | Period | 2021 Expense | | :--------------------------- | :------------- | | 3 Months Ended June 30 | $27 | | 6 Months Ended June 30 | $53 | - As of January 2, 2022, there was no additional unrecognized expense related to the 2019 RSU grant[33][34] Note 5 – Fair Value Measurements This note describes the methodologies and hierarchy used to measure the fair value of financial instruments - Financial instruments are grouped into a three-level hierarchy based on the observability of inputs used to determine fair value: Level 1 (quoted prices in active markets), Level 2 (observable inputs for similar assets/liabilities), and Level 3 (unobservable and significant inputs)[37][38] Assets Measured at Fair Value on a Recurring Basis (June 30, 2022, in thousands) | Description | Fair Value | Level 1 | Level 2 | Level 3 | | :----------------------------------- | :--------- | :------ | :------ | :------ | | Total available-for-sale securities | $201,429 | $- | $201,429 | $- | | IRLCs - asset | $118 | $- | $- | $118 | | Forward sales commitments - asset | $59 | $- | $- | $59 | | Total assets at fair value | $201,606 | $- | $201,429 | $177 | Assets Measured at Fair Value on a Nonrecurring Basis (June 30, 2022, in thousands) | Description | Balance as of June 30, 2022 | Level 1 | Level 2 | Level 3 | | :----------------------------------- | :-------------------------- | :------ | :------ | :------ | | Impaired loans* | $1,371 | $- | $- | $1,371 | | Other real estate owned | $761 | $- | $- | $761 | - Level 3 inputs for IRLCs and Forward Sales Commitments include a range of pull-through rates (70%-100%, weighted average 85%)[47] - Level 3 inputs for Impaired loans and OREO include selling costs (0%-10% for loans, 10% for OREO) and discounts for lack of marketability and age of appraisal (0%-20% for loans, 0%-25% for OREO)[57] Note 6 – Securities This note provides details on the company's investment securities, including their classification, fair value, and unrealized gains/losses Securities Holdings (June 30, 2022, in thousands) | Category | Amortized Costs | Gross Gains | Unrealized (Losses) | Fair Value | | :----------------------------------- | :-------------- | :---------- | :------------------ | :--------- | | Held-to-Maturity | $3,647 | $- | $(286) | $3,361 | | Available-for-Sale | $228,345 | $49 | $(26,965) | $201,429 | Unrealized Losses by Duration (June 30, 2022, in thousands) | Category | Fair Value (Less than 12 months) | Unrealized Losses (Less than 12 months) | Fair Value (More than 12 months) | Unrealized Losses (More than 12 months) | Total Fair Value | Total Unrealized Losses | | :----------------------------------- | :------------------------------- | :-------------------------------------- | :------------------------------- | :-------------------------------------- | :--------------- | :---------------------- | | Held-to-maturity | $3,647 | $286 | $- | $- | $3,647 | $286 | | Available-for-sale | $136,628 | $16,305 | $54,197 | $10,748 | $190,926 | $27,040 | - Management does not consider the unrealized losses on securities to be other-than-temporary impairment due to the nature of the securities, minimal default risk, and no intent or requirement to sell prior to recovery[68][69] - No sales of available-for-sale securities occurred during the three and six months ended June 30, 2022 and 2021[70] Note 7 – Business Segments This note presents financial information for the company's distinct operating segments, including community banking and advisory services - The Company operates in three reportable business segments: traditional full-service community banking, mortgage loan origination, and registered investment advisory (wealth management)[73] Net Income by Business Segment (3 Months Ended June 30, 2022, in thousands) | Segment | Net Income | | :----------------------------------- | :--------- | | Community Banking | $1,865 | | Mortgage | $110 | | Advisory Services | $317 | | Total | $2,292 | Net Income by Business Segment (6 Months Ended June 30, 2022, in thousands) | Segment | Net Income | | :----------------------------------- | :--------- | | Community Banking | $3,294 | | Mortgage | $469 | | Advisory Services | $668 | | Total | $4,431 | - The investment advisory business (PWW) contributed $961k and $1,976k in noninterest income for the three and six months ended June 30, 2022, respectively, as it was acquired on December 31, 2021[76] Note 8 – Loans, allowance for loan losses and OREO This note details the loan portfolio, allowance for loan losses, and other real estate owned, including non-accrual loans Loan Portfolio Summary (in thousands) | Loan Segment | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :------------------ | | Commercial | $102,879 | $105,067 | | Commercial real estate | $354,061 | $338,149 | | Consumer | $100,165 | $89,102 | | Residential | $56,833 | $51,066 | | Total loans | $613,938 | $583,384 | | Less allowance for loan losses | $6,616 | $6,915 | | Net loans | $607,322 | $576,469 | Non-Accrual Loans (in thousands) | Loan Segment | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :------------------ | | Commercial | $60 | $25 | | Commercial Mortgages-Owner Occupied | $502 | $501 | | Commercial Mortgages-Non-Owner Occupied | $129 | $138 | | Consumer Secured | $8 | $127 | | Residential Mortgages | $156 | $163 | | Totals | $855 | $954 | - Other real estate owned (OREO) remained constant at $761k from December 31, 2021, to June 30, 2022[84] - One loan modification was classified