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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2012
BANK OF THE JAMES FINANCIAL GROUP, INC. (Exact Name of Registrant as Specified in Its Charter)
(434) 846-2000 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). ¨ Yes x No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 3,342,415 shares of Common Stock, par value $2.14 per share, were outstanding at May 11, 2012.
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Table of ContentsPART I – FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Bank of the James Financial Group, Inc. and Subsidiaries Consolidated Balance Sheets (dollar amounts in thousands, except per share amounts)
See accompanying notes to these consolidated financial statements
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Table of ContentsBank of the James Financial Group, Inc. and Subsidiaries Consolidated Statements of Income (dollar amounts in thousands, except per share amounts) (unaudited)
See accompanying notes to these consolidated financial statements
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Table of ContentsBank of the James Financial Group, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Three months ended March 31, 2012 and 2011 (dollar amounts in thousands) (unaudited)
See accompanying notes to these consolidated financial statements
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Table of ContentsBank of the James Financial Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three months ended March 31, 2012 and 2011 (dollar amounts in thousands, except per share amounts) (unaudited)
See accompanying notes to these consolidated financial statements
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Table of ContentsBank of the James Financial Group, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands) (unaudited)
See accompanying notes to these consolidated financial statements
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Table of ContentsNotes to Consolidated Financial Statements Note 1 – Basis of Presentation The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2012 and 2011 in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information is contained in Financial’s Annual Report on Form 10-K for the year ended December 31, 2011. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2011 included in Financial’s Annual Report on Form 10-K. Results for the three month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb loss in the existing loan portfolio of Bank of the James (the “Bank”), Financial’s wholly-owned subsidiary. 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 (to the extent available due to limited history), 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 Bank’s policies with respect to the methodology for determining the allowance for loan losses involve a higher degree of complexity and require management to make subjective judgments that often require assumptions or estimates about uncertain matters. These critical policies and their assumptions are periodically reviewed with the Board of Directors. Note 2 – Use of Estimates The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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Table of ContentsNote 3 – Earnings Per Share Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of 1999 Financial (the “1999 Plan”) are considered dilutive. The following is a summary of the earnings per share calculation for the three months ended March 31, 2012 and 2011.
The following table sets forth the incremental shares associated with option shares that were not included in calculating the diluted earnings because their effect was anti-dilutive:
Note 4 – Stock Based Compensation Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.
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Table of ContentsNote 4 – Stock Based Compensation (continued)
Stock option plan activity for the three months ended March 31, 2012 is summarized below:
Intrinsic value is calculated by subtracting exercise price of option shares from the market price of underlying shares and multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is greater than the market price on a given date. All compensation expense related to the foregoing stock option plan has been recognized. The Company’s ability to grant additional options shares under the 1999 Plan has expired. Note 5 – Fair Value Measurements Determination of Fair Value The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
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Table of ContentsNote 5 – Fair Value Measurements (continued)
Fair Value Hierarchy In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy: Securities available-for-sale Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.
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Table of ContentsNote 5 – Fair Value Measurements (continued)
The following table summarizes the Company’s financial assets that were measured at fair value on a recurring basis during the period (in thousands):
Impaired loans Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over one year old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.
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Table of ContentsNote 5 – Fair Value Measurements (continued)
Other Real Estate Owned Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820. Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate is over one year old, then the fair value is considered Level 3. Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The following table summarizes the Company’s impaired loans and OREO measured at fair value on a nonrecurring basis during the period (in thousands).
The following table sets forth information regarding the quantitative inputs used to value assets classified as Level 3:
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Table of ContentsNote 5 – Fair Value Measurements (continued)
The following table summarizes activity at the Level 3 valuation for the first quarter of 2012: Three months ended March 31, 2012 (dollars in thousands)
Financial Instruments Cash, cash equivalents and Federal Funds sold The carrying amounts of cash and short-term instruments approximate fair values. Securities Fair values of securities, excluding Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Bankers’ Bank stock are based on quoted market prices. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain fixed rate loans are based on quoted market prices of similar loans adjusted for differences in loan characteristics. Fair values for other loans such as commercial real estate and commercial and industrial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Bank Owned Life Insurance (BOLI) The carrying amount approximates fair value. Deposits Fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed rate certificates of deposit are estimated using discounted cash flow analyses that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. FHLB borrowings The fair value of FHLB borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements.
