Bank of the James Financial Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with 2019. The company is a Virginia bank holding company whose principal business is community banking through Bank of the James, with mortgage banking as a second reportable segment. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net income | $4.980 million | $5.605 million | Down 11.2% |
| Diluted EPS | $1.15 | $1.28 | Down 10.2% |
| Net interest income | $25.146 million | $24.552 million | Up 2.4% |
| Net interest margin | 3.32% | 3.77% | Down 45 basis points |
| Provision for loan losses | $2.548 million | $0.523 million | Up $2.025 million |
| Total noninterest income | $10.975 million | $7.188 million | Up 52.7%; mortgage-loan sale gains were the largest component |
| Noninterest expense | $27.394 million | $24.283 million | Up 12.8% |
| Total assets | $851.386 million | $725.394 million | Up 17.4% |
| Net loans | $601.934 million | $573.274 million | Up 5.0% |
| Total deposits | $764.967 million | $649.459 million | Up 17.8% |
| Cash and cash equivalents | $100.886 million | $39.111 million | Up $61.775 million |
| Operating cash flow | $5.199 million | $5.592 million | Down $0.393 million |
| Stockholders’ equity | $66.732 million | $61.445 million | Up $5.287 million |
- Earnings and margins: Lower interest expense supported net interest income growth, but falling asset yields—particularly on PPP loans and other low-yielding balances—compressed margin. Return on average assets fell to 0.62% from 0.80%; return on average equity declined to 8.01% from 9.52%. The efficiency ratio improved slightly to 75.84% from 76.51%.
- Revenue mix: Mortgage banking originated 1,304 loans totaling $298.154 million, versus 768 loans totaling $163.394 million in 2019. Mortgage contributed $2.693 million of pretax income, compared with $1.125 million. Gains on mortgage-loan sales were $7.812 million, up from $4.254 million.
- Credit and asset quality: The allowance for loan losses rose to $7.156 million, or 1.17% of total loans, from $4.829 million, or 0.84%. Nonaccrual loans increased to $2.063 million from $1.301 million; net charge-offs were $0.221 million. Total nonperforming assets declined to $3.168 million from $3.640 million, chiefly as OREO fell to $1.105 million from $2.339 million.
- Liquidity and funding: Management said liquidity was sufficient. Liquid assets totaled $191.071 million at year-end. No balance was outstanding on disclosed borrowing facilities; stated available non-deposit funding was $258.421 million, although access to the full FHLB amount requires additional collateral. The increase in deposits and cash reflected pandemic-related customer balances, stimulus funds and PPP-related cash flows.
- Debt and capital: The company issued $10.050 million of 3.25% notes in 2020, maturing September 2025, and used $5.0 million of proceeds to retire 2017 notes. Year-end capital notes were $10.027 million net of issuance costs. Bank-only regulatory capital ratios were 11.12% CET1, 11.12% Tier 1 risk-based, 12.25% total risk-based and 8.28% Tier 1 leverage; the Bank was categorized as well-capitalized. These are Bank-only ratios, not consolidated company ratios.
- Cash returns: The company paid $1.215 million in common dividends during 2020, or $0.28 per share. It repurchased 18,000 shares under its 2020 plan; that plan expired January 20, 2021. A $0.07-per-share fourth-quarter dividend was declared in January 2021.
Material changes versus 2019
- Net income decreased despite higher net interest income and noninterest income. The main pressures were a $2.025 million increase in loan-loss provision and $3.111 million higher noninterest expense.
- Compensation and benefits rose by $2.338 million, including approximately $0.7 million associated with an early retirement plan. Credit expense, equipment and outside-service costs also increased.
- Deposits and assets expanded sharply, while the loan portfolio grew more moderately. PPP loans totaled $42.46 million across 379 loans at year-end; PPP loans are fully SBA-guaranteed.
- Available-for-sale securities increased to $90.185 million from $59.655 million. Accumulated other comprehensive income improved as securities valuations rose.
Outlook, commentary, risks and unusual items
- Management warned that COVID-19 could significantly adversely affect future earnings, cash flows, capital and liquidity; the duration and magnitude were not reasonably estimable. It provided no quantified earnings or margin guidance.
- During 2020, the Bank modified 191 loans with approximately $95 million in principal. At year-end, four loans totaling about $7.06 million remained in deferment. Management reported it was not evaluating additional deferrals at that time. COVID-related modifications were generally excluded from TDR classification under applicable relief provisions.
- Management identified $81.726 million of loans, or 13.42% of the loan portfolio, in listed pandemic-sensitive industries, including hospitality, restaurants, retail and services, and religious/charitable borrowers. It said it continued to monitor these exposures.
- Key ongoing risks include concentrated lending in the Lynchburg/Region 2000 area, commercial real estate and larger-balance borrower exposure, borrower deterioration, interest-rate and margin sensitivity, deposit competition, cyber and operational risks, and extensive regulation. CECL adoption was scheduled for periods beginning after December 15, 2022; management was assessing its effects.
- The Bank recorded a $2.548 million loan-loss provision and a $0.437 million OREO valuation write-down. The independent auditor issued an unqualified opinion on the financial statements and identified the allowance’s qualitative factors as a critical audit matter. Management concluded internal control over financial reporting was effective; the auditor did not attest to that conclusion.
- Management anticipated possible additional branch expansion, subject to regulatory approval, including a Boonsboro Road location targeted for 2022. No quantified expansion or earnings targets were provided.
Most important facts for investors to verify
- Whether pandemic-related deferrals have resumed or converted into delinquencies, nonperforming loans, charge-offs or higher reserve needs.
- The adequacy and assumptions behind the $7.156 million allowance, including the impact of PPP balances and the eventual transition to CECL.
- Whether mortgage origination and loan-sale gains remain elevated, and how earnings perform if refinancing activity or mortgage margins normalize.
- How the 45-basis-point margin decline, low-rate environment and deposit mix affect future net interest income.
- Actual availability and collateral requirements for borrowing lines, the use of the 2020 note proceeds, and the parent company’s capacity to service debt and pay dividends.
- Any subsequent changes to capital, liquidity, branch plans, or the company’s dividend and share-repurchase policies.