BANK OF THE JAMES FINANCIAL GROUP, INC. 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 the COVID-19 pandemic on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets; ?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), including changes to address the impact of COVID-19; ?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; ?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; ?diversion of management time on pandemic-related issues; ?adoption of new accounting standards or changes in existing standards; ?changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic; ?compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Financial may pursue or implement; ?a potential resurgence of economic and political tensions withChina , the ongoing war betweenRussia andUkraine and potential expansion of combatants, and the sanctions imposed onRussia by numerous countries and private companies, all of which may have a destabilizing effect on financial markets and economic activity; and ?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. 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. IMPACT OF COVID-19
Effects on Market Areas
The COVID-19 pandemic and certain provisions of the Coronavirus Aid, Relief and
Economic Security Act ("CARES Act") and other recent legislative and regulatory
relief efforts have had and are expected to continue to have a material impact
on the Company's operations, as further discussed below.
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Policy and Regulatory Developments
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
?OnMarch 27, 2020 ,President Trump signed the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a$2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a$349 billion loan program administered through theU.S. Small Business Administration (SBA), referred to as the Paycheck Protection Program, or PPP Program, which was subsequently increased by$320 billion onApril 24, 2020 . Under the PPP program, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP program. EffectiveAugust 8, 2020 , banks ceased taking applications under the PPP program. In addition, the CARES Act provided financial institutions the option to temporarily suspend certain requirements under GAAP related to loan modifications and classification as troubled debt restructurings ("TDRs") for a limited period of time to account for the effects of COVID-19. ?OnApril 7, 2020 , federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs, and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. In addition, upon expiration of the initial loan modification period, the Bank, pursuant to the "Joint Statement on Additional Loan Accommodations Related to COVID-19" publishedAugust 3, 2020 , is encouraged to continue to work with effected borrowers on additional loan modifications. Since the beginning of the pandemic in the spring of 2020, the Bank has modified a total of 191 loans. The principal balances of these loans onMarch 31, 2022 (adjusted for payoffs) totaled approximately$76 million . As ofJune 30, 2022 , none of the 191 previously modified loans remain in deferment and all such previously deferred loans are current. ?OnDecember 27, 2020 ,President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "Economic Aid Act") into law to provide continued assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic. Section 311 of the Economic Aid Act added a new temporary provision that authorizes the SBA to guarantee Paycheck Protection Program Second Draw Loans (the "PPP Second Draw Program"), under generally the same terms and conditions available under the PPP Under section 311, SBA was authorized to guarantee loans under the PPP Second Draw Program throughMay 31, 2021 ("Second Draw PPP Loans") to borrowers that previously received an initial PPP loan and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan. In addition, the Economic Aid Act permitted individuals and business that did not receive an initial PPP loan to apply under the PPP Program. ?In accordance with the relief provisions of the CARES Act and theMarch 22, 2020 (revisedApril 2020 ) Joint Interagency Regulatory Guidance, the above modifications were not considered to be troubled debt restructurings and were excluded from TDR classification. The TDR relief provisions provided for by the CARES Act were extended inDecember 2020 by the Consolidated Appropriations Act through the earlier ofJanuary 1, 2022 or 60 days after the national COVID-19 emergency terminates. Effects on Our Business The COVID-19 pandemic and the specific developments referred to above have had an impact on our business. Initially, we anticipated that the COVID-19 pandemic could have a negative impact on our financial condition, capital levels and results of operations could be significantly adversely affected. Mitigation efforts, as described in further detail below, helped offset the effects of the pandemic. COVID-19 Crisis Management As an essential service provider,Bank of the James has continued to provide uninterrupted service to its clients throughout the COVID-19 crisis. OnMarch 2, 2020 the Company's Management Committee initiated plans in response to the emerging risk related to the pandemic. From the beginning, our management of the crisis has focused on protecting the health and well-being of our employees and clients while continuing to provide our clients with full access to banking services. As the operational risk related to the COVID-19 crisis evolved, the Company took proactive measures to manage operational risk, including the following: 33
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?The Company has implemented its Business Continuity Plan.
?All branches remain open, with routine banking services offered through online
banking, drive-thru, ATMs, and full lobby access.
?Implemented a number of actions to support a healthy workforce, including:
-Flexible work practices such as work-from-home options, working in shifts and
placing greater distances between employees;
-Limitation of business travel and in-person meetings; and
-Use of online meeting platforms, including successfully conducting the 2020,
2021, and 2022 Annual Meetings of Shareholders in a virtual format.