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Table of ContentsNote 5 – Fair Value Measurements (continued)
Short-term borrowings The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate fair value. Capital notes Fair values of capital notes are based on market prices for debt securities having similar maturity and interest rate characteristics. Accrued interest The carrying amounts of accrued interest approximate fair value. Off-balance sheet credit-related instruments Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Fair value of off-balance sheet credit-related instruments were deemed to be immaterial at March 31, 2012 and December 31, 2011 and therefore are not included in the table below. The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments are as follows (in thousands):
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Table of ContentsNote 5 – Fair Value Measurements (continued)
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-balance-sheet and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment; a significant liability that is not considered a financial liability is accrued post-retirement benefits. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Financial assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of Financial’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Bank. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.
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Table of ContentsNote 5 – Fair Value Measurements (continued)
Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Bank’s overall interest rate risk. Note 6 – Capital Notes In connection with a private placement of unregistered debt securities, Financial issued capital notes in the amount $7,000,000 (the “Notes”) in 2009. The Notes bore interest at the rate of 6% per year with interest payable quarterly in arrears. During the three months ended March 31, 2012, Financial made interest payments on the Notes totaling $105,000. No principal payments were due until the Notes matured on April 1, 2012. Financial paid the Notes in full on or about this date with proceeds from the 2012 Offering described below. Financial currently is conducting a private placement of unregistered debt securities (the “2012 Offering”) pursuant to which it will sell a maximum of $12,000,000 in principal of notes (the “2012 Notes”). As of April 1, 2012, Financial had issued 2012 Notes in the amount $8,762,000. The 2012 Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first quarterly interest payment on the 2012 Notes is due on July 1, 2012. No principal payments are due until the Notes mature on April 1, 2017 unless the Notes are called in full or in part after April 1, 2013. On the maturity date or a call date, the principal and all accrued but unpaid interest on the Notes will be due and payable. Financial will continue to sell the 2012 Notes until June 30, 2012 (extended from April 30, 2012 and subject to further extension), it has sold $12,000,000 in principal of 2012 Notes, or it terminates the offering, or, whichever occurs first.
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Table of ContentsNote 7 – Investments The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2012 and December 31, 2011 (amounts in thousands):
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Table of ContentsNote 7 – Investments (continued)
The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011 (amounts in thousands):
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent of Financial, if any, to sell the security; (4) whether Financial more likely than not will be required to sell the security before recovering its cost; and (5) whether Financial does not expect to recover the security’s entire amortized cost basis (even if Financial does not intend to sell the security). At March 31, 2012, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of March 31, 2012, the Bank owned 23 securities that were being evaluated for other than temporary impairment. 10 of these securities were S&P rated AAA and 13 were S&P rated AA. As of March 31, 2012, 10 of these securities were obligations of government sponsored entities and 13 were municipal issues. Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because the Bank expects to recover the entire amortized cost basis, no declines currently are deemed to be other-than-temporary.
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Table of ContentsNote 8 – Business Segments The Company has two reportable business segments: (i) a traditional full service community banking segment and, (ii) a mortgage loan origination business. The community banking business segment includes Bank of the James which provides loans, deposits, investments and insurance to retail and commercial customers throughout Region 2000. The mortgage segment provides a variety of mortgage loan products principally within Region 2000. Mortgage loans are originated and sold in the secondary market through purchase commitments from investors. Because of the pre-arranged purchase commitments, there is minimal risk to the Company. Both of the Company’s reportable segments are service based. The mortgage business is a fee-based business while the Bank’s primary source of revenue is net interest income. The Bank also provides a referral network for the mortgage origination business. The mortgage business may also be in a position to refer its customers to the Bank for banking services when appropriate. Information about reportable business segments and reconciliation of such information to the consolidated financial statements for three months ended March 31, 2012 and 2011 was as follows (dollars in thousands): Business Segments
Note 9 – Loans, allowance for loan losses and OREO Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes. The classifications set forth below do not correspond directly to the
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
classifications set forth in the call report (Form FFIEC 041). Management has determined that the classifications set forth below are more appropriate for use in identifying and managing risk in the loan portfolio.
A summary of loans, net is as follows (dollars in thousands):
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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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
Below is a summary and definition of the Bank’s risk rating categories:
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:
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
Financing Receivables on Non-Accrual Status (dollars in thousands)
We also classify other real estate owned (OREO) as a nonperforming asset. OREO, which is accounted for in the “other assets” section of the Consolidated Balance Sheets, represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO increased to $3,566,000 on March 31, 2012 from $3,253,000 on December 31, 2011. The following table represents the changes in OREO balance during the three months ended March 31, 2012. OREO Changes (Dollars in Thousands)
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
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Table of ContentsNote 9 – Loans and allowance for loan losses and OREO (continued)
Troubled Debt Restructurings There were no loan modifications during the three months ended March 31, 2012. The following table describes Troubled Debt Restructurings made within the last twelve months that defaulted during the three months ended March 31, 2012.
