Bank of the James Financial Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. Income and cash-flow figures are compared with Q1 2021. Dollar figures below are in millions unless stated otherwise.
Business context
The company is a Virginia bank holding company whose principal business is community banking, supplemented by mortgage lending and investment advisory services. Its December 31, 2021 acquisition of Pettyjohn, Wood & White (PWW), an investment adviser with approximately $650 million in assets under management and advisement at acquisition, contributed a new advisory revenue stream in Q1 2022.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior balance |
|---|---|---|
| Interest income | $6.915 | $7.365 in Q1 2021 |
| Net interest income | $6.390 | $6.748 in Q1 2021 |
| Net interest margin | 2.86% | 3.35% in Q1 2021 |
| Noninterest income | $3.631 | $2.434 in Q1 2021 |
| Noninterest expense | $7.648 | $6.889 in Q1 2021 |
| Net income | $2.139 | $1.835 in Q1 2021 |
| Diluted earnings per share | $0.45 | $0.38 in Q1 2021 |
| Net cash from operating activities | $(2.993) | $5.671 in Q1 2021 |
| Total assets | $973.585 | $987.634 at December 31, 2021 |
| Total loans, excluding loans held for sale | $595.794 | $583.384 at December 31, 2021 |
| Total deposits | $881.427 | $887.056 at December 31, 2021 |
| Cash and cash equivalents | $96.807 | $183.153 at December 31, 2021 |
| Available-for-sale securities, at fair value | $212.616 | $161.267 at December 31, 2021 |
| Stockholders’ equity | $60.579 | $69.429 at December 31, 2021 |
Net income rose 16.6% year over year, while net interest income declined 5.3%. Management attributed the earnings increase mainly to a $0.300 million recovery of loan losses and higher noninterest income, including $1.015 million of PWW advisory fees and increased mortgage loan-sale gains. Higher personnel and other operating costs partly offset those gains. The filing reports an annualized return on average assets of 0.89% and return on average equity of 12.27%, compared with 0.85% and 11.49%, respectively, in Q1 2021.
The lower net interest margin reflected reduced loan yields and lower PPP fee accretion compared with the prior-year period. Average loan yield was 4.05%, versus 4.51%; the average rate paid on interest-bearing deposits was 0.17%, versus 0.33%.
Cash and cash equivalents fell by $86.346 million during the quarter. Investing activities used $77.175 million, chiefly reflecting $68.805 million of securities purchases and $12.155 million of net loan originations. Financing activities used $6.178 million, including a $5.629 million net deposit decline and $0.332 million of dividends. Management reported $309.423 million of liquid assets, including cash and available-for-sale investments, and considered liquidity adequate. A credit line available for liquidity had no outstanding balance.
At March 31, 2022, the Bank reported capital ratios of 8.40% leverage, 11.16% Tier 1 risk-based and CET1, and 12.11% total risk-based. The filing states that capital exceeded well-capitalized regulatory thresholds. Capital notes were $10.034 million and other borrowings were $10.856 million. The company paid a quarterly dividend of $0.07 per share.
Material changes and credit quality
- Total assets declined 1.42% from year-end. Loans grew 2.13% gross, led by commercial real estate lending, while deposits decreased 0.63%.
- Available-for-sale securities increased with purchases, but their unrealized losses widened substantially as market interest rates rose. The quarter recorded a $13.491 million pretax unrealized loss and a $10.657 million after-tax other comprehensive loss; accumulated other comprehensive loss reached $12.043 million. Management said it did not consider the losses other-than-temporary and did not expect to be required to sell the securities before recovery.
- The allowance for loan losses ended at $6.870 million, or 1.15% of loans, versus $6.915 million, or 1.19%, at year-end. The quarter included a $0.300 million recovery, $0.263 million of recoveries and $0.008 million of charge-offs.
- Nonperforming assets were $1.613 million, including $0.852 million of nonaccrual loans and $0.761 million of other real estate owned. The filing also reports $0.367 million of performing troubled debt restructurings. It says all 191 COVID-related modified loans were current and no longer in deferment; their reported principal balance was approximately $76 million.
- Operating cash flow was negative despite positive net income, reflecting mortgage-loan production and related sales timing among other working-capital movements.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management said rising mortgage rates could reduce refinancing activity and put mortgage-segment revenue under pressure; it also cited the mortgage division’s market presence and expanded originator staffing as supportive of originations. Management plans to continue evaluating liquidity and the loan-loss allowance as economic conditions evolve. The company was assessing adoption of the CECL credit-loss standard, then expected to apply for fiscal years beginning after December 15, 2022, and planned parallel testing before implementation.
Disclosed risks include interest-rate changes and their effects on margins and securities values; economic, inflationary, pandemic, geopolitical and competitive conditions; real-estate collateral values; regulatory and operational risks; and potential credit deterioration or customer draws on credit lines. The company had $187.016 million of commitments to extend credit and $3.227 million of letters of credit; actual funding needs may be lower because commitments can expire unused. It reported no pending material legal proceedings other than routine litigation, no material changes to previously disclosed risk factors, and effective disclosure controls.
Most important facts for investors to verify
- Whether securities unrealized losses remain temporary and whether liquidity needs could require sales before recovery.
- How deposit trends, loan growth, credit-line draws and operating cash flows affect liquidity and funding costs.
- Whether the allowance remains adequate as economic conditions and loan performance change, and the eventual effect of CECL adoption.
- Whether PWW’s advisory fees and acquired customer relationships support expected returns, and how acquisition-related costs evolve.
- How rising rates affect net interest margin, mortgage originations and loan demand; also monitor the $190.243 million of off-balance-sheet credit commitments.