Business context and reporting period
Bank of the James Financial Group, Inc. (NASDAQ: BOTJ) is a Virginia bank holding company. Its main business is community banking through Bank of the James, complemented by mortgage origination and investment advisory services through Pettyjohn, Wood & White (PWW). This summary covers the fiscal year ended December 31, 2023, compared with 2022.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Net income | $8.704 million | $8.959 million |
| Basic and diluted EPS | $1.91 | $1.91 |
| Net interest income | $29.740 million | $29.703 million |
| Net interest margin | 3.29% | 3.23% |
| Total assets at year-end | $969.371 million | $928.571 million |
| Total deposits at year-end | $878.459 million | $848.138 million |
| Net loans at year-end | $601.921 million | $605.366 million |
| Operating cash flow | $9.492 million | $9.312 million |
Interest income rose to $39.362 million from $31.853 million, while interest expense increased sharply to $9.622 million from $2.150 million as deposit rates reset upward. The average rate on interest-bearing liabilities rose to 1.30% from 0.29%; the average yield on earning assets rose to 4.36% from 3.46%. Return on average assets was 0.92% (0.91% in 2022), and return on average equity was 17.07% (15.59%). The latter increase partly reflected lower average equity after share repurchases.
Noninterest income was $12.867 million, down from $13.244 million, mainly due to lower mortgage-sale gains. Noninterest expense declined to $32.507 million from $32.737 million. The efficiency ratio was 76.29%, versus 76.23%. Income tax expense fell to $1.575 million from $2.151 million; 2023 included a one-time Virginia tax benefit associated with accumulated parent-company losses.
Year-end cash and cash equivalents were $74.838 million. Management reported $291.348 million of liquid assets, including cash, bank balances, federal funds sold and available-for-sale securities. The Bank also reported $297.524 million of non-deposit funding capacity, subject to collateral availability; none was outstanding at year-end. Stockholders’ equity was $60.039 million. Bank-only regulatory capital ratios were 12.37% CET1, 12.37% Tier 1 risk-based, 13.38% total risk-based and 9.57% Tier 1 leverage; the Bank was categorized as well-capitalized.
Year-end debt included $10.042 million of capital notes, bearing 3.25% and maturing June 2025, and $9.890 million of other borrowings, principally the NBB note. The NBB note’s approximately $8.104 million balloon payment is due December 2026. Deposits exceeding FDIC insurance limits totaled $221.312 million, up from $185.848 million.
Material changes versus 2022
- Net income declined $255,000, or about 2.8%, while EPS remained $1.91. The recovery of credit losses fell to $179,000 from $900,000; lower mortgage-sale gains and higher salaries also weighed on results.
- Net interest income was nearly flat despite higher asset yields, as deposit and other funding costs rose substantially. The margin increased six basis points.
- Deposits grew 3.58%, but noninterest-bearing deposits fell 13.31% as customers shifted funds toward higher-rate accounts. Interest-bearing deposits increased 7.35%.
- Total loans, including loans held for sale, declined to $610.591 million from $614.048 million. Non-accrual loans fell to $391,000 from $633,000; year-end OREO declined to zero from $566,000.
- Available-for-sale securities increased to $216.510 million from $185.787 million. Their net-of-tax unrealized loss narrowed to $21.615 million from $26.781 million, contributing to $5.166 million of other comprehensive income.
- The Company adopted CECL on January 1, 2023. The adoption reduced opening retained earnings by approximately $1.599 million after tax. The allowance for loan losses ended the year at $7.412 million, or 1.22% of loans, compared with $6.259 million, or 1.02%, in 2022.
- The Company repurchased 85,319 shares for approximately $997,000 during 2023. It paid $0.32 per share in dividends during the year; a $0.10 fourth-quarter dividend was paid in March 2024.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management said anticipated 2024 interest-rate changes could negatively affect results or financial condition. Given the Company’s asset sensitivity, management expects gradual rate decreases generally to pressure results.
- The Bank anticipated opening a Buchanan branch and a temporary Nellysford location in the second quarter of 2024, subject to operational and regulatory requirements. Permanent banking use of the Nellysford property is restricted until September 2025. Management generally expects new branches to become profitable within 12 to 18 months of opening. A possible Timberlake-area branch would require an estimated $900,000 to $1.5 million of improvements.
- Key risks include concentration in the Lynchburg-area economy and real estate, significant commercial real estate exposure and large individual loans, competition for deposits, funding-cost and interest-rate sensitivity, unrealized securities losses, liquidity risk, and cybersecurity and third-party service-provider risks. The Company said it had not experienced unusual deposit or liquidity pressure from rate increases or banking-sector turmoil.
- Management said it intends and is able to hold securities with unrealized losses until recovery or maturity; a forced or necessary sale could adversely affect earnings and capital. The filing reports no credit impairment allowance on available-for-sale securities at year-end.
- Off-balance-sheet commitments to extend credit were approximately $173.148 million and standby letters of credit were $2.636 million. Management did not anticipate material losses from these arrangements. Mortgage rate-lock commitments were approximately $11.562 million, with corresponding investor commitments to purchase loans that close.
- The independent auditor issued an unmodified opinion on the financial statements and identified the CECL loan-loss allowance estimate as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to attest to internal-control effectiveness. The Company disclosed no material pending legal proceedings. It announced Yount, Hyde & Barbour’s dismissal after the 2023 audit and selected Elliott Davis as auditor for 2024; the filing reports no disagreements or reportable events with the former auditor.
Important facts for investors to verify
- How deposit pricing, deposit mix and competition affect funding costs and net interest margin as rates change.
- Whether the $221.312 million of deposits above FDIC limits remains stable, and how the Bank’s liquidity and available borrowing capacity perform under stress.
- Commercial real estate concentrations, large-loan exposures, criticized or classified credit trends, and the assumptions behind the CECL allowance.
- Whether securities unrealized losses recover without sales and how rate changes affect tangible capital and liquidity.
- Execution, costs and returns for planned branch expansion, and whether mortgage and PWW revenue trends support earnings.
- The NBB note’s December 2026 balloon payment, dividend capacity at the Bank and holding company, and the transition to the new 2024 auditor.