Note 10 – Subsequent Events In preparing these financial statements, Financial has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. Note 11 – Recent accounting pronouncements In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements. In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company has included the required disclosures in its consolidated financial statements. In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other
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Table of ContentsNote 11 – Recent accounting pronouncements (continued)
comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has included the required disclosures in its consolidated financial statements. In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements. In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.
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Table of ContentsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); 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 the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make. 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. The allowance for loan losses is management’s estimate of the losses that may be sustained in our loan portfolio. 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 “Impairment of a Loan”, 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”). See “Management Discussion and Analysis Results of Operations – Allowance for Loan Losses and Loan Loss Reserve” below for further discussion of the allowance for loan losses.
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Table of ContentsOverview Financial is a bank holding company headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to as the “Bank”). We conduct three 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”), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance”). The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell County, and the City of Lynchburg. 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 area. 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.com. 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 non-interest income, including loan fees and service charges, and its non-interest 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 the Region 2000 area, providing additional services to its customers, and controlling costs. The Bank now services its banking customers through the following nine full service branch locations in the Region 2000 area.
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The Bank also has opened a limited-service branch located in the Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia 24503. In addition, the Bank, through its Mortgage division, originates residential mortgage loans through two offices – one located at the Forest Branch and the other located at 1152 Hendricks Store Road, Moneta, Virginia. The Investment division operates primarily out of its office located at the Church Street Branch. The Bank continuously evaluates areas located within Region 2000 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 anticipates opening 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 location that the Bank currently is considering. Timberlake Road Area, Campbell County (Lynchburg), Virginia. As previously disclosed, the Bank has purchased certain real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank does not anticipate opening a branch at this location prior to 2013. The Bank has determined that the existing structure is not suitable for use as a bank branch. Rustburg, Virginia. In March, 2011 the Bank purchased certain real property near the intersection of Routes 501 and 24 in Rustburg, Virginia. The structure on the property is being demolished and removed. The Bank does not anticipate opening a branch at this location prior to the first quarter of 2013. The Bank has installed an ATM in a local municipal building in order to establish a presence in this market until the branch has been established. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit the property will be between $900,000 and $1,500,000 per location. 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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Table of ContentsOFF-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:
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. Collateral is required in instances that the Bank deems necessary. SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion represents management’s discussion and analysis of the financial condition of Financial as of March 31, 2012 and December 31, 2011 and the results of operations of Financial for the three month and nine month periods ended March 31, 2012 and 2011. This discussion should be read in conjunction with the financial statements included elsewhere herein. All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Financial Condition Summary March 31, 2012 as Compared to December 31, 2011 Total assets were $433,372,000 on March 31, 2012 compared with $427,436,000 at December 31, 2011, an increase of 1.39%. The increase in total assets is due primarily to an increase in Federal funds sold and securities available-for-sale resulting from an increase in deposits, as explained in the following paragraph.
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Table of ContentsTotal deposits increased from $374,234,000 as of December 31, 2011 to $386,591,000 on March 31, 2012, an increase of 3.30%. This increase occurred because of the Bank’s increased efforts to obtain lower cost demand deposits and the Bank’s increased presence in the market. Total loans decreased to $318,191,000 on March 31, 2012 from $324,366,000 on December 31, 2011. Loans, net of unearned income and allowance, decreased to $312,185,000 on March 31, 2012 from $318,754,000 on December 31, 2011, a decrease of 2.06%. 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):
