Bank of the James Financial Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement figures are in thousands unless noted. The company is a Virginia community bank holding company with mortgage, investment advisory, investment and insurance activities.
Financial results and position
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $9.583 million for Q2; $18.681 million YTD | Q2 2022: $7.598 million; YTD 2022: $14.513 million |
| Net interest income | $7.345 million for Q2; $14.987 million YTD | Q2 2022: $7.124 million; YTD 2022: $13.514 million |
| Net interest margin | 3.30% for Q2; 3.40% YTD | Q2 2022: 2.99%; YTD 2022: 2.92% |
| Net income / diluted EPS | $2.534 million / $0.56 for Q2; $4.518 million / $0.99 YTD | Q2 2022: $2.292 million / $0.48; YTD 2022: $4.431 million / $0.93 |
| Noninterest income | $3.444 million for Q2; $6.488 million YTD | Q2 2022: $3.034 million; YTD 2022: $6.665 million |
| Noninterest expense | $7.876 million for Q2; $15.951 million YTD | Q2 2022: $7.592 million; YTD 2022: $15.240 million |
| Total assets | $950.896 million | $928.571 million at Dec. 31, 2022 |
| Deposits | $867.092 million | $848.138 million at Dec. 31, 2022 |
| Net loans | $610.418 million; gross loans were $618.004 million | $605.366 million net; gross loans $611.625 million at Dec. 31, 2022 |
| Cash and cash equivalents | $73.529 million | $61.762 million at Dec. 31, 2022 |
| Capital notes / other borrowings | $10.040 million / $10.173 million | At Dec. 31, 2022: $10.037 million / $10.457 million |
Cash flow, liquidity and capital
- For the first six months, operating cash flow was $2.596 million, investing cash flow was negative $7.586 million and financing cash flow was positive $16.757 million. Cash and equivalents increased $11.767 million.
- Management reported $260.154 million in consolidated liquid assets, comprising cash, bank deposits and available-for-sale securities. It said liquidity was adequate and reported no borrowings from the FHLB, Federal Reserve or federal funds market at June 30. The bank had briefly borrowed $14 million from the FHLB after the Silicon Valley Bank failure to test its contingency plan, then repaid it about two weeks later.
- Some available-for-sale securities were pledged: approximately $5 million market value for correspondent-bank credit lines, $35 million for public deposits and $36.5 million par value for Federal Reserve Bank Term Funding Program advances.
- Bank-only capital ratios at June 30 were 9.39% leverage, 11.72% CET1 and Tier 1 risk-based, and 12.73% total risk-based. The filing says regulatory capital exceeded well-capitalized thresholds; consolidated capital ratios are not calculated by the company.
Changes and notable items
- Q2 net income increased 10.6% year over year; six-month net income increased 2.0%. Higher asset yields lifted interest income, while interest expense rose sharply as deposit costs increased. Q2 interest expense was $2.238 million versus $0.474 million; YTD expense was $3.694 million versus $0.999 million.
- Management attributed improved margin to earning-asset yields repricing faster than funding costs. Average interest-bearing deposit costs rose to 1.15% in Q2 and 0.93% YTD, from 0.14% and 0.16% in 2022, respectively.
- Deposits grew $18.954 million from year-end, driven mainly by time deposits. Noninterest-bearing demand deposits declined from $154.884 million to $151.261 million, and NOW, money market and savings deposits declined from $560.479 million to $525.765 million.
- Available-for-sale securities had a $32.232 million unrealized loss at June 30; accumulated other comprehensive loss was $25.463 million. Management attributed losses primarily to market interest rates and volatility, said it did not intend to sell and was not likely to be required to sell before recovery, and recorded no credit-loss allowance on the portfolio.
- Nonperforming assets declined to $915,000 from $1.199 million at year-end; nonperforming loans were $415,000, with no loans 90 days past due and still accruing. The loan allowance was $7.586 million, or 1.23% of loans. The company adopted CECL on January 1, reducing retained earnings by approximately $1.599 million after tax; it also recorded a $723,000 allowance for unfunded commitments.
- YTD noninterest income fell 2.7%, primarily because lower mortgage origination volume reduced gains on loan sales; Q2 noninterest income rose, supported by fees and wealth management. PWW reported approximately $680 million in assets under management and advisement at June 30.
- The company repurchased 16,700 shares in April for approximately $185,000; its board terminated the related $998,000 repurchase plan after substantially exhausting the allocated funds.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance was provided. Management expects net interest margin to remain flat or compress in the near-to-mid term as deposit rates may need to rise. It expects mortgage originations to continue trailing 2022 amid higher mortgage rates and believes purchase mortgages will remain the majority of originations in the short term.
- Management cited potential borrower stress from inflation, labor shortages, supply-chain disruption and higher interest rates, which could increase nonperforming assets, credit allowances or loan modifications. It also warned that banking-industry failures could affect liquidity if customers draw credit lines or withdraw deposits unusually quickly; it reported no unusual deposit or liquidity pressure through the first half.
- The bank purchased property in Buchanan, Virginia on August 7, 2023 and anticipated opening a branch there before year-end, subject to regulatory approval. Other possible branch expansion would require investment and approval; no specific opening timetable was provided for other locations.
- Off-balance-sheet commitments to extend credit were $180.092 million and letters of credit were $3.538 million. These are contractual exposure amounts and do not necessarily represent future cash requirements, as some commitments may expire undrawn.
- The company reported no pending legal proceedings other than routine litigation and no material changes to the risk factors in its 2022 Form 10-K. It cautioned that actual results may differ from forward-looking statements. Management said disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Key facts for investors to verify
- Whether rising deposit costs continue to outpace asset-yield increases and pressure net interest margin and earnings.
- Deposit composition and stability, available borrowing capacity, and liquidity exposure from securities pledges and customer drawdowns.
- Unrealized securities losses, the company’s ability and intent to hold investments through recovery, and the effect of any required sales on capital or earnings.
- Credit quality trends in commercial real estate and other loan segments, CECL reserve assumptions, and whether nonperforming assets or charge-offs increase.
- Mortgage production and gain-on-sale trends, PWW fee revenue and assets under management, and costs or regulatory approvals associated with planned branch expansion.