We anticipate that the Company will continue to maintain these policies as long
as necessary.
GENERAL
Critical Accounting Policies
Bank of the James Financial Group, Inc.'s ("Financial") financial statements are
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The financial information contained within our statements
is, to a significant extent, based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss ratios as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use in estimating risk. In addition, GAAP itself
may change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
Financial's critical accounting policies include the evaluation of the allowance
for loan losses which is based on management's estimate of an amount that is
adequate to absorb probable losses inherent in the loan portfolio of the Bank.
The allowance for loan losses is established through a provision for loan loss
based on available information including the composition of the loan portfolio,
historical loan losses, specific impaired loans, availability and quality of
collateral, age of the various portfolios, changes in local economic conditions,
and loan performance and quality of the portfolio. Different assumptions used in
evaluating the adequacy of the Bank's allowance for loan losses could result in
material changes in Financial's financial condition and results of operations.
The allowance is based on two basic principles of accounting: (i) ASC 450
"Contingencies", which requires that losses be accrued when they are probable of
occurring and are reasonably estimable and (ii) ASC 310 "Receivables", which
requires that losses on impaired loans be accrued based on the differences
between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. Guidelines for
determining allowances for loan losses are also provided in the SEC Staff
Accounting Bulletin No. 102 - "Selected Loan Loss Allowance Methodology and
Documentation Issues" and the Federal Financial Institutions Examination
Council's interagency guidance, "Interagency Policy Statement on the Allowance
for Loan and Lease Losses" (the "FFIEC Policy Statement").
The Bank's policy with respect to the methodology for determining the allowance
for loan losses involves a higher degree of complexity and requires management
to make subjective judgments that often require assumptions or estimates about
uncertain matters. This critical policy and its assumptions are periodically
reviewed with the Board of Directors.
See "Management Discussion and Analysis Results of Operations - Allowance and
Provision for Loan Losses" below for further discussion of the allowance for
loan losses.
Financial also considers valuation of other real estate owned (OREO) a critical
accounting policy. OREO consists of properties acquired through foreclosure or
deed in lieu of foreclosure. These properties are carried at fair value less
estimated costs to sell at the date of foreclosure. Losses from the acquisition
of property in full or partial satisfaction of loans are charged against the
allowance for loan losses. Subsequent write-downs, if any, are charged against
expense. Gains and losses on the sales of foreclosed properties are included in
determining net income in the year of the sale. Operating costs after
acquisition are expensed.
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
nets assets acquired and liabilities assumed as of the acquisition date.
Goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but tested for
impairment at least annually or more frequently in events
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and circumstances exists that indicate that a goodwill impairment test should be performed. The initial goodwill impairment test will occur in 2022 as goodwill was the result of a transaction onDecember 31, 2021 . The Company has selectedSeptember 1 of each year as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.Goodwill is the only intangible asset with an indefinite life on our consolidated balance sheet.
Overview
Financial is a bank holding company headquartered inLynchburg, 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 throughBOTJ Insurance, Inc. , a subsidiary of the Bank, (which we refer to as "Insurance business"), and as ofDecember 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 aVirginia banking corporation headquartered inLynchburg, Virginia . The Bank was incorporated under the laws of theCommonwealth of Virginia as a state-chartered bank in 1998 and began banking operations inJuly 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 theCentral Virginia , Region 2000 area, which encompasses the seven jurisdictions of theTown of Altavista ,Amherst County ,Appomattox County , theTown of Bedford ,Bedford County ,Campbell County , and theCity of Lynchburg . Recently the Bank has begun to expand to other areas inVirginia , specificallyRoanoke ,Charlottesville ,Harrisonburg ,Blacksburg ,Lexington andRustburg . 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 onDecember 31, 2021 . PWW is aLynchburg, 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
Our operating results depend primarily upon the Bank's net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank's net income also is affected by its provision for loan losses, as well as the level of its 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 the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.
The Bank intends to enhance its profitability by increasing its market share in our service areas, providing additional services to its customers, and controlling costs.
