Bank of the James Financial Group, Inc. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are to FY 2020. This is an annual filing, not a standalone fourth-quarter report. Unless noted, dollar amounts below are in millions.
Business context
The company is a Virginia bank holding company whose principal business is community banking through Bank of the James, with mortgage banking also contributing materially. On December 31, 2021, it acquired investment adviser Pettyjohn, Wood & White, Inc. (PWW), which had approximately $650 million in assets under management and advisement. Because the acquisition closed on the final day of the year, PWW did not contribute to FY 2021 earnings.
Financial performance and condition
| Metric | FY 2021 / year-end | FY 2020 / comparison |
|---|---|---|
| Net income | $7.589 million | $4.980 million |
| Diluted EPS | $1.60 | $1.04 |
| Net interest income | $27.079 million | $25.146 million |
| Net interest margin | 3.14% | 3.32% |
| Noninterest income | $11.209 million | $10.975 million |
| Noninterest expense | $29.337 million | $27.394 million |
| Total assets | $987.634 million | $851.386 million |
| Net loans | $576.469 million | $601.934 million |
| Total deposits | $887.056 million | $764.967 million |
| Cash and cash equivalents | $183.153 million | $100.886 million |
| Shareholders’ equity | $69.429 million | $66.732 million |
- Net income rose 52.4%, reflecting a $1.933 million increase in net interest income and a $3.048 million reduction in loan-loss provision expense, partly offset by higher operating costs. The 2021 provision was a $0.500 million recovery, versus a $2.548 million provision in 2020.
- Net interest income improved as interest expense fell to $2.102 million from $4.540 million, despite lower interest income. Management attributed margin pressure to lower asset yields, including the effect of low-yield PPP loans and the low-rate environment.
- Return on average assets was 0.82% (0.62% in 2020); return on average equity was 11.34% (8.01%). The efficiency ratio increased to 76.62% from 75.84%.
- Mortgage banking originated 1,335 loans totaling approximately $331.2 million, compared with 1,304 loans totaling $298.2 million in 2020. Mortgage contributed $2.360 million to pretax income, down from $2.693 million.
- Operating cash flow was $15.785 million, compared with $5.199 million in 2020. Investing activities used $64.464 million, including the PWW acquisition and purchases of securities; financing activities provided $130.946 million, principally reflecting deposit growth. Cash increased $82.267 million.
- Available-for-sale securities were $161.267 million, up from $90.185 million. Their unrealized losses increased, contributing to a $3.178 million after-tax comprehensive loss for the year.
- Year-end bank capital ratios were 11.38% CET1, 11.38% Tier 1 risk-based, 12.37% total risk-based, and 8.22% Tier 1 leverage. The Bank was categorized as well-capitalized; these ratios are for the Bank, not the consolidated company.
- Debt included $10.031 million of capital notes and $10.985 million of other borrowings. The latter includes an $11 million secured note issued December 29, 2021 at 4.00%, with a balloon payment of approximately $9.375 million due December 31, 2024. Capital notes bear 3.25% interest and mature June 30, 2025.
- Reported liquid assets totaled $344.420 million. The Bank also reported $281.082 million of available nondeposit funding capacity, including FHLB advances; full access to that capacity is subject to collateral requirements.
Material changes, outlook, risks, and unusual items
- Credit quality improved: Nonaccrual loans were approximately $0.954 million (0.16% of loans), versus $2.063 million (0.34%) a year earlier. Nonperforming assets declined to approximately $1.716 million from $3.168 million. Management reduced COVID-related qualitative reserve factors as borrowers returned from deferrals; it cautioned that renewed economic deterioration could increase problem loans and required reserves.
- Funding and balance sheet: Deposits grew 16.0%, while net loans declined 4.2%, largely from PPP loan payoffs and normal amortization. The company held substantial cash and securities rather than matching deposit growth with loan growth.
- COVID-19: The company said the pandemic affected 2021 results to a lesser extent than 2020, but continuing economic effects remained uncertain. It modified 191 loans totaling approximately $95 million in 2020; none remained in deferral at year-end 2021.
- Acquisition: PWW was acquired for $10.5 million cash. The company recorded approximately $3.0 million of goodwill and $8.4 million of customer-relationship intangibles, amortized over 15 years. Management expected PWW to add advisory-fee income beginning in 2022 and planned to report it as a separate segment.
- Management outlook: Management said it is asset-sensitive and expects higher interest rates to benefit results, while noting that rates, economic conditions, and mortgage demand are uncertain. It anticipated a possible new branch in Lynchburg in fall 2022 and continued to evaluate expansion, subject to regulatory approval. No numerical earnings or revenue guidance was provided.
- Key risks: Concentrated lending in Virginia, substantial commercial real estate exposure and individually large loans, interest-rate and securities-value sensitivity, deposit competition and liquidity risk, cybersecurity and vendor exposures, regulation, and ongoing effects of the pandemic. Management also identified $83.7 million of loans in selected industries it considered potentially COVID-sensitive.
- Internal control weakness: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2021 because review controls failed to detect errors in a third-party PWW acquisition valuation. The errors led to material balance-sheet reclassifications, with no income-statement impact. Management said it designed and implemented new review controls. The auditor issued an unmodified opinion on the financial statements but did not attest to internal controls; the allowance for loan losses was identified as a critical audit matter.
- The company reported no material pending legal proceedings. It declared a $0.07-per-share fourth-quarter 2021 dividend in January 2022, payable in March 2022. Dividend capacity remains subject to regulatory and capital limits.
Important facts for investors to verify
- Reconcile the allowance and provision disclosures, including the $0.500 million 2021 recovery, and assess whether reserve levels remain appropriate as CECL adoption approaches.
- Track remediation and independent validation of the material weakness in acquisition-valuation review controls.
- Review the PWW purchase accounting, goodwill impairment testing, customer-relationship amortization, and subsequent advisory-fee contribution.
- Assess the sensitivity of net interest income and securities values to rate changes, alongside deposit retention, funding costs, and collateral-dependent borrowing capacity.
- Monitor commercial real estate concentrations, large borrower exposures, and the performance of COVID-sensitive industry loans.
- Confirm dividend sustainability against Bank capital requirements and the parent company’s reliance on Bank dividends.