Total nonperforming assets, which consist of non-accrual loans and other real estate owned (“OREO”) decreased to $13,345,000 on March 31, 2012 from $13,628,000 on December 31, 2011. This decrease was primarily due to a decrease in non-accrual (or nonperforming) loans. Non-accrual loans decreased 5.75% to $9,779,000 on March 31, 2012 from $10,375,000 on December 31, 2011. The decrease primarily resulted from a large commercial relationship’s ability to liquidate real estate collateral and curtail principal on a non-accrual loan. As discussed in more detail below under “Results of Operations—Allowance for Loan Losses”, management has provided for the anticipated losses on these loans in the loan loss reserve. If interest on non-accrual loans had been accrued, such interest on a cumulative basis would have approximated $905,000 and $1,233,000, as of March 31, 2012 and December 31, 2011, respectively. 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 credit losses charged against earnings. These loans were included in the non-performing loan totals listed above. OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure, deed in lieu of foreclosure or repossession. On December 31, 2011, the Bank was carrying 18 OREO properties on its books at a value of $3,253,000. During the three months ended March 31, 2012, the Bank acquired 9 additional OREO properties and disposed of 6 OREO properties, and as of March 31, 2012 the Bank is carrying 21 OREO properties at a value of $3,566,000. The OREO properties are available for sale and are being actively marketed on the Bank’s website and through other means. The Bank had loans in the amount of $187,000 at March 31, 2012 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $783,000 at December 31, 2011. 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. Cash and cash equivalents increased to $26,380,000 on March 31, 2012 from $23,340,000 on December 31, 2011. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase is in large part due to an increase
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Table of Contentsin deposits in excess of loans. The Bank invested a majority of the increase in deposits in fed funds. Cash and cash equivalents can vary due to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations. Securities held-to-maturity did not change materially, decreasing to $8,101,000 on March 31, 2012 from $8,133,000 on December 31, 2011. Securities available-for-sale increased to $57,159,000 on March 31, 2012, from $48,338,000 December 31, 2011. During the three months ended March 31, 2012 the Bank received $3,155,000 in proceeds from maturities and/or calls of securities available-for-sale and $5,390,000 in proceeds from the sale of securities available-for-sale. The Bank purchased $17,650,000 in securities available-for sale during the same period. The increase from December 31, 2011 in securities available-for-sale was primarily due to the investment of funds received from an increase in deposit accounts and a decrease in the principal of loan balances. Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $1,172,000 at March 31, 2012 and $1,169,000 at December 31, 2011, a non-material increase of $3,000. 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 At March 31, 2012, Financial, on a consolidated basis, had liquid assets of $83,539,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold and available-for-sale investments. Management believes that liquid assets were adequate at March 31, 2012. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary. In connection with a private placement of unregistered debt securities, Financial issued capital notes in the amount $7,000,000 (the “Notes”) in 2009. The Notes bore interest at the rate of 6% per year with interest payable quarterly in arrears. During the three months ended March 31, 2012, Financial made interest payments on the Notes totaling $105,000. No principal payments were due until the Notes matured on April 1, 2012. Financial paid the Notes in full on or about this date with proceeds from the 2012 Offering described below. Financial currently is conducting a private placement of unregistered debt securities (the “2012 Offering”) pursuant to which it will sell a maximum of $12,000,000 in principal of notes (the “2012 Notes”). The 2012 Notes will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 2012 Notes will bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first interest payment will be due on July 1, 2012. The notes mature on April 1, 2017, but are subject to prepayment in whole or in part on or after April 1, 2013 at Financial’s sole discretion on 30 days written notice to the holders. Unless prepaid, no principal payments are due until the debt matures on April 1, 2017 (the “Maturity Date”). As of May 11, 2012, Financial has closed on subscriptions for the purchase of $8,762,000. Financial used $7,000,000 of these proceeds from the 2012 Offering to pay the 2009 Notes on maturity. Financial anticipates that it will continue to sell the 2012 Notes until June 30, 2012 (extended from April 30, 2012 and subject to further extension), it has sold $12,000,000 in principal of 2012 Notes, or it terminates the offering, or, whichever occurs first. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material negative impact on Financial’s short-term or long-term liquidity.
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Table of ContentsAt March 31, 2012, the Bank had a leverage ratio of 7.95%, a Tier 1 risk-based capital ratio of 10.74% and a total risk-based capital ratio of 12.00%. As of March 31, 2012 and December 31, 2011 the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of March 31, 2012 and December 31, 2011: Bank Level Only Capital Ratios
The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $500,000,000, 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 would no longer be comparable to the capital ratios of the Bank because the proceeds from the private placement of the 6% capital notes due on April 1, 2017 do not qualify as equity capital on a consolidated basis. Results of Operations Comparison of the Three months Ended March 31, 2012 and 2011 Earnings Summary Financial had net income including all operating segments of $360,000 for the three months ended March 31, 2012 compared to $435,000 for the comparable period in 2011. The basic and diluted earnings per common share for the three months ended March 31, 2012 were $0.11, compared to basic and diluted earnings per share of $0.13 for the three months ended March 31, 2011.
