Bank of the James Financial Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; financial statements are unaudited. Amounts are in thousands of dollars unless noted.
Business context and financial results
The Virginia-based bank holding company operates community banking, mortgage origination, and investment advisory businesses. Its investment advisory subsidiary, Pettyjohn, Wood & White (PWW), was acquired on December 31, 2021, and therefore contributes to 2022 results but not the comparable 2021 periods.
- Q2 net income: $2.292 million, up from $2.014 million; diluted EPS was $0.48 versus $0.42.
- First-half net income: $4.431 million, up from $3.849 million; diluted EPS was $0.93 versus $0.81.
- Net interest income: Q2 $7.124 million versus $6.710 million; first half $13.514 million versus $13.458 million. Net interest margin fell to 2.99% in Q2 and 2.92% for the first half, from 3.15% and 3.25%, respectively. Management attributed margin pressure mainly to lower PPP-related loan fees.
- Noninterest income: Q2 $3.034 million, little changed from $3.049 million; first half $6.665 million versus $5.483 million. PWW advisory fees contributed $0.961 million in Q2 and $1.976 million in the first half. Mortgage loan-sale gains declined year over year.
- Noninterest expense: Q2 $7.592 million, up 4.9%; first half $15.240 million, up 7.9%. Higher personnel costs, including PWW staff, contributed to the increases.
- Credit costs: The company recorded loan-loss recoveries of $0.300 million in Q2 and $0.600 million in the first half, compared with no provision or recovery in the 2021 comparable periods. The allowance was $6.616 million, or 1.08% of loans, at June 30.
Financial position, cash flow and capital
- Assets: $959.6 million at June 30, down 2.8% from December 31, 2021. Net loans were $607.3 million, up 5.4%; total loans before allowance were $613.9 million. Available-for-sale securities were $201.4 million, up from $161.3 million.
- Deposits and liquidity: Deposits were $875.3 million, down 1.3%. Cash and cash equivalents fell to $74.9 million from $183.2 million, primarily reflecting deposit outflows, loan growth, and securities purchases. Management reported $276.3 million of liquid assets, including available-for-sale securities, and considered liquidity adequate. The bank also cited access to Federal Home Loan Bank and Federal Reserve borrowing facilities.
- Cash flows, first half: Operating cash flow was $1.1 million, investing cash outflow was $96.6 million, and financing cash outflow was $12.8 million. The investing outflow principally reflected securities purchases and net loan growth; financing outflow primarily reflected lower deposits and dividends.
- Securities and equity: Available-for-sale securities had $27.0 million of gross unrealized losses at June 30. First-half after-tax other comprehensive loss was $19.9 million, contributing to a decline in stockholders’ equity to $53.3 million from $69.4 million at year-end. Management did not consider the securities’ declines other-than-temporary, citing the nature of the holdings and no intent or expected need to sell before recovery.
- Debt and capital: Capital notes were $10.0 million and other borrowings were $10.7 million. The bank’s leverage ratio was 8.28%, Tier 1 risk-based and CET1 ratios were 11.08%, and total risk-based capital was 11.96%; management stated the bank exceeded well-capitalized thresholds.
Changes, outlook and risks
- Profit increased year over year, aided by loan-loss recoveries and, for the first half, PWW advisory revenue. PWW-related amortization and employee costs also increased expenses.
- Loans grew while deposits and cash balances declined. Securities purchases increased the portfolio, while rising market rates drove substantial unrealized losses and reduced reported equity.
- Management expected purchase mortgages to remain a majority of mortgage originations and anticipated strong mortgage originations through the remainder of 2022, while warning that higher rates could pressure mortgage revenue and limit refinancing. No formal earnings or financial guidance was provided.
- The company identified interest-rate and economic conditions, real-estate collateral values, COVID-19 effects, inflation, supply-chain disruption, geopolitical tensions, competition, and regulatory or operational risks as uncertainties. Previously COVID-modified loans were current and no longer in deferment; management nevertheless noted that future credit and liquidity effects remained uncertain.
- Off-balance-sheet commitments to extend credit totaled $191.9 million and letters of credit $4.3 million. These are contractual maximum amounts and are not necessarily expected cash requirements.
- The NBB borrowing was modified effective July 1, 2022: its balloon maturity was extended to December 31, 2026, its rate reduced from 4.00% to 3.90%, and the expected balloon payment is approximately $8.1 million. The company was preparing for CECL implementation, expected to run the new methodology alongside the existing method during the final four months of 2022 before adoption.
- The filing reported no pending material legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether loan growth and deposit trends remain sustainable and how they affect liquidity and funding costs.
- How net interest margin responds to changing rates and the fading impact of PPP fees.
- The valuation, duration, and potential realization of the securities portfolio’s unrealized losses, and resulting effects on equity and regulatory capital.
- Whether credit quality, the allowance, and nonperforming loans change as economic conditions evolve; nonperforming assets were $1.6 million at quarter-end.
- PWW’s continuing contribution to advisory revenue, expenses, and the results of the acquisition.
- The eventual CECL transition impact on the allowance, earnings, and capital; the filing did not provide a quantified estimate.