as a Troubled Debt Restructuring (TDR) during the three and six months ended June 30, 2022, due to an extension of the maturity date[103] - All 191 loans previously modified in response to COVID-19 are current and no longer in deferment as of June 30, 2022[105] Note 9 – Revenue Recognition This note explains the company's policies for recognizing revenue from various sources, including service charges and advisory fees - Revenue from service charges on deposit accounts is recognized over time for recurring fees and at a point in time for transactional fees[107] - Fees, exchange, and other service charges (e.g., debit/credit card income, ATM fees) are recognized when services are rendered or upon completion[108] - Investment advisory fees are earned over time, typically charged quarterly based on the market value of assets under management[109] Note 10 - COVID-19 and Current Economic Conditions This note discusses the ongoing impact of the COVID-19 pandemic and current economic conditions on the company's operations - The extent of COVID-19's effect on the Company's operational and financial performance depends on future developments and remains uncertain[112] - Management continues to evaluate current economic conditions to determine the pandemic's impact on customer financial obligations and asset valuations[113] Note 11 – Capital Notes and Other Borrowings This note provides details on the company's capital notes and other borrowing arrangements, including terms and modifications - The Company completed a private placement of $10,050,000 in 2020 Notes, bearing interest at 3.25% and maturing on June 30, 2025[114] - The NBB Note terms were modified on June 30, 2022, extending the balloon payment date to December 31, 2026, and lowering the interest rate to 3.90% from 4.00%[117] Note 12 – Acquisitions This note details recent acquisitions, including the purchase of an investment advisory firm and related goodwill - Financial acquired Pettyjohn, Wood & White, Inc. (PWW), an investment advisory firm with approximately $650 million in assets under management, on December 31, 2021, for $10.5 million in cash[120] - The acquisition resulted in $3.0 million in goodwill (not tax deductible) and $8.4 million in amortizable intangible assets (customer relationships, amortized over 15 years)[121] - Goodwill related to PWW increased by approximately $818,000 during the six months ended June 30, 2022, due to a contractual net working capital adjustment[122] Note 13 – Recent accounting pronouncements and other authoritative guidance This note outlines the impact and assessment of recently issued accounting standards and guidance on the company - The Company is assessing the impact of ASU 2016-13 (CECL model), effective for smaller reporting companies after December 15, 2022, and has begun the implementation process[123] - ASU 2022-03 clarifies that contractual sale restrictions on equity securities are not considered in fair value measurement; no material impact is expected[125] - ASU 2022-02 eliminates TDR accounting guidance for CECL adopters and enhances disclosures for loan refinancings/restructurings; the Company is assessing its impact[126][127] - The Company is evaluating ASU 2020-04 and 2021-01 regarding reference rate reform and is assessing other benchmarks like SOFR to substitute for LIBOR[128] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operating results, including forward-looking statements and critical accounting policies CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This section warns that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including the effects of COVID-19, regulatory changes, economic conditions, and interest rate fluctuations[131] - Shareholders should not place undue reliance on forward-looking statements, and the Company disclaims any obligation to update them[133] IMPACT OF COVID-19 This section discusses the ongoing and potential effects of the COVID-19 pandemic on the company's market areas, policies, and business operations Effects on Market Areas This section describes the impact of the COVID-19 pandemic on the company's primary market areas - The COVID-19 pandemic and related legislative/regulatory relief efforts have had and are expected to continue to have a material impact on the Company's operations[135] Policy and Regulatory Developments This section outlines the legislative and regulatory responses to COVID-19 and their implications for the company - The CARES Act established the Paycheck Protection Program (PPP), in which the Bank participated, and provided options to temporarily suspend GAAP requirements for COVID-19 related loan modifications[137] - Federal banking regulators encouraged institutions to work prudently with affected borrowers, generally not categorizing COVID-19 related modifications as Troubled Debt Restructurings (TDRs)[137] - As of June 30, 2022, none of the 191 previously modified loans (totaling approximately $76 million) remain in deferment, and all are current[137] Effects on Our Business This section details the specific impacts of the COVID-19 pandemic on the company's business operations and financial performance - Initial negative impacts of the COVID-19 pandemic on financial condition, capital, and results were offset by mitigation efforts[138] COVID-19 Crisis Management This section describes the company's strategies and actions taken to manage the COVID-19 crisis and ensure business continuity - The Company implemented its