The Bank services its banking customers through the following locations in
Full-Service Branches
?The main office located at828 Main Street inLynchburg (the "Main Street Office"), ?A branch located at5204 Fort Avenue inLynchburg (the "Fort Avenue Branch"), ?A branch located at4698 South Amherst Highway inAmherst County (the "Madison Heights Branch"), ?A branch located at17000 Forest Road in Forest (the "Forest Branch"), ?A branch located at4935 Boonsboro Road , Suites C and D inLynchburg (the "Boonsboro Branch"), ?A branch located at164 South Main Street ,Amherst, Virginia (the "Amherst Branch"), ?A branch located at1405 Ole Dominion Boulevard in theTown of Bedford, Virginia , located off ofIndependence Boulevard (the "Bedford Branch"), ?A branch located at1110 Main Street ,Altavista, Virginia (the "Altavista Branch"), ?A branch located at1391 South High Street ,Harrisonburg, VA (the "Harrisonburg Branch"), 35
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Table of Contents ?A branch located at1745 Confederate Blvd ,Appomattox, VA (the "Appomattox Branch"), ?A branch located at225 Merchant Walk Avenue ,Charlottesville, VA (the "5th Street Station Branch"), ?A branch located at3562 Electric Road ,Roanoke, VA (the "Roanoke Branch"), ?A branch located at45 South Main St. ,Lexington, VA (the "Lexington Branch"), ?A branch located at550 Water St. ,Charlottesville, VA (the "Water Street Branch"), ?A branch located at2101 Electric Rd ,Roanoke, VA (the "Oak Grove Branch"), and ?A branch located at13 Village Highway ,Rustburg, VA (the "Rustburg Branch").
Limited Service Branches
?Westminster-
?Westminster-
Loan Production Offices
?Residential mortgage loan production office located at the Forest Branch,
?Residential mortgage loan production office located at
?Residential mortgage loan production office located at
?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
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: ?Real property located in theTimberlake Road area ofCampbell County (Lynchburg ),Virginia . The Timberlake property is not suitable for its intended use as a branch bank. Management anticipates that it will be necessary to raze the current structures and replace it with appropriate new construction. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit and construct a branch at this location could be between$900,000 and$1,500,000 . ?Real property located at4105 Boonsboro Road ,Lynchburg, Virginia . This property is a former bank branch and with minor cosmetic improvements is suitable as is to be used as a bank branch. The Bank does not anticipate utilizing this location as a bank branch prior to the fourth quarter of 2022. ?Real property located at1925 Atherholt Road ,Lynchburg, Virginia . OnDecember 31, 2021 , the Bank purchased real property located at1925 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'sLynchburg 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.
Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.
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OFF-BALANCE SHEET ARRANGEMENTS
The Bank is a party to various financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of our customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Such commitments involve, to varying degrees, elements of
credit risk and interest rate risk in excess of the amount recognized in the
balance sheets and could impact the overall liquidity and capital resources to
the extent customers accept and/or use these commitments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. A summary of the Bank's
commitments is as follows:
June 30, 2022
(in thousands)
Commitments to extend credit $ 191,935
Letters of Credit 4,263
Total $ 196,138
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 June 30, 2022 and December 31, 2021 and
the results of operations of Financial for the three and six month periods ended
June 30, 2022 and 2021. 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
Financial Condition Summary
June 30, 2022 as Compared to December 31, 2021
Total assets were $959,577,000 on June 30, 2022 compared with $987,634,000 at
December 31, 2021 , a decrease of 2.84%. The decrease in total assets was
primarily due to a decrease in cash and cash equivalents. This decrease in cash
and cash equivalents was due primarily to i) a decrease in deposits; ii) the use
of cash to fund loan growth; and iii) the use of cash to purchase securities
available-for-sale to take advantage of the increase in interest rates. The
resulting increase in securities available-for-sale was offset by an increase in
the unrealized loss (mark to market) on the securities available-for-sale.
Total deposits decreased from
Total loans, excluding loans held for sale, increased to$613,938,000 onJune 30, 2022 from$583,384,000 onDecember 31, 2021 , resulting from an increase in commercial real estate loans (owner occupied and non-owner occupied and excluding construction loans). Growth was partially offset by the continued payoff of PPP loans, the payoff of two substandard loans, and normal 37
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amortization. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to$607,322,000 onJune 30, 2022 from$576,469,000 onDecember 31, 2021 , an increase of 5.35%. The following summarizes the position of the Bank's loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands): June 30, 2022 December 31, 2021 Amount Percentage (%) Amount Percentage (%) Commercial$ 102,879 16.76$ 105,067 18.01 Commercial Real Estate 354,061 57.66 338,149 57.97 Consumer 100,165 16.32 89,102 15.27 Residential 56,833 9.26 51,066 8.75 Total loans$ 613,938 100.00$ 583,384 100.00 Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and OREO decreased to$1,616,000 onJune 30, 2022 from$1,715,000 onDecember 31, 2021 . OREO remained constant at$761,000 on bothJune 30, 2022 andDecember 31, 2021 . Non-performing loans decreased slightly from$954,000 atDecember 31, 2021 to$855,000 atJune 30, 2022 . As discussed in more detail below under "Results of Operations-Allowance and Provision for Loan Losses," management has provided for the anticipated losses on these loans in the allowance for loan losses. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for loan losses charged against earnings.
