Business context and reporting period
Bank of the James Financial Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The Virginia-based company operates a community bank and a mortgage origination business; mortgage loans are generally presold to investors. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $6.71 | $5.92 | $13.46 | $12.05 |
| Noninterest income | $3.05 | $2.79 | $5.48 | $4.98 |
| Noninterest expense | $7.24 | $6.94 | $14.13 | $13.13 |
| Net income | $2.01 | $0.82 | $3.85 | $1.82 |
| Basic and diluted EPS | $0.42 | $0.17 | $0.81 | $0.38 |
| Net interest margin | 3.15% | 3.13% | 3.25% | 3.37% |
Management attributed higher earnings chiefly to the absence of the prior-year loan-loss provision and higher mortgage loan-sale gains; lower deposit costs also supported net interest income. Loan-loss provision was zero in both 2021 periods, versus $0.76 million for Q2 2020 and $1.65 million for the first half of 2020. Mortgage loan-sale gains rose to $2.31 million in Q2 and $4.08 million in the first half, compared with $1.95 million and $3.13 million, respectively. Noninterest expenses increased year over year, including personnel, marketing, credit and FDIC insurance costs.
- Balance sheet: Total assets were $908.4 million at June 30, up 6.7% from year-end 2020. Deposits increased 7.1% to $819.4 million; cash and cash equivalents were $123.3 million. Net loans were $595.2 million, down from $601.9 million at year-end, while available-for-sale securities rose to $131.0 million from $90.2 million.
- Credit quality: Nonperforming assets declined to $2.75 million from $3.17 million at year-end; nonaccrual loans were $1.99 million and OREO was $0.76 million. The allowance for loan losses was $7.21 million, or 1.20% of loans (about 1.29% excluding fully SBA-guaranteed PPP loans). Past-due loans totaled $2.42 million; none were 90 days past due and still accruing.
- Cash flow: For the six months, operating activities provided $8.04 million, investing activities used $38.87 million and financing activities provided $53.23 million. Cash and cash equivalents increased $22.40 million.
- Liquidity and capital: Management reported $254.3 million in liquid assets, including available-for-sale securities; $33.4 million of those securities were pledged. A liquidity line had no outstanding balance. Bank-only capital ratios were 8.21% leverage, 11.50% CET1 and Tier 1 risk-based, and 12.61% total risk-based capital; the Bank exceeded well-capitalized benchmarks.
- Debt and equity: Capital notes had a $10.0 million balance and bear 3.25% interest, with maturity on September 30, 2025 and repayment permitted on or after September 30, 2021. The company repurchased 14,300 shares in Q2 for $0.22 million. A 10% stock dividend was declared in May; per-share data were adjusted accordingly.
Changes, outlook and risks
Compared with 2020, first-half earnings improved substantially as the prior year included COVID-related credit-loss provisions. The 2021 allowance balance rose modestly from year-end because recoveries exceeded charge-offs, not because of a provision. Deposits and cash increased, while loans contracted amid PPP forgiveness and lower commercial loan demand. The securities portfolio expanded, and its net unrealized loss position increased; management did not consider the losses other-than-temporary.
Management expects net interest margins to remain compressed and earnings to be affected as the PPP program winds down. It expected mortgage originations to remain strong through the rest of 2021, while noting that higher rates could pressure mortgage revenue and future mortgage rates were uncertain. Management stated that the allowance was appropriate at quarter-end but could require increases if economic conditions deteriorate. It also highlighted continued uncertainty from COVID-19, including the Delta variant, and potential effects on borrowers, liquidity, credit quality, employees and vendors. Other stated risks include interest-rate and economic changes, competition, regulation, real-estate collateral values, and operational and compliance risks. No specific earnings or revenue guidance was provided.
The Bank had modified 191 loans with approximately $90 million of principal outstanding at June 30; none remained in deferment and all were current. It had identified $82.3 million of loans in industries it considered potentially vulnerable to pandemic impacts, equal to 13.66% of the loan portfolio. The filing reported no pending material legal proceedings other than routine litigation. Management concluded disclosure controls were effective and reported no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether margin compression and the end of PPP-related activity materially reduce net interest income and earnings.
- Whether the allowance remains adequate as pandemic-sensitive borrowers perform, particularly the identified $82.3 million of industry exposures.
- Deposit trends, liquidity needs and capital ratios, including the effect of customers drawing credit commitments; off-balance-sheet commitments to extend credit were $160.5 million, with $4.3 million in letters of credit.
- The sustainability of mortgage volume and gains, and the sensitivity of that business to mortgage-rate changes.
- The impact of adopting CECL, which the company was assessing and expected to implement for fiscal years beginning after December 15, 2022.