Business Continuity Plan, maintained open branches with various service options, and adopted flexible work practices to protect employee and client health[141] GENERAL This section provides an overview of the company's business activities and critical accounting policies Critical Accounting Policies This section highlights the key accounting policies requiring significant judgment and estimates, such as allowance for loan losses - Critical accounting policies include the evaluation of the allowance for loan losses, valuation of other real estate owned (OREO), and goodwill impairment testing[145][149][150] - The allowance for loan losses is based on management's estimate of probable losses, considering loan portfolio composition, historical losses, impaired loans, collateral quality, and economic conditions[145] - Goodwill is tested for impairment at least annually (September 1) or more frequently if impairment indicators exist[152] Overview This section provides a general description of the company's business, market areas, and strategic objectives - Financial is a bank holding company primarily engaged in retail banking through Bank of the James, with additional activities in mortgage banking, investment services, insurance, and investment advisory services (PWW)[153][154] - The Bank's primary market area has expanded from Central Virginia (Region 2000) to include Roanoke, Charlottesville, Harrisonburg, Blacksburg, Lexington, and Rustburg[153] - The Bank intends to enhance profitability by increasing market share, providing additional services, and controlling costs[157] - The Bank is considering additional branch locations in Campbell County (Timberlake Road), 4105 Boonsboro Road, and 1925 Atherholt Road in Lynchburg, with new branches expected to become profitable within 12 to 18 months[163][164] OFF-BALANCE SHEET ARRANGEMENTS This section describes the company's off-balance sheet commitments, including credit extensions and letters of credit Off-Balance Sheet Commitments (June 30, 2022, in thousands) | Commitment Type | Amount | | :----------------------------------- | :----- | | Commitments to extend credit | $191,935 | | Letters of Credit | $4,263 | | Total | $196,138 | - The Bank's mortgage division presells all originated loans to third-party investors, eliminating credit and interest rate risk on rate lock commitments[170] SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section summarizes the company's financial position and operating performance for the reporting periods Financial Condition Summary This section provides a summary of key changes in the company's assets, liabilities, and equity - Total assets decreased by 2.84% to $959,577k at June 30, 2022, primarily due to a decrease in cash and cash equivalents, partially offset by loan growth and increased available-for-sale securities[174] - Total deposits decreased by 1.32% to $875,346k at June 30, 2022[175] - Total loans (excluding held for sale) increased by 5.24% to $613,938k at June 30, 2022, driven by commercial real estate loans[176] - Total nonperforming assets decreased to $1,616k at June 30, 2022, from $1,715k at December 31, 2021, with non-accrual loans decreasing to $855k[177] - Cash and cash equivalents decreased to $74,854k at June 30, 2022, from $183,153k at December 31, 2021[183] - Securities available-for-sale increased to $201,429k at June 30, 2022, from $161,267k at December 31, 2021, despite an increase in unrealized loss of approximately $25,162k[185][186] Liquidity and Capital This section discusses the company's liquidity position and regulatory capital ratios, ensuring compliance and financial stability - Financial had $276,283k in liquid assets at June 30, 2022, with $35,596k of available-for-sale securities pledged as collateral[188] Bank Regulatory Capital Ratios (June 30, 2022) | Capital Ratio | Actual | Regulatory Minimum (1) | Well Capitalized Benchmark | | :----------------------------------- | :----- | :----------------------- | :------------------------- | | Tier 1 capital to average total assets | 8.28% | 4.000% | 5.000% | | Common Equity Tier 1 capital | 11.08% | 7.000% | 6.500% | | Tier 1 risk-based capital ratio | 11.08% | 8.500% | 8.000% | | Total risk-based capital ratio | 11.96% | 10.500% | 10.000% | - The Bank's regulatory capital levels exceeded those established for well-capitalized institutions at June 30, 2022, and December 31, 2021[190] - The Bank has elected not to opt into the Community Bank Leverage Ratio (CBLR) framework at this time[198] Results of Operations This section analyzes the company's financial performance, including earnings, interest income, and expenses Earnings Summary This section provides a concise overview of the company's net income and key profitability metrics Earnings Summary (in thousands, except per share amounts) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | $2,292 | $2,014 | $4,431 | $3,849 | | Basic and diluted EPS | $0.48 | $0.42 | $0.93 | $0.81 | | Annualized return on average stockholders' equity | 12.68% | 12.23% | 12.48% | 11.86% | | Annualized return on average assets | 0.89% | 0.88% | 0.89% | 0.86% | - The increase in net income for both periods was primarily due to a recovery of loan losses and an increase in net interest income[199][200] Interest Income, Interest Expense, and Net Interest Income This section analyzes the components of interest income and expense, and their impact on net interest income and margin Interest Income, Expense, and Net