As a result of the COVID-19 pandemic, we anticipate that our commercial, commercial real estate, residential and consumer borrowers may encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings. Any potential financial impacts are unknown at this time.
OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. OnDecember 31, 2021 , the Bank was carrying two OREO properties on its books at a value of$761,000 . During the six months endedJune 30, 2022 , the Bank neither acquired or disposed of any OREO property. The OREO properties are available for sale and are being actively marketed. The Bank had loans in the amount of$432,000 atJune 30, 2022 classified as performing TDRs as compared to$372,000 atDecember 31, 2021 . None of these TDRs were included in non-accrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year. At the beginning of the COVID-19 pandemic, we developed relief programs to assist borrowers in financial need. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that were insignificant. The Bank modified a total of 191 loans. The principal balances of these loans onJune 30, 2022 (adjusted for payoffs) totaled approximately$76 million . As ofJune 30, 2022 andDecember 31, 2021 , none of the 191 previously modified loans remain in deferment and all such previously deferred loans are current. Cash and cash equivalents decreased to$74,854,000 onJune 30, 2022 from$183,153,000 onDecember 31, 2021 . Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease was due primarily to i) a decrease in deposits; ii) the use of cash to fund loan growth; and iii) the use of cash to purchase securities available-for-sale to take advantage of the increase in interest rates. 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
Securities available-for-sale, which are carried on the balance sheet at fair market value, increased to$201,429,000 onJune 30, 2022 , from$161,267,000 onDecember 31, 2021 . During the six months endedJune 30, 2022 , the Bank purchased$71,580,000 in available-for-sale securities, which was responsible for the increase in securities available-for sale. During the six months endedJune 30, 2022 the Bank did not sell any securities available-for-sale and received$6,027,000 in proceeds from calls, maturities, and 38
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paydowns of securities available-for-sale, which partially offset the increase.
The increase was offset in part by an increase in the unrealized loss on
securities available for sale of approximately
Financial's investment inFederal Home Loan Bank of Atlanta (FHLBA) stock totaled$489,000 atJune 30, 2022 and$426,000 atDecember 31, 2021 , an increase of$63,000 . FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Liquidity and Capital AtJune 30, 2022 , Financial, on a consolidated basis, had liquid assets of$276,283,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately$35,596,000 (representing current market value) of the available-for-sale securities are pledged as collateral with$30,165,000 pledged as security for public deposits, and$5,431,000 pledged as security on a line of credit the Bank may draw on from time to time to meet liquidity needs. This line of credit currently has a zero balance. Management believes that liquid assets were adequate atJune 30, 2022 . Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, if additional liquidity is needed, the Bank has the ability to purchase federal funds on the open market, borrow from the FHLBA using loans or investments within the Bank's portfolio as collateral, and to borrow from theFederal Reserve Bank's discount window. The COVID-19 pandemic could have a material negative impact on Financial's short-term or long-term liquidity. For example, if customers unexpectedly draw down on existing lines of credit, our liquidity could be impacted. While we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic, management is closely monitoring our sources and uses of funds in order to meet our cash flow requirements while maximizing profits. Based in part on recent loan activity including loans made pursuant to the PPP as discussed below under "Allowance and Provision for Loan Losses," the Bank is monitoring liquidity to ensure it is able to fund future loans and withdrawals related to the use of PPP funds. AtJune 30, 2022 , the Bank had a leverage ratio of approximately 8.28%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 11.08% and a total risk-based capital ratio of approximately 11.96%. As ofJune 30, 2022 andDecember 31, 2021 , 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 ofJune 30, 2022 andDecember 31, 2021 : ? 39
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Bank Level Only Capital Ratios
Analysis of Capital for
(dollars in thousands)
June 30, December 31,
Analysis of Capital 2022 2021
Tier 1 capital
Common Stock $ 3,742 $ 3,742
Surplus 22,325 22,325
Retained earnings 57,052 52,821
Total Tier 1 capital $ 83,119 $ 78,888
Common Equity Tier 1 Capital
(CET1) $ 83,119 $ 78,888
Tier 2 capital
Allowance for loan losses $ 6,616 $ 6,915
Total Tier 2 capital: $ 6,616 $ 6,915
Total risk-based capital $ 89,735 $ 85,803
Risk weighted assets $ 749,994 $ 693,400
Average total assets $ 1,003,598 $ 959,794
Actual Regulatory Benchmarks
For Capital For Well
June 30, December 31, Adequacy Capitalized
2022 2021 Purposes (1) Purposes
Capital Ratios:
Tier 1 capital to average
total assets 8.28% 8.22% 4.000% 5.000%
Common Equity Tier 1 capital 11.08% 11.38% 7.000% 6.500%
Tier 1 risk-based capital
ratio 11.08% 11.38% 8.500% 8.000% Total risk-based capital ratio 11.96% 12.37% 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 atJune 30, 2022 would be slightly 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. InJuly 2013 , theFederal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule was fully implemented onJanuary 1, 2019 and implemented a capital conservation buffer of 2.5%. As a result, the Bank is required to have 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. OnSeptember 17, 2019 theFederal Deposit Insurance Corporation finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. 40
