Bank of the James Financial Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless stated otherwise. Dollar amounts are in millions, except per-share data. The company operates community banking, mortgage origination and investment advisory businesses, primarily in Virginia.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $7.364 | $7.900 | $22.351 | $21.414 |
| Net income | $2.078 | $2.574 | $6.596 | $7.005 |
| Diluted EPS | $0.46 | $0.55 | $1.44 | $1.48 |
| Noninterest income | $3.201 | $3.854 | $9.689 | $10.519 |
| Noninterest expense | $8.140 | $8.879 | $24.091 | $24.119 |
| Net interest margin | 3.21% | 3.42% | 3.33% | 3.09% |
- Interest income increased to $10.143 million in Q3 and $28.824 million year to date, while interest expense rose more sharply to $2.779 million and $6.473 million, respectively. Higher deposit rates and balances drove much of the expense increase.
- Q3 net income fell 19%; nine-month net income fell 6%. Lower mortgage gains and higher funding costs weighed on results. Nine-month net interest income grew, but did not offset reduced noninterest income and other impacts.
- Q3 and year-to-date return on average assets were 0.86% and 0.93%; return on average equity was 15.68% and 17.20%, respectively.
- Operating cash flow was $5.969 million for the first nine months, versus $5.363 million in 2022. Cash and cash equivalents increased $37.767 million to $99.529 million; financing cash flow included a $32.065 million net deposit increase, $1.100 million in dividends and $0.997 million in share repurchases.
Financial condition, liquidity and capital
- At September 30, total assets were $960.887 million, up 3.5% from year-end 2022. Deposits were $880.203 million, up 3.8%; loan balances were $606.905 million, down 0.8% from $611.625 million. Management attributed slower loan growth to weaker demand amid higher rates.
- Deposit mix shifted toward time deposits: $200.854 million versus $132.775 million at year-end; NOW, money market and savings deposits declined to $524.721 million from $560.479 million. Noninterest-bearing demand deposits were $154.628 million.
- Cash and cash equivalents were $99.529 million. Management reported $281.506 million of liquid assets, including cash, bank deposits and available-for-sale securities. It said liquidity was adequate; the bank had no borrowings from its identified contingent funding sources at quarter-end. Approximately $217 million, or 24.57% of deposits, was uninsured.
- Available-for-sale securities had a fair value of $181.977 million and unrealized pre-tax losses of $37.694 million; accumulated other comprehensive loss was $29.778 million after tax. Management attributed the losses primarily to market rates, stated it intended and was able to hold the securities until recovery, and recorded no credit-loss allowance on the portfolio.
- Bank-only capital ratios were 9.48% leverage, 12.11% CET1 and Tier 1 risk-based, and 13.11% total risk-based. The filing states these exceeded well-capitalized benchmarks.
- Capital notes were $10.041 million and other borrowings $10.030 million. The bank reported no FHLB or other contingent-source borrowings at September 30. It temporarily borrowed $14 million from the FHLB after the Silicon Valley Bank failure to test its funding plan, then repaid the advance about two weeks later.
Asset quality and other material changes
- Nonperforming assets were $0.585 million, down from $1.199 million at year-end; nonperforming loans were $0.585 million. Loans past due were $1.111 million, with none 90 days or more past due and accruing. Other real estate owned declined to zero after the sale of two properties.
- The allowance for loan credit losses was $7.320 million, or 1.21% of loans, versus $6.259 million, or 1.02%, at year-end. The company adopted CECL on January 1, 2023, reducing opening retained earnings by approximately $1.599 million after tax. The change in methodology limits direct allowance comparisons with earlier periods.
- Commercial real estate represented $329.464 million, or 54.3%, of loans. The filing reports $6.024 million of substandard loans and $2.596 million of special-mention loans under its risk-rating disclosures. No loans were individually assigned an allowance at September 30.
- Mortgage loan sale gains declined to $0.989 million in Q3 and $3.065 million year to date, from $1.472 million and $4.675 million. Wealth management fees increased to $1.050 million and $3.098 million. The advisory subsidiary reported approximately $680 million of assets under management and advisement.
- Noninterest expenses were nearly flat year to date. Lower expenses included the absence of a one-time expense related to a previously disclosed fraud in Q3 2022; personnel costs increased modestly.
Outlook, risks and contingencies
- Management expects net interest margin to remain flat or compress in the near to mid-term, citing faster repricing of interest-bearing liabilities and the possibility of further deposit-rate increases.
- Management said mortgage originations were likely to continue trailing 2022 levels; higher rates were pressuring refinancing and mortgage revenue. Purchase originations made up 89% of Q3 mortgage volume.
- Management identified inflation, higher rates, economic uncertainty, labor and supply-chain conditions, real-estate values, banking-sector stability and liquidity, regulation, competition, and geopolitical events among risks that could affect results. It cautioned that borrower stress could increase nonperforming assets, credit allowances and loan modifications; potential impacts were not quantified.
- Off-balance-sheet commitments totaled $183.573 million: $180.365 million to extend credit and $3.208 million in letters of credit. The filing notes many commitments may expire undrawn. A separate $0.690 million allowance for unfunded commitments was included in other liabilities.
- The bank is considering branch expansion. It purchased properties in Buchanan and Nellysford in 2023; the filing says a Buchanan branch was not expected before Q1 2024, subject to approvals, and a restrictive covenant prevents banking use of the Nellysford property until September 2025. Management generally expects new branches to become profitable within 12–18 months of opening.
- No pending material legal proceedings were reported beyond routine litigation. Management reported effective disclosure controls and no significant changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether deposit pricing continues to rise faster than asset yields, and the resulting effect on net interest margin and earnings.
- Trends in uninsured deposits, deposit mix, liquidity availability and use of contingent borrowing capacity.
- Commercial real-estate concentration, risk-rating migration, delinquencies and adequacy of CECL loan and unfunded-commitment allowances.
- Whether unrealized securities losses recover as management expects and whether liquidity needs could require securities sales.
- Mortgage production and sale gains, wealth-management fee growth, and costs or returns associated with planned branch expansion.