Bank of the James Financial Group, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019, with comparison to 2018. The Virginia bank holding company operates primarily through Bank of the James, a community bank serving markets centered on Lynchburg, Virginia, and a mortgage division that originates loans for sale. It expanded its branch footprint during 2019, including openings in Lexington and Rustburg. Unless noted, financial amounts below are in U.S. dollars.
Key financial results and condition
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net income | $5.605 million | $5.302 million | Up 5.7% |
| Basic and diluted EPS | $1.28 | $1.21 | Up $0.07 |
| Net interest income | $24.552 million | $23.176 million | Up 5.9% |
| Net interest margin | 3.77% | 3.75% | Up 2 basis points |
| Total noninterest income | $7.188 million | $5.235 million | Up 37.3%; includes $394,000 net securities gains |
| Noninterest expense | $24.283 million | $21.064 million | Up 15.3% |
| Efficiency ratio | 76.51% | 74.14% | Worsened as expenses grew faster than revenue |
| Return on average assets / equity | 0.80% / 9.52% | 0.81% / 9.74% | Both slightly lower |
| Total assets | $725.394 million | $674.897 million | Up 7.5% |
| Net loans | $573.274 million | $530.016 million | Up 8.2% |
| Total deposits | $649.459 million | $612.043 million | Up 6.1% |
| Stockholders’ equity | $61.445 million | $55.143 million | Up $6.302 million |
Revenue, margins, and expenses. Interest income rose to $29.816 million from $26.971 million, while interest expense increased to $5.264 million from $3.795 million as deposit balances and rates paid rose. Mortgage-loan sale gains increased to $4.254 million from $2.918 million; mortgage originations totaled $163.394 million, versus $115.331 million in 2018. Management attributed higher expenses mainly to compensation, equipment, and costs associated with branch expansion and mortgage staffing. The reported income tax expense was $1.329 million in both years; the effective tax rate was 19.17% in 2019.
Cash flow, liquidity, and debt. Net cash provided by operating activities was $5.592 million, investing activities used $52.525 million, and financing activities provided $35.719 million. Cash and cash equivalents declined $11.214 million to $39.111 million. Management reported $98.766 million in liquid assets, including available-for-sale securities, and $215.747 million in available non-deposit funding capacity; full access to some capacity depends on pledging additional collateral. No borrowings were outstanding on disclosed bank credit facilities at year-end. The parent had $5 million of 4% capital notes due January 2022. Reported lease liabilities totaled approximately $5.946 million at year-end ($1.524 million operating and $4.422 million finance leases).
Asset quality and capital. Non-accrual loans declined to $1.301 million from $2.939 million; total nonperforming assets fell to $3.640 million from $5.369 million. Net charge-offs were $275,000, compared with $887,000, and the provision for loan losses was $523,000, compared with $716,000. The allowance was $4.829 million, or 0.84% of period-end loans. Commercial real estate represented $303.9 million of the $578.1 million gross loan portfolio. The Bank was categorized as well-capitalized; year-end ratios were 10.75% common equity Tier 1, 10.75% Tier 1 risk-based, 11.54% total risk-based, and 9.13% Tier 1 leverage.
Material changes versus 2018
- Profit and net interest income increased, supported by loan growth and higher earning-asset yields; net interest margin improved modestly.
- Noninterest income increased substantially, particularly mortgage-sale gains, life-insurance income, and securities gains.
- Operating costs rose materially with expansion, and the efficiency ratio deteriorated despite higher revenue.
- Loans and deposits expanded; non-accrual loans, net charge-offs, and total nonperforming assets declined.
- Available-for-sale securities increased to $59.655 million from $52.727 million. Other comprehensive income was $2.238 million, compared with a $774,000 loss in 2018, largely reflecting securities valuation changes.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management expected to pursue further branch expansion, subject to regulatory approval, and anticipated continued mortgage opportunity from historically low rates and added production capacity. Management generally expected new branches to become profitable within 12 to 18 months. These are expectations, not assured results.
- Rate and pandemic developments: The Federal Reserve cut its target rate to 0%–0.25% by March 15, 2020 in response to coronavirus-related economic concerns. The filing warns of pandemic-related effects on borrowers, deposits, collateral values, and operations; those developments occurred after the 2019 reporting date.
- Concentration and credit risk: Lending is concentrated in Virginia markets, with substantial exposure to real estate and commercial borrowers. Management identifies local economic weakness, large individual loans, commercial real estate, and loan-policy exceptions as risks.
- Other risks: Competition for deposits and loans, interest-rate sensitivity, liquidity, cybersecurity and operational disruption, regulatory costs, and the ability to execute expansion plans could affect results. The allowance for loan losses is an estimate subject to uncertainty; management was evaluating the future CECL standard, scheduled to apply to the company after December 15, 2022.
- Contingencies and governance: Commitments to extend credit were $134.186 million and standby letters of credit were $3.469 million; management did not anticipate material losses. The filing reports no material pending legal proceedings. The Bank leases its principal Lynchburg location from an entity wholly owned by a company and Bank director.
- Capital returns: The company paid $0.28 per share in 2019 dividends and declared a fourth-quarter dividend of $0.07 per share. It repurchased 21,000 shares during 2019 for $315,000. A new authorization for up to 65,000 shares was approved in January 2020; future dividends and repurchases remain subject to capital, regulatory, and board considerations.
Important facts for investors to verify
- Confirm the reported expense detail against the audited statements: the MD&A expense table lists other real estate expense of $366,000 and “other” expense of $1.289 million, while the income statement text lists $277,000 and $1.075 million, respectively, despite the same $24.283 million total.
- Assess whether the lower nonperforming-asset levels and reduced charge-offs are sustainable, given the loan portfolio’s real estate and local-market concentration and the allowance ratio of 0.84%.
- Evaluate the effect of 2020 rate cuts and coronavirus conditions on net interest margin, mortgage income, borrower performance, liquidity, and collateral values; the 2019 results do not reflect subsequent developments.
- Review the funding and capital implications of loan growth, time-deposit maturities, the $5 million parent-company notes, lease obligations, and collateral conditions on stated borrowing capacity.
- Check the audited financial statements and subsequent filings for updates to branch expansion, dividend policy, share repurchases, and CECL implementation. The independent auditor issued an unqualified opinion on the financial statements; management reported effective internal control, but the auditor did not express an opinion on internal control.