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In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than$10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. While the CBLR framework is currently available for banks to use in theirJune 30, 2022 Call Report, the Bank has elected not to opt into the CBLR framework at this time. Results of Operations
Comparison of the Three and Six Months Ended June 30, 2022 and 2021Earnings Summary
Financial had net income including all operating segments of$2,292,000 and$4,431,000 for the three and six months endedJune 30, 2022 , compared to$2,014,000 and$3,849,000 for the comparable periods in 2021. Basic and diluted earnings per common share for the three and six months endedJune 30, 2022 were$0.48 and$0.93 , compared to basic and diluted earnings per share of$0.42 and$0.81 for the three and six months endedJune 30, 2021 . The increase in net income for the three months endedJune 30, 2022 , as compared to the prior year period was due primarily to i) a recovery of$300,000 from the allowance for loan losses during the quarter as compared to no recovery in the same period in 2021; and ii) an increase in net interest income in the quarter of$414,000 . The increase in net income for the six months endedJune 30, 2022 , as compared to the prior year period was due primarily to i) a recovery of$600,000 from the allowance for loan losses during the first six months as compared to no recovery in the same period in 2021; and ii) an increase in noninterest income of for the six months endedJune 30, 2022 of$1,182,000 , which was primarily due to an increase in wealth management fees from the services provided by PWW. Because the acquisition of PWW closed onDecember 31, 2021 , PWW did not contribute any noninterest income in the first six months of 2021. These operating results represent an annualized return on average stockholders' equity of 12.68% and 12.48% for the three and six months endedJune 30, 2022 , compared with 12.23% and 11.86% for the three and six months endedJune 30, 2021 . This increase for the three and six months endedJune 30, 2022 was due to an increase in our net income and a decrease in stockholders' equity as a result of a decrease in the value of the available-for-sale securities resulting from an application of the mark-to-market accounting rules. The Company had an annualized return on average assets of 0.89% for both the three and six months endedJune 30, 2022 compared with 0.88% and 0.86% for the same periods in 2021. The increase for the three and six months endedJune 30, 2022 largely resulted from an increase in the Bank's net income and was partially offset by an increase in average assets.
See "Noninterest Income" below for mortgage business and wealth management segment discussions.
Interest Income, Interest Expense, and Net Interest Income
For the three months endedJune 30, 2022 , interest income increased to$7,598,000 from$7,234,000 for the same period in 2021, due primarily to an increase in interest earning assets, which was offset in part by a decrease in yields on total earning assets. In the comparable period of 2021, the yield on loans were elevated due to the accretion of PPP fees as PPP loans were forgiven. The average rate received on loans was 4.12% for the three months endedJune 30, 2022 as compared to 4.33% for the same period in 2021. The rate on total average earning assets decreased for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 primarily because a decrease in the rates previously discussed. For the six months endedJune 30, 2022 , interest income decreased slightly to$14,513,000 from$14,599,000 for the same period in 2021, due primarily to a decrease in yields on total interest earning assets, which was partially offset by an increase in total earning assets. In the comparable period of 2021, the yield on loans were elevated due to the accretion of PPP fees as PPP loans were forgiven. The average rate received on loans was 4.08% for the six months endedJune 30, 2022 as compared to 4.42% for the same period in 2021. The rate on total average earning assets decreased for the six months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 primarily because a decrease in the rates previously discussed. Interest expense decreased to$474,000 and$999,000 for the three and six months endedJune 30, 2022 from$524,000 and$1,141,000 for the same periods in 2021, decrease of 9.54% and 12.45%. The decrease for the three and six month periods resulted primarily from a decrease in interest rates paid on deposits. The Bank's average rate paid on interest bearing deposits was 0.14% and 0.16% during the three and six months endedJune 30, 2022 as compared to 0.25% and 0.29% for the same periods in 2021. 41
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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 and six months endedJune 30, 2022 of$7,124,000 and$13,514,000 as compared to$6,710,000 and$13,458,000 for the same periods in 2021. The net interest margin was 2.99% and 2.92% for the three and six months endedJune 30, 2022 as compared to 3.15% and 3.25% for the same periods in 2021. The decreases was primarily attributable to the decrease in loan fees related to the PPP program in 2022 as compared to 2021. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact net interest margin. TheFOMC has taken actions that are likely to positively impact our net interest margin in the near term. Other financial impacts could occur, though such potential impacts are unknown at this time.