Interest Income (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Interest income | $7,598 | $7,234 | $14,513 | $14,599 | | Interest expense | $474 | $524 | $999 | $1,141 | | Net interest income | $7,124 | $6,710 | $13,514 | $13,458 | | Net interest margin | 2.99% | 3.15% | 2.92% | 3.25% | - Interest income increased for the three-month period due to higher interest-earning assets but decreased slightly for the six-month period due to lower yields on assets[203][204] - Interest expense decreased for both periods due to lower interest rates paid on deposits[205] - Net interest margin decreased for both periods, primarily attributable to a decrease in loan fees related to the PPP program in 2022[206] Noninterest Income This section details the company's noninterest revenue streams, including fees and gains on loan sales Noninterest Income (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total noninterest income | $3,034 | $3,049 | $6,665 | $5,483 | | Gain on sales of loans held for sale | $1,299 | $2,310 | $3,203 | $4,084 | | Wealth management fees (PWW) | $961 | $- | $1,976 | $- | - Noninterest income decreased for the three-month period but increased for the six-month period, primarily driven by fees from the newly acquired PWW investment advisory business, offsetting a decrease in gains on sales of loans held for sale[209][210] - Purchase mortgage originations increased as a percentage of total originations (81.93% for 3 months 2022 vs 64.44% for 3 months 2021), and management anticipates strong originations despite rising interest rates[212][213] Noninterest Expense This section analyzes the company's operating expenses, including salaries, benefits, and occupancy costs Noninterest Expense (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total noninterest expenses | $7,592 | $7,237 | $15,240 | $14,126 | | Salaries and employee benefits | $4,533 | $4,076 | $8,522 | $7,808 | - Noninterest expense increased for both periods due to higher personnel expenses (including PWW employees) and occupancy/supply costs, partially offset by decreases in equipment, marketing, and credit expenses[217] Allowance and Provision for Loan Losses This section discusses the allowance for loan losses and the provision for loan losses, reflecting credit risk management Allowance for Loan Losses Activity (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Provision (Recovery of) loan losses | $(300) | $- | $(600) | $- | | Loans charged off | $(1) | $- | $(9) | $(64) | | Recoveries of loans charged off | $47 | $106 | $310 | $120 | | Net recoveries | $46 | $106 | $301 | $56 | | Balance, end of period | $6,616 | $7,212 | $6,616 | $7,212 | - The allowance for loan losses (ALL) was $6,616k at June 30, 2022, representing 1.08% of total loans outstanding, down from 1.19% at December 31, 2021[219] - The decrease in ALL was primarily driven by reduced qualitative factor adjustments related to the COVID-19 pandemic and all previously deferred loans returning to normal status[219] Income Taxes This section details the company's income tax expense and effective tax rate for the reporting periods Income Tax Expense and Effective Tax Rate (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income tax expense | $574 | $508 | $1,108 | $966 | | Effective tax rate | 20.03% | 20.14% | 20.00% | 20.06% | - The effective tax rate remained lower than the statutory corporate tax rate due to federal income tax benefits from bank-owned life insurance[229] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that the company has no quantitative and qualitative disclosures about market risk to report for the period - This item is not applicable to the Company[237] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective with no significant changes in internal controls - Financial's disclosure controls and procedures were effective as of June 30, 2022[238] - No significant changes occurred in the Company's internal controls over financial reporting during the quarter ended June 30, 2022[239] PART II – OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings and risk factors Item 1. Legal Proceedings The company is not involved in any pending legal proceedings other than routine litigation incidental to its business - The Company is not involved in any pending legal proceedings beyond routine litigation incidental to its business[240] 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 reported - There have been no material changes to risk factors as previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[241] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the company for the reporting period - This item is not applicable[242] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable[243] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable[243] Item 5. Other Information This item is not applicable to the company for the reporting period - This item is not applicable[243] 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 filed include Section 302 and 906 certifications, and XBRL formatted consolidated financial statements (Balance Sheets, Statements of Income, Comprehensive Loss, Cash Flows, Changes in Stockholders' Equity, and Notes)[244] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the report's accuracy - The report was signed by Robert R. Chapman III (President, Principal Executive Officer) and J. Todd Scruggs (Secretary and Treasurer, Principal Financial Officer and Principal Accounting Officer) on August 12, 2022[248]