BANK OF THE JAMES FINANCIAL GROUP INC Management's Discussion and Analysis of Financial Condition and Resultsof Operations (form 10-Q)

Published: 2022-05-12 13:02:06 ET BOTJ

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Effects on Market Areas

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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:

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Overview

The Bank's principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.bank.

The Bank intends to enhance its profitability by increasing its market share in our service areas, providing additional services to its customers, and controlling costs.

The Bank services its banking customers through the following locations in Virginia:

Full-Service Branches

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Limited Service Branches

?Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia, and

?Westminster-Canterbury facilities located at 250 Pantops Mountain Road, Charlottesville, Virginia.

Loan Production Offices

?Residential mortgage loan production office located at the Forest Branch,

?Residential mortgage loan production office located at 2001 South Main Street, Blacksburg, Virginia, and

?Commercial, consumer and residential mortgage loan production office located at the Water Street Branch.

The Investment division and the Insurance business operate primarily out of offices located at the Main Street Office. PWW operates our investment advisory business primarily from its offices at 1925 Atherholt Road in Lynchburg.

The Bank continuously evaluates areas located within our service areas to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.

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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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.

All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Total deposits decreased from $887,056,000 as of December 31, 2021 to $881,427,000 on March 31, 2022, a decrease of 0.63%. The decrease resulted in large part from decreases in the following deposit categories: non-interest-bearing demand deposits and time deposits.

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excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $588,924,000 on March 31, 2022 from $576,469,000 on December 31, 2021, an increase of 2.16%. 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):

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.

Securities held-to-maturity were flat, decreasing slightly to $3,651,000 on March 31, 2022 from $3,655,000 on December 31, 2021. This decrease is a result of normal amortization of premiums within the held-to-maturity portfolio.

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maturities, and 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 $13,500,000.

Liquidity and Capital

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Bank Level Only Capital Ratios

Analysis of Capital for Bank of the James

8.500% 8.000% Total risk-based capital ratio 12.11% 12.37% 10.500% 10.000%

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Earnings Summary

See "Non-Interest Income" below for mortgage business segment discussion.

Interest Income, Interest Expense, and Net Interest Income

Financial's net interest margin analysis and average balance sheets are shown in Schedule I below.

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Financial provides investment advisory services through PWW. In the quarter ended March 31, 2022, PWW generated non interest revenue (fee income) of $1,015,000 in for the period ended March 31, 2022 as compared to $0 for the same period in 2021.

Allowance and Provision for Loan Losses

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The following sets forth the reconciliation of the allowance for loan loss:

Balance, end of period $ 6,870 $ 7,106

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The Bank's internal risk rating system is in place to grade commercial and commercial real estate loans. Category ratings are reviewed periodically by lenders and the credit review area of the Bank based on the borrower's individual situation. Additionally, internal and external monitoring and review of credits are conducted on an annual basis.

Below is a summary and definition of the Bank's risk rating categories:

?"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.

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(1)Net accretion or amortization of deferred loan fees and costs are included in interest income.

(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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