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 decreased to$3,034,000 for the three months endedJune 30, 2022 from$3,049,000 for the same period in 2021. This decrease was primarily related to a decrease in gains on sales of loans held for sale of$1,011,000 from$2,310,000 during the quarter endedJune 30, 2021 to$1,299,000 for the same period in 2022. The decrease was partially offset by fees generated from PWW's investment advisory business. Fee income from PWW was$961,000 in for the period endedJune 30, 2022 as compared to$0 for the same period in 2021. Noninterest income increased to$6,665,000 for the six months endedJune 30, 2022 from$5,483,000 for the same period in 2021. This increase was primarily related to fees generated from PWW's investment advisory business and was partially offset by the decrease in gains on sale of loans held for sale. Fee income from PWW was$1,976,000 in for the period endedJune 30, 2022 as compared to$0 for the same period in 2021. 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$50,235,000 and$87,404,000 or 81.93% and 71.17%, respectively, of the total mortgage loans originated in the three and six months endedJune 30, 2022 as compared to$54,116,000 and$84,954,000 or 64.44% and 52.94% of the total mortgage loans originated in the same periods in 2021. Because of a rising mortgage interest rate environment, management anticipates that in the short term purchase mortgage originations will continue to represent a majority of mortgage originations. However, management also believes that a continued increase in long term market interest rates could limit refinancing activity. Although mortgage rates increased dramatically in the first six months of 2022, rates remain attractive when compared to rates over the last 20 years. Because of uncertainty surrounding current and near-term economic conditions arising from the COVID-19 pandemic, supply chain issues, inflation, and geopolitical concerns, management cannot predict future mortgage rates. Nevertheless, management expects that the Mortgage division's reputation in Region 2000, steady residential real estate inventory and the recent hiring of additional mortgage loan originators inRoanoke ,Harrisonburg ,Charlottesville ,Blacksburg , and most recently,Wytheville , will result in strong mortgage originations through the remainder of 2022. Management also believes that the rising interest rates could put revenue from the mortgage segment under 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 immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division's impact on noninterest income will remain immaterial in 2022. 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 42
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and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance's impact on noninterest income will remain immaterial in 2022.
Financial provides investment advisory services through PWW. In the three and six months endedJune 30, 2022 , PWW generated non interest revenue (fee income) of$961,000 and$1,976,000 as compared to$0 for the same periods in 2021.
Noninterest Expense
Noninterest expense for the three and six months endedJune 30, 2022 increased to$7,592,000 and$15,240,000 from$7,237,000 and$14,126,000 for the same periods in 2021, increases of 4.91% and 7.89%, respectively. These increases resulted from increases in personnel expenses from variable compensation along with the added personnel expense of PWW employees, occupancy expense, and supply expense. The increases were offset in part by a decrease in equipment expense, marketing expense, and credit expense.FDIC insurance expense increased in the quarter endedJune 30, 2022 , but decreased for the six months endedJune 30, 2022 . Total personnel expense was$4,533,000 and$8,522,000 for the three and six month periods endedJune 30, 2022 as compared to$4,076,000 and$7,808,000 for the same periods in 2021.
