Bank of the James Financial Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
The Virginia-based company operates community banking, mortgage lending and investment advisory businesses. Its advisory subsidiary, Pettyjohn, Wood & White (PWW), was acquired on December 31, 2021. The bank’s primary market is Central Virginia, with expansion into other Virginia markets.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $7.900 | $6.822 | $21.414 | $20.280 |
| Net interest margin | 3.42% | 3.11% | 3.09% | 3.20% |
| Noninterest income | $3.854 | $2.822 | $10.519 | $8.305 |
| Noninterest expense | $8.879 | $7.298 | $24.119 | $21.424 |
| Net income | $2.574 | $1.881 | $7.005 | $5.730 |
| Diluted EPS | $0.55 | $0.40 | $1.48 | $1.21 |
Q3 and nine-month net income rose approximately 37% and 22%, respectively. Management attributed the improvement mainly to higher net interest income, higher noninterest income and recoveries of loan losses ($0.3 million in Q3; $0.9 million year to date). These gains were partly offset by increased operating expenses and lower mortgage-loan sale gains. PWW contributed $0.959 million of advisory fees in Q3 and $2.935 million year to date; it had no comparable contribution in 2021.
Mortgage-loan sale gains declined to $1.472 million in Q3 from $2.091 million, and to $4.675 million year to date from $6.175 million. Total noninterest expense increased 21.7% in Q3 and 12.6% year to date, reflecting personnel, PWW-related, professional/data-processing and other costs.
Financial position, cash flow and capital
| Metric | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Total assets | $962.570 | $987.634 |
| Total deposits | $883.069 | $887.056 |
| Total loans, excluding loans held for sale | $620.511 | $583.384 |
| Cash and cash equivalents | $81.020 | $183.153 |
| Available-for-sale securities, at fair value | $191.131 | $161.267 |
| Stockholders’ equity | $48.339 | $69.429 |
Loans grew 6.4% from year-end, led by commercial real estate lending. Cash and cash equivalents fell substantially as funds supported loan growth and securities purchases. The company reported a $27.084 million accumulated other comprehensive loss, versus a $1.386 million loss at year-end, primarily reflecting market-value declines on available-for-sale securities as interest rates rose. Management said it did not intend, and did not expect to be required, to sell these securities before recovery.
For the first nine months, operating cash flow was $5.363 million, investing cash flow was negative $100.452 million, and financing cash flow was negative $7.044 million; cash declined by $102.133 million. The company reported $272.151 million of liquid assets, including cash and available-for-sale investments, and stated liquidity was adequate. A borrowing line had no outstanding balance.
At the Bank level, the leverage ratio was 8.57%, CET1 and Tier 1 risk-based ratios were each 10.81%, and the total risk-based capital ratio was 11.66%. The Bank exceeded the stated well-capitalized thresholds. Capital notes were $10.037 million and other borrowings were $10.596 million; a $10.05 million 3.25% note matures June 30, 2025. The holding company’s secured NBB borrowing was modified in 2022: its rate was reduced to 3.90% and balloon maturity extended to December 31, 2026.
Material changes, outlook and risks
- Net interest margin improved year over year in Q3 as asset yields repriced faster than funding costs, but declined for the nine-month period, partly because prior-year PPP fee accretion waned. Management said rate increases could support near-term margin while adding longer-term uncertainty.
- Credit quality indicators improved: nonperforming assets fell to $1.354 million from $1.715 million at year-end; nonaccrual loans declined to $0.788 million from $0.954 million. The allowance for loan losses was $6.394 million, or 1.03% of loans, versus $6.915 million, or 1.19%, at year-end. Management cited improved asset quality and pandemic-related factors, but warned that future economic conditions could require higher reserves.
- Management noted inflation, rising rates, labor shortages and supply-chain disruption could affect borrowers, collateral values, credit losses and liquidity. Mortgage rates had risen significantly, pressuring originations; management expected purchase mortgages to remain the majority of originations and anticipated strong activity through the rest of 2022, while acknowledging continued rate increases could constrain volume and revenue. No formal earnings or financial guidance was provided.
- One loan modification was classified as a troubled debt restructuring during the quarter and nine-month period. A property write-down of $0.195 million reduced OREO to $0.566 million; a sale contract was subject to customary contingencies and expected to close by April 30, 2023. The filing reports no pending legal proceedings other than routine business litigation.
- The company repurchased 112,000 shares for $1.402 million in August under a repurchase program authorized up to $1.5 million, expiring July 18, 2023. The PWW acquisition generated $3.0 million goodwill and $8.4 million of amortizable intangibles; goodwill increased by approximately $0.818 million for a purchase-price working-capital adjustment. Management reported no goodwill impairment in its September 2022 assessment.
- The company was preparing for CECL adoption, required for it in 2023, and was running the new methodology alongside its existing allowance process. The filing identifies interest-rate, economic, real-estate, regulatory, competitive, operational and geopolitical risks, among others.
Important facts for investors to verify
- Whether deposit trends and the sharp decline in cash remain manageable as lending and securities funding needs evolve.
- How rising rates affect net interest margin, deposit costs, securities values and the company’s ability to hold securities through recovery.
- Whether credit quality, criticized/substandard loans and the allowance remain adequate under changing economic conditions.
- Whether mortgage production and gains on loan sales continue to weaken, and how PWW assets under management and advisory fees perform.
- The final CECL impact, and the status and proceeds of the OREO sale contract and remaining property.