Bank of the James Financial Group, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The company is a Virginia community bank holding company with community banking and mortgage origination segments. This unaudited filing covers the three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $6.203 | $6.165 | $18.257 | $18.447 |
| Provision for loan losses | $0.700 | $0.108 | $2.348 | $0.434 |
| Noninterest income | $3.064 | $2.161 | $8.039 | $5.039 |
| Noninterest expense | $6.744 | $6.373 | $19.876 | $17.947 |
| Net income | $1.454 | $1.474 | $3.270 | $4.085 |
| Diluted EPS | $0.34 | $0.34 | $0.75 | $0.93 |
| Net interest margin | 3.10% | 3.75% | 3.27% | 3.83% |
- Q3 net income was down about 1% year over year; nine-month net income fell about 20%. Higher loan-loss provisioning and operating costs weighed on results, partly offset by higher noninterest income, particularly mortgage loan-sale gains.
- Interest income declined 3.4% in Q3 and 1.4% year to date. Management attributed pressure on yields and net interest margin to lower rates, including the lower yields on PPP loans. Interest expense fell 20.7% in Q3 and 3.3% year to date as deposit rates declined.
- Mortgage loan-sale gains were $2.459 million in Q3 and $5.586 million year to date, versus $1.337 million and $3.103 million in the respective 2019 periods. Management expected strong mortgage originations through the rest of 2020 but noted that rising rates could pressure mortgage revenue.
- Noninterest expenses rose 5.8% in Q3 and 10.8% year to date. Cited items included variable compensation, $245,000 of PPP-related compensation, a $750,000 early-retirement-plan cost, higher mortgage-production credit costs, equipment and professional expenses; PPP origination costs were partly deferred.
Balance sheet, liquidity, and capital
- At September 30, 2020, total assets were $849.1 million, up 17.1% from year-end 2019; deposits were $763.9 million, up 17.6%. Management said deposit growth partly reflected PPP funds not yet deployed by customers.
- Total loans were $623.5 million, up from $578.1 million at year-end, with growth driven in part by PPP lending. Commercial loans increased to $174.8 million from $114.3 million; commercial real estate loans were $298.5 million versus $303.9 million.
- Cash and cash equivalents were $95.0 million, compared with $39.1 million at year-end. Management reported $170.7 million of liquid assets, including available-for-sale securities, and considered liquidity adequate. It also warned that customer draws on credit lines or pandemic effects could pressure liquidity.
- Nine-month cash flows were $(0.9) million from operations, $(61.3) million from investing, and $118.1 million from financing; cash increased $55.9 million. The filing attributes much of the liquidity build to deposit growth and PPP funds. Mortgage-loan originations and sales create substantial operating cash-flow movements.
- Stockholders’ equity was $65.8 million, versus $61.4 million at year-end. The Bank’s leverage, Tier 1 risk-based/CET1, and total risk-based capital ratios were 8.12%, 11.14%, and 12.27%, respectively; the Bank exceeded well-capitalized regulatory benchmarks.
- Capital notes totaled $10.0 million net of issuance costs. In 2020 the company issued $10.05 million principal of 3.25% notes due September 30, 2025, and used $5.0 million to repay 4.00% notes. The new notes are subject to full or partial repayment on or after September 30, 2021.
Credit quality, outlook, and risks
- The allowance for loan losses was $7.0 million, or 1.12% of loans (1.25% excluding PPP loans), versus $4.8 million, or 0.84%, at year-end. Management attributed about $1.75 million of the nine-month provision to COVID-related qualitative factors and said further deterioration could require additional provisioning.
- Nonperforming assets were $3.9 million, up from $3.6 million at year-end; nonaccrual loans rose to $2.5 million from $1.3 million. OREO declined to $1.4 million from $2.3 million. Management reported a significant Q3 reduction in a previously nonperforming relationship after liquidation of collateral.
- The Bank modified 184 loans totaling $95.3 million under short-term COVID relief programs during the first nine months. At quarter-end, nine loans totaling $8.9 million remained in deferment, and four relationships totaling about $6.0 million were being evaluated for second deferrals. These qualifying short-term modifications were not classified as TDRs. PPP lending exceeded $68 million for more than 550 clients by June 30; the Bank accepted no new PPP applications in Q3.
- Management identified $81.3 million of loans, or 13.04% of the portfolio, in sectors it considers vulnerable to COVID-19, including hospitality, restaurants, retail and services, education/childcare, and assisted living. It said pandemic effects on borrowers, asset values, earnings, capital and liquidity remain uncertain and could be materially adverse.
- Management expected future earnings to remain affected by the pandemic and said provisions may remain elevated. The filing provides no specific earnings or margin guidance. Mortgage rates were expected to remain near historic lows in the near term, though management could not predict their path.
- Other disclosed risks include interest-rate and economic changes, real-estate collateral values, regulation, competition, operational reliance on third-party vendors, and possible effects of the LIBOR transition. The company was assessing the future credit-loss standard (CECL), with adoption required after December 15, 2022 for this smaller reporting company.
- Off-balance-sheet commitments to extend credit were $144.3 million and standby letters of credit were $3.5 million. The company reported no pending legal proceedings other than routine litigation and no significant change in disclosure controls.
Important facts for investors to verify
- How the remaining COVID-related deferrals and the four relationships under second-deferral review perform, and whether nonperforming loans or charge-offs increase.
- Whether the $7.0 million allowance remains adequate as pandemic conditions, vulnerable-sector exposures, and PPP-loan repayment or forgiveness evolve.
- How sustainable mortgage origination volumes and loan-sale gains are, and the effect of interest rates on mortgage income and net interest margin.
- Whether deposit growth and current liquidity persist, especially as PPP funds are deployed and customers draw committed credit.
- The company’s ability to maintain capital ratios, service the 3.25% notes, and fund any future credit losses or expansion plans.