Allowance and Provision for Loan Losses
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged-off, net of recoveries, reduce the allowance. The provision for the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon two components - specific impairment and general reserves. 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 as well as all TDRs, 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 loan loss calculation, the Bank had a recovery of$300,000 and$600,000 from the allowance for loan losses in the three and six month periods endedJune 30, 2022 . This compares to a provision of$0 for each of the comparable periods in 2021. AtJune 30, 2022 , the allowance for loan losses was 1.08% of total loans outstanding, versus 1.19% and 1.20% of total loans outstanding atDecember 31, 2021 andJune 30, 2021 , respectively. The decrease in the allowance for loan losses was largely driven by decreased qualitative factor adjustments related to the ongoing COVID-19 pandemic, primarily in relation to the economy and because all loans previously in deferral due to COVID-19 conditions have returned to normal status. The specific reserve was$0 atDecember 31, 2021 andJune 30, 2022 . PPP loans are guaranteed in full by theU.S. Small Business Administration , and therefore, are excluded from the Company's allowance for loan losses calculation. As shown in the table below, the total balance in the allowance decreased, from$6,915,000 as ofDecember 31, 2021 to$6,616,000 onJune 30, 2022 . The decrease was due in part to the$600,000 recovery discussed above and was offset by recoveries exceeding charge-offs during the first six months of 2022. The effects of the pandemic may require the Company to fund increases in the allowance for loan losses in future periods. Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for loan losses and constitute a realized loss. Charged-off loans were$1,000 and$9,000 for the three and six months endedJune 30, 2022 as compared to$0 and$64,000 for the comparable periods in 2021. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three and six months endedJune 30, 2022 , the Bank had recoveries of charged-off loans of$47,000 and$310,000 as compared with$106,000 and$120,000 for the comparable periods in 2021. In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank's loan portfolio. As set forth in the tables below, the Bank's allowance arising from the specific impairment evaluation as ofJune 30, 2022 was unchanged as compared toDecember 31, 2021 . ? 43
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The following tables summarize the allowance activity for the periods indicated:
Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Six Months Ended June 30, 2022
Commercial
Commercial Real Estate Consumer Residential Total
Allowance for Loan Losses:
Beginning Balance $ 1,471 $ 3,637 $ 860 $ 947 $ 6,915
Charge-Offs - - (9) - (9)
Recoveries 87 206 12 5 310
Provision (Recovery of) (261) (709) 58 312 (600)
Ending Balance 1,297 3,134 921 1,264 6,616
Ending Balance:
Individually evaluated for
impairment - - - - -
Ending Balance:
Collectively evaluated for
impairment 1,297 3,134 921 1,264 6,616
Totals: $ 1,297 $ 3,134 $ 921 $ 1,264 $ 6,616
Financing Receivables:
Ending Balance:
Individually evaluated for
impairment - 1,735 252 1,362 3,349
Ending Balance:
Collectively evaluated for
impairment 102,879 352,326 99,913 55,471 610,589
Totals: $ 102,879 $ 354,061 $ 100,165 $ 56,833 $ 613,938
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Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
As of and For the Year Ended December 31, 2021
Commercial
Commercial Real Estate Consumer Residential Total
Allowance for Loan Losses:
Beginning Balance $ 2,001 $ 3,550 $ 868 $ 737 $ 7,156
Charge-Offs (53) - (38) - (91)
Recoveries 112 72 29 137 350
Provision (Recovery of) (589) 15 1 73 (500)
Ending Balance 1,471 3,637 860 947 6,915
Ending Balance:
Individually evaluated for
impairment - - - - -
Ending Balance:
Collectively evaluated for
impairment 1,471 3,637 860 947 6,915
Totals: $ 1,471 $ 3,637 $ 860 $ 947 $ 6,915
Financing Receivables:
Ending Balance:
Individually evaluated for
impairment 17 2,694 59 1,316 4,086
Ending Balance:
Collectively evaluated for
impairment 105,050 335,455 89,043 49,750 579,298
Totals: $ 105,067 $ 338,149 $ 89,102 $ 51,066 $ 583,384 The following sets forth the reconciliation of the allowance for loan loss:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) (in thousands)
2022 2021 2022 2021
Balance, beginning of period $ 6,870 $ 7,106 $ 6,915 $ 7,156
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
No nonaccrual loans were excluded from the impaired loan disclosures at June 30,
2022 and December 31, 2021 . If interest on these loans had been accrued, such
income cumulatively would have approximated $201,000 and $177,000 on June 30,
2022 and December 31, 2021 , 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.
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.
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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.
Income Taxes
For the three and six months endedJune 30, 2022 , Financial had an income tax expense of$574,000 and$1,108,000 as compared to$508,000 and$966,000 for the three and six months endedJune 30, 2021 . This represents an effective tax rate of 20.03% and 20.00% for the three and six months endedJune 30, 2022 as compared with 20.14% and 20.06% for the three and six months endedJune 30, 2021 . Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance. 46
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Table of Contents Net Interst Margin Analysis Average Balance Sheets For the Three Months EndedJune 30, 2022 and 2021 (dollars in thousands) 2022 2021 Average Average Average Interest Rates Average Interest Rates Balance Income/ Earned/ Balance Income/ Earned Sheet Expense Paid Sheet Expense /Paid ASSETS Loans, including fees (1)(2)$ 596,775 $ 6,126 4.12%$ 610,338 $ 6,587 4.33% Loans held for sale 4,074 48 4.73% 5,542 37 2.68% Federal funds sold 103,575 164 0.64% 103,439 20 0.08% Interest-bearing bank balances 18,863 27 0.57% 18,823 5 0.11% Securities (3) 232,697 1,211 2.09% 116,214 559 1.93% Federal agency equities 1,253 27 8.64% 1,276 29 9.12% CBB equity 116 - - % 116 - - % Total earning assets 957,353 7,603 3.19% 855,748 7,237 3.39% Allowance for loan losses (6,894) (7,139) Non-earning assets 80,525 69,741 1,030,984 Total assets$ 1,030,984 $ 918,350 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand interest bearing 460,350 97 0.08% 404,554 109 0.11% Savings 131,171 18 0.06% 109,813 29 0.11% Time deposits 138,142 146 0.42% 143,633 278 0.78% Total interest bearing deposits 729,663 261 0.14%
658,000 416 0.25%
Other borrowed funds Other borrowings 10,807 108 4.01% - - - % Financing leases 3,359 24 2.87% 3,783 27 2.86% Capital Notes 10,034 81 3.24% 10,029 81 3.24% Total interest-bearing liabilities 753,863 474 0.25%
671,812 524 0.31%
Noninterest bearing deposits 194,431 171,187
Other liabilities 10,201 9,285
Total liabilities 958,495 852,284
Stockholders' equity 72,489 66,066
Total liabilities and
1,030,984
Stockholders' equity $ 1,030,984 $ 918,350
Net interest earnings $ 7,129 $ 6,713
Net interest margin 2.99% 3.15%
Interest spread 2.94% 3.08%
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(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 non-accrual loans.
(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities. Assumed income tax rates of 21% were used for the periods presented.
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Table of Contents Net Interst Margin Analysis Average Balance Sheets For the Six Months EndedJune 30, 2022 and 2021 (dollars in thousands) 2022 2021 Average Average Average Interest Rates Average Interest Rates Balance Income/ Earned/ Balance Income/ Earned Sheet Expense Paid Sheet Expense /Paid ASSETS Loans, including fees (1)(2)$ 592,702 $ 12,003 4.08%$ 610,876 $ 13,379 4.42% Loans held for sale 3,856 76 3.97% 5,848 105 3.62% Federal funds sold 100,437 201 0.40% 93,067 34 0.07% Interest-bearing bank balances 18,883 34 0.36% 18,740 19 0.20% Securities (3) 215,718 2,178 2.04% 106,283 1,032 1.96% Federal agency equities 1,231 31 5.08% 1,355 35 5.21% CBB equity 116 - - % 116 - - % Total earning assets 932,943 14,523 3.14% 836,285 14,604 3.52% Allowance for loan losses (6,929) (7,147) Non-earning assets 80,307 68,779 1,006,321 Total assets$ 1,006,321 $ 897,917 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand interest bearing 455,376 204 0.09% 391,298 216 0.11% Savings 127,835 37 0.06% 106,009 57 0.11% Time deposits 140,031 324 0.47% 146,580 651 0.90% Total interest bearing deposits 723,242 565 0.16% 643,887 924 0.29% Other borrowed funds Other borrowings 10,873 222 4.12% - - 0.00% Financing leases 3,419 49 2.89% 3,841 54 2.84% Capital Notes 10,033 163 3.28% 10,028 163 3.28% Total interest-bearing liabilities 747,567 999 0.27%
657,756 1,141 0.35%
Noninterest bearing deposits 176,950 164,974
Other liabilities 10,204 9,753
Total liabilities 934,721 832,483
Stockholders' equity 71,600 65,434
Total liabilities and
1,006,321
Stockholders' equity $ 1,006,321 $ 897,917
Net interest earnings $ 13,524 $ 13,463
Net interest margin 2.92% 3.25%
Interest spread 2.87% 3.17%
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(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 non-accrual loans.
(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities. Assumed income tax rates of 21% were used for the periods presented.
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