Bank of the James Financial Group, Inc. — Q1 2021 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2021. The Virginia-based company operates a community bank and a mortgage origination business; its primary market is Central Virginia, with expansion into other Virginia markets. Financial results are compared with Q1 2020; balance-sheet comparisons are with December 31, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $7.365 | $7.488 in Q1 2020 |
| Net interest income | $6.748 | $6.136 in Q1 2020 |
| Net interest margin | 3.35% | 3.63% in Q1 2020 |
| Noninterest income | $2.434 | $2.186 in Q1 2020 |
| Noninterest expense | $6.889 | $6.197 in Q1 2020 |
| Provision for loan losses | $0 | $0.888 in Q1 2020 |
| Net income / diluted EPS | $1.835 / $0.42 | $0.995 / $0.23 in Q1 2020 |
| Return on average assets / equity | 0.85% / 11.49% | 0.54% / 6.52% in Q1 2020 |
| Total assets | $886.360 | $851.386 at December 31, 2020 |
| Total deposits | $801.190 | $764.967 at December 31, 2020 |
| Total loans, excluding loans held for sale | $613.591 | $609.090 at December 31, 2020 |
| Cash and cash equivalents | $124.050 | $100.886 at December 31, 2020 |
| Stockholders’ equity | $65.334 | $66.732 at December 31, 2020 |
- Net income rose 84% year over year, primarily reflecting the absence of the prior-year loan-loss provision and higher mortgage-loan sale gains. Interest income fell 1.6%, while interest expense fell 54.4%, helping lift net interest income.
- Lower-yielding PPP loans contributed to margin compression: average loan yield declined to 4.51% from 4.87%; net interest margin declined to 3.35% from 3.63%. Average rates paid on interest-bearing deposits fell to 0.33% from 0.90%.
- Mortgage gains on loan sales increased to $1.774 million from $1.177 million. Q1 2020 included $0.431 million of gains on securities sales; Q1 2021 had none. Noninterest expense increased 11.2%, including higher personnel, credit, marketing and FDIC insurance costs.
- Operating cash flow was $6.171 million, investing cash flow was a use of $18.610 million, and financing cash flow provided $35.603 million. Cash increased $23.164 million during the quarter. Deposit growth was the principal financing source; securities purchases were a major investing use.
- At quarter-end the bank reported $223.882 million of liquid assets. Approximately $28.570 million of available-for-sale securities were pledged as collateral; its liquidity line had no outstanding balance. Management said liquidity was adequate.
- Bank-only regulatory capital ratios were 8.33% leverage, 11.47% CET1 and Tier 1 risk-based, and 12.59% total risk-based capital. The bank exceeded well-capitalized thresholds.
- Capital notes carried at $10.029 million bear interest at 3.25% and mature September 30, 2025; full or partial repayment is permitted on or after September 30, 2021. The filing also reports $10.029 million of capital notes on the balance sheet.
Material changes and credit quality
- Assets increased 4.1% and deposits increased 4.7% from year-end, partly due to customer stimulus funds and PPP-related balances. Loans grew 0.7%; commercial lending increased while consumer and residential balances declined.
- The allowance for loan losses was $7.106 million, or 1.16% of loans, versus $7.156 million, or 1.17%, at year-end. Net charge-offs were $50,000. Management attributed the zero provision to improving or stabilizing economic indicators and said PPP loans are fully SBA-guaranteed.
- Nonperforming assets declined to $2.723 million from $3.168 million; nonperforming loans declined to $1.963 million from $2.063 million, and OREO declined to $0.761 million after property sales. Past-due loans totaled $2.357 million, with $1.516 million more than 90 days past due; none were accruing.
- Loans rated special mention totaled $12.528 million and substandard loans $5.019 million. Commercial real estate represented 50.8% of the loan portfolio.
- Available-for-sale securities increased to $99.832 million. Their net unrealized loss was reflected in other comprehensive income: quarterly OCI was negative $2.717 million, contributing to a decline in equity despite positive net income. Management said the $2.582 million gross unrealized losses were not other-than-temporary, citing security quality and no intent or expected need to sell before recovery.
- The company repurchased 14,600 shares for $0.212 million at an average $14.51 per share under a newly authorized 47,000-share program; 32,400 shares remained authorized for repurchase at quarter-end. The quarterly dividend was $0.28 per share.
Outlook, commentary and risks
- Management expects future earnings to be affected by the winding down of PPP and continued net-interest-margin pressure. It anticipated strong mortgage originations through