BANK OF THE JAMES FINANCIAL GROUP INC quarterly report, Q2 FY2020

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Bank of the James Financial Group, Inc. (BOTJ) — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.

Business context and financial performance

The company is a Virginia community bank holding company with community banking and mortgage origination operations. Its primary market is Central Virginia, with expansion into other Virginia markets. The mortgage division generally sells originated loans to investors.

  • Q2 net income: $0.821 million, versus $1.377 million in Q2 2019; diluted EPS was $0.19 versus $0.31.
  • First-half net income: $1.816 million, versus $2.611 million in 1H 2019; diluted EPS was $0.42 versus $0.60.
  • Net interest income: Q2 $5.918 million, down 3.8%; first half $12.054 million, down 1.9% year over year. Net interest margin fell to 3.13% for Q2 and 3.37% for 1H, from 3.82% and 3.87%, respectively.
  • Noninterest income: Q2 $2.789 million, versus $1.659 million; first half $4.975 million, versus $2.878 million. Growth reflected higher mortgage loan-sale gains and securities-sale gains.
  • Noninterest expense: Q2 $6.935 million, up 16.1%; first half $13.132 million, up 13.5%. The filing reports annualized returns on average assets of 0.41% for Q2 and 0.47% for 1H, and returns on average equity of 5.33% and 5.95%, respectively.

Financial position, liquidity and capital

  • At June 30, total assets were $827.1 million, up 14.0% from year-end 2019. Deposits were $746.0 million, up 14.9%; management attributed much of the growth to PPP-related funds not yet deployed.
  • Total loans were $629.8 million, up from $578.1 million at year-end, largely reflecting PPP originations. The allowance for loan losses was $6.2 million, or 0.98% of loans (1.11% excluding PPP loans), versus $4.8 million, or 0.84%, at year-end.
  • Cash and cash equivalents rose to $90.8 million from $39.1 million. Six-month cash flows were $0.4 million provided by operations, $46.5 million used in investing, and $97.8 million provided by financing. Financing included a $96.5 million net deposit increase and debt issuance and refinancing.
  • Management reported $145.9 million of liquid assets and stated liquidity was adequate. A $8.979 million securities-secured credit line had no outstanding balance. The filing cautions that pandemic-related credit-line draws or other developments could pressure liquidity.
  • Bank-only capital ratios at June 30 were 8.30% Tier 1 leverage, 10.99% CET1 and Tier 1 risk-based, and 12.00% total risk-based capital. The Bank exceeded the filing’s well-capitalized benchmarks.
  • Capital notes were $7.275 million at quarter-end. The company sold $7.275 million of 3.25% notes due 2025 by June 30 and used $5.0 million to retire 4.00% notes. It completed the remaining $2.775 million of the offering after quarter-end, on July 8.

Material changes and credit quality

  • Provision for loan losses increased to $0.760 million in Q2 and $1.648 million in 1H, from $0.116 million and $0.326 million in the comparable 2019 periods. Management attributed the increase to pandemic-related economic uncertainty, higher qualitative reserves, and a $0.300 million specific reserve for a large relationship.
  • Nonperforming assets increased to $6.801 million from $3.640 million at year-end. Nonaccrual loans rose to $5.185 million from $1.301 million; the increase primarily involved one relationship of approximately $3.3 million. Management reported a contract to sell collateral, with closing expected later in Q3, and said it had provided for anticipated losses.
  • COVID-19 payment modifications covered 184 loans totaling $94.504 million, or 15.01% of the loan portfolio. Most were commercial borrowers; 33.68% of the modified balance involved principal-only deferrals. These short-term modifications were not classified as TDRs under applicable guidance.
  • Loans past due were $8.530 million at June 30, including $4.885 million more than 90 days past due; none were reported as over 90 days past due and still accruing. OREO declined to $1.616 million from $2.339 million.

Outlook, risks and unusual items

  • Management expects COVID-19 and its economic effects to adversely affect future results, with provision expense potentially remaining elevated. The overall impact was not yet quantifiable; future credit quality, asset valuations, liquidity and net interest margin are exposed to uncertainty.
  • Lower interest rates reduced asset yields, while lower-yielding PPP loans contributed to margin pressure. Management anticipated continued mortgage origination strength through the rest of 2020, while noting that rates and economic uncertainty make the outlook difficult to predict.
  • Expenses included $245,000 of additional compensation related to PPP execution and $750,000 associated with an early retirement plan. PPP loan-origination costs of $400,000 were deferred and will be recognized over the related loans’ lives, subject to possible acceleration upon repayment or forgiveness.
  • The Bank had originated more than $68 million of PPP loans to over 550 clients by June 30. Management noted that forgiveness, repayments and use of PPP funds could affect income and liquidity.
  • The company suspended share repurchases on April 21; it had repurchased 18,000 shares in Q1. It paid $0.07 per share in dividends during each 2020 quarter shown.
  • Off-balance-sheet commitments to extend credit were $149.268 million, with $3.535 million of letters of credit. The filing says these commitments may not be fully drawn.
  • The filing identifies COVID-19, interest-rate movements, borrower and real-estate credit risk, regulatory changes, competition, and operational dependence on third-party vendors as risks. Management reported effective disclosure controls and no significant changes in internal control over financial reporting.

Important facts for investors to verify

  • Whether the $3.3 million troubled relationship’s collateral sale closed as expected and what loss, if any, was ultimately realized.
  • How COVID-19 deferrals performed after expiration, including extensions, delinquencies, nonaccruals, charge-offs and reserve adequacy.
  • Whether deposit growth and elevated cash balances persisted as PPP funds were deployed, and how liquidity and capital ratios changed.
  • How PPP forgiveness, loan repayment and deferred origination-cost recognition affected subsequent earnings and net interest margin.
  • Whether the completed $10.05 million note offering was used as planned and how the additional debt affected capital, interest expense and shareholder distributions.