Bank of the James Financial Group, Inc. — Q1 2020 Form 10-Q
Business context and period: Community banking and mortgage lending in Virginia; unaudited results cover the three months ended March 31, 2020, compared with Q1 2019. Balance-sheet comparisons are against December 31, 2019. Amounts below are in millions unless noted.
Financial results and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior period |
|---|---|---|
| Total assets | $746.1 | $725.4 at Dec. 31, 2019 |
| Total deposits | $668.3 | $649.5 at Dec. 31, 2019 |
| Total loans, excluding loans held for sale | $576.1 | $578.1 at Dec. 31, 2019 |
| Interest income | $7.49 | $7.23 in Q1 2019 |
| Net interest income | $6.14 | $6.13 in Q1 2019 |
| Net interest margin | 3.63% | 3.92% in Q1 2019 |
| Provision for loan losses | $0.89 | $0.21 in Q1 2019 |
| Noninterest income | $2.19 | $1.22 in Q1 2019 |
| Noninterest expense | $6.20 | $5.60 in Q1 2019 |
| Net income / diluted EPS | $0.995 / $0.23 | $1.234 / $0.28 in Q1 2019 |
| Cash and cash equivalents | $64.2 | $39.1 at Dec. 31, 2019 |
Cash flow: Operating activities provided $0.19; investing activities provided $6.74; financing activities provided $18.15. Cash and cash equivalents increased $25.09 during the quarter.
Credit, capital and debt: The allowance for loan losses was $5.47, or 0.95% of loans, versus $4.83, or 0.84%, at year-end. Nonperforming assets were $3.22, including $1.45 of nonaccrual loans and $1.76 of other real estate owned. Bank capital ratios at March 31 included a 9.07% leverage ratio, 10.82% CET1 and Tier 1 risk-based ratios, and an 11.70% total risk-based ratio; the Bank exceeded well-capitalized thresholds. Capital notes outstanding were $5.0. The company subsequently began offering up to $12.0 of notes at 3.25%, maturing June 30, 2025.
Management reported $119.2 of liquid assets, including available-for-sale securities; $21.1 of those securities were pledged. The Bank’s line of credit had no balance. Off-balance-sheet commitments to extend credit and letters of credit totaled $137.2.
Material changes versus Q1 2019
- Net income fell $0.24, and diluted EPS declined from $0.28 to $0.23, primarily reflecting a larger loan-loss provision and higher noninterest expense.
- Net interest income was nearly flat, while net interest margin fell 29 basis points. Average loan yield declined to 4.87% from 4.99%; average rate paid on interest-bearing deposits rose to 0.90% from 0.82%.
- Noninterest income rose, supported by mortgage-loan sale gains of $1.18 versus $0.69 and securities gains of $0.43 versus none in Q1 2019. Noninterest expense increased 10.7%, including higher personnel, equipment and professional costs.
- Compared with year-end 2019, deposits rose 2.9%, while total loans excluding loans held for sale declined modestly. Cash increased, in part as the Bank sold available-for-sale securities to bolster liquidity.
Outlook, risks and unusual items
- COVID-19: Management anticipated significant adverse effects on the economy, borrowers and the Company, but said the ultimate impact could not yet be determined. It expected loan-loss provision expense could remain elevated; further deterioration could increase delinquencies, nonperforming assets and required reserves.
- By May 12, the Bank had made COVID-related modifications on 159 loans totaling $82.2, or 14.27% of the March 31 loan portfolio. These short-term modifications were not treated as troubled debt restructurings under applicable guidance. The Bank reported more than $67 of PPP funding for over 550 clients as of May 1.
- Management identified $85.2 of loans in sectors considered potentially vulnerable to COVID-related disruption, including hospitality, restaurants, retail and services, and religious/charitable organizations.
- The Bank continued branch and digital services under its business-continuity plan. Management said it had not experienced unusual deposit or liquidity pressure at the reporting date, but warned that customer credit-line draws or prolonged disruption could harm liquidity and financial results.
- After quarter-end, eight of nine eligible employees accepted early retirement. The Company recorded approximately $0.63 of one-time expense on April 3, 2020, with no future cash expenditures under the plan.
- The Company repurchased 18,000 shares for $0.275 during the quarter at an average $15.28 per share; repurchases were temporarily suspended April 21.
- No formal full-year earnings or financial guidance was provided. Management’s mortgage outlook anticipated strong originations through the remainder of 2020, while noting uncertainty about rates and economic conditions.
Important facts for investors to verify
- Subsequent trends in COVID-related loan deferrals, borrower performance, criticized loans, charge-offs and allowance adequacy.
- Actual PPP originations, forgiveness, associated fees and funding/liquidity effects.
- Whether deposit growth and liquid assets remain sufficient as loan demand and customer draws evolve.
- The terms, proceeds and use of funds from the proposed $12.0 million note offering, and any effect on debt service and capital.
- The sustainability of mortgage gains and securities-sale gains, given their contribution to Q1 noninterest income.
- The filing’s COVID discussion cites a Lynchburg unemployment rate “as of December 2020,” a date that appears inconsistent with this March 31, 2020 reporting period; verify the intended reference.