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Table of ContentsThe decrease in net income was due in large part to the increased provision to the allowance for loan loss reserve as discussed in more detail below (See “Allowance for Loan Losses”). These operating results represent an annualized return on stockholders’ equity of 5.38% for the three months ended March 31, 2012, compared with 6.74% for the same period in 2011. The Company had an annualized return on average assets for the three months ended March 31, 2012 of 0.34%, compared with 0.42% for three months ended March 31, 2011. See Non-Interest Income below for mortgage business segment discussion. Interest Income, Interest Expense, and Net Interest Income Interest income decreased to $4,686,000 for the three months ended March 31, 2012 from $4,942,000 for the same period in 2011, a decrease of 5.18%. Interest income decreased primarily because the rate on total average earning assets decreased from 5.11% for the three month period ended March 31, 2011 to 4.78% for the three months ended March 31, 2012. The rate on total average earning assets decreased in part because the Bank invested a greater percentage of its earning assets in investment securities and federal funds rather than loans and because the average yield on loans decreased both quarterly and year to date. Although management cannot be certain, management expects that interest rates will remain near historic lows for the remainder of 2012 and may continue to negatively impact our interest income. Interest expense decreased to $820,000 for the three months ended March 31, 2012 from $1,235,000 for the same period in 2011, a decrease of 33.60%. This significant decrease in interest expense resulted in large part from a decrease in the rate paid on balances on deposits. The Bank’s average rate paid on deposits was 1.30% during the three month period ended March 31, 2011 as compared to 0.78% for the same period in 2012. This resulted from management’s efforts to minimize the Bank’s interest expense and maximize its net interest margin. The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three months ended March 31, 2012 was $3,866,000 compared with $3,707,000 for the same period in 2011. The increase in net interest income for the three months ended March 31, 2012 as compared with the comparable three month period in 2011 was due the fact that the rate paid on deposit accounts has decreased since last year. The net interest margin was 3.94% for the three months ended March 31, 2012, up from 3.83% in the same period a year ago. Financial’s net interest margin analysis and average balance sheets are shown in Schedule I on page 44. Non-Interest Income Non-interest income is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency. Non-interest income exclusive of gains on sales of securities decreased to $630,000 for the three months ended March 31, 2012 from $641,000 for the three months ended March 31, 2011. This decrease for the three months ended March 31, 2012 as compared to the same periods last year was due primarily to a decrease in mortgage fee income. Gains on sales of securities increased to $41,000 for the three months ended March 31, 2012 as compared to $31,000 for the comparable period in 2011.
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Table of ContentsThe Bank, through the Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the Region 2000 area. 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 no credit or interest rate risk on these mortgages. Management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2012. Management expects that low rates coupled with the Mortgage division’s reputation in Region 2000 will allow us to maintain revenue at the Mortgage division. Revenue from mortgage origination fees decreased in the three month period ended March 31, 2012 as compared to the same period for 2011. Management believes that regulatory pressure may result in a decreased number of competitors to the Mortgage division and this could result in an increase in market share. 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 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 2012. In the third quarter of 2008, we began providing insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has one full-time and one part-time employee that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2012. Non-Interest Expense Non-interest expense for the three months ended March 31, 2012 increased to $3,284,000, or 3.60%, respectively, from $3,170,000 for the comparable periods in 2011. This increase in non-interest expense from the comparable period in 2011 can be attributed in large part to an increase in insurance expense. The increased non-interest expenses were offset in part by a decrease in compensation expense, which resulted primarily from a decrease in commission expense as well as the Bank’s decision to restructure certain departments and the resulting reduced staffing. Total personnel expense was $1,503,000 for the three month period ended March 31, 2012 as compared to $1,427,000 for the same periods in 2011. Compensation for some employees of the Mortgage division and the Investment division is commission-based and therefore subject to fluctuation. During the quarter and three months ended March 31, 2012, the FDIC premium expense decreased to $144,000 from $229,000 for the three months ended March 31, 2011. FDIC assessment payments have decreased primarily because the FDIC changed the asset base on which the assessments are calculated. Allowance for Loan Losses The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The provision to 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 many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures,
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Table of Contentshistorical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $750,000 to the allowance for loan loss for the three months ended March 31, 2012 compared to a provisions of $579,000 comparable period in 2011. The increase in the loan loss provision for the quarter ended March 31, 2012 as compared to the same quarter in 2011 was due to the following factors:
Management believes that the current allowance for loan loss of $6,006,000 (or 1.89% of total loans) at March 31, 2012, as compared to $5,612,000 (or 1.73% of total loans) as of December 31, 2011 remains adequate. The following tables summarizes the allowance activity for the periods indicated:
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The following sets forth the reconciliation of the allowance for loan loss:
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