Bank of the James Financial Group, Inc. — Q1 2023 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Amounts are in dollars unless noted. The company operates community banking, mortgage lending and investment advisory businesses, primarily in Virginia.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Interest income | $9.098 million | $6.915 million |
| Net interest income | $7.642 million | $6.390 million |
| Net interest margin | 3.48% | 2.86% |
| Noninterest income | $3.044 million | $3.631 million |
| Noninterest expense | $8.075 million | $7.648 million |
| Provision for (recovery of) credit losses | $140,000 | ($300,000) |
| Net income | $1.984 million | $2.139 million |
| Diluted earnings per share | $0.43 | $0.45 |
| Operating cash flow | $4.823 million | ($2.993 million) |
Net income fell about 7% year over year. Higher interest income and service charges partly offset increased funding costs, lower mortgage gains and the shift from a credit-loss recovery to a provision. The return on average assets was 0.85%, versus 0.89%; annualized return on average equity was 16.25%, versus 12.27% (management attributed the higher equity return partly to lower equity following securities valuation losses).
Financial condition, liquidity and capital
- Total assets were $948.1 million, up 2.1% from year-end. Net loans were $618.2 million, up 2.1%; total deposits were $864.4 million, up 1.9%.
- Deposit mix shifted: time deposits rose to $169.0 million from $132.8 million, while noninterest-bearing demand deposits and NOW, money-market and savings balances declined.
- Cash and cash equivalents were $64.6 million. Management reported $254.2 million in liquid assets, including cash and available-for-sale securities. No borrowings from the FHLB, Federal Reserve or correspondent lines were outstanding at quarter-end. The bank temporarily borrowed $14 million from the FHLB after the Silicon Valley Bank failure to test its contingency plan and repaid it about two weeks later.
- Available-for-sale securities were $189.6 million, with $30.6 million of gross unrealized losses and a $24.2 million after-tax accumulated other comprehensive loss. Management said it did not intend, and was not likely to be required, to sell the securities before recovery. Securities pledged as collateral included approximately $5 million for correspondent lines, $32 million for public deposits and $37 million par value for the Federal Reserve Bank Term Funding Program.
- Capital notes were $10.0 million and other borrowings were $10.3 million. Bank-only capital ratios were 9.22% leverage, 11.26% CET1 and Tier 1 risk-based, and 12.27% total risk-based; the bank reported exceeding well-capitalized thresholds.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $192.2 million. These amounts are contractual commitments, not necessarily expected cash requirements.
Material changes, outlook and risks
- CECL adoption: Effective January 1, 2023, the company adopted the expected-credit-loss standard. Adoption reduced retained earnings by approximately $1.6 million after tax and increased the loan allowance; prior-period figures were not restated, limiting direct comparison. The allowance for loan losses was $7.715 million at March 31, versus $6.259 million at year-end. The company also recorded a $779,000 allowance for unfunded commitments.
- Credit quality: Nonperforming assets declined to $1.065 million from $1.199 million; nonperforming loans were $525,000. Loans more than 90 days past due totaled $94,000, with none accruing. Management cited inflation, labor shortages, supply-chain disruption and higher rates as potential pressures on borrowers.
- Interest-rate and funding outlook: Management said margin could remain level or compress in the near to mid term as deposit rates rise. Higher market rates helped asset yields reprice faster than funding costs during the quarter, but could weigh on future profitability.
- Mortgage and fee income: Mortgage gains fell to $923,000 from $1.904 million as origination volume declined. Management expects mortgage originations to continue trailing 2022 and refinancing activity to be constrained by higher rates. Wealth-management fees were relatively stable at $1.006 million.
- Banking-sector and liquidity risks: Management warned that failures of Silicon Valley Bank and First Republic Bank could adversely affect liquidity if customers withdraw deposits or draw credit lines unusually quickly. It reported no unusual deposit flows during Q1 and said it was monitoring funding. FDIC insurance premiums are expected to rise.
- Other notable items: The company repurchased 68,619 shares for $813,000 in Q1 at an average $11.85 per share. It repurchased another 16,700 shares in April and terminated the repurchase plan on April 18 after substantially exhausting its allocation. One OREO property was written down by $26,000; one was under contract subject to customary contingencies.
The filing provides no specific earnings or revenue guidance. Management’s outlook statements are subject to economic, interest-rate, credit, liquidity, regulatory and other risks. Management reported effective disclosure controls and no material change in other internal controls beyond controls implemented for CECL adoption.
Important facts for investors to verify
- How deposit pricing, deposit retention and funding mix develop, particularly given the increase in time deposits and management’s margin-compression warning.
- The company’s ability to meet liquidity needs under stress, including the availability and practical capacity of pledged securities and contingent borrowing sources.
- Loan performance, concentrations and allowance adequacy under CECL; compare credit measures with care because the accounting method and loan classifications changed.
- Whether unrealized securities losses recover as management expects, and whether any need to sell securities could crystallize losses.
- Whether mortgage activity and related gains continue to weaken, and how recurring advisory and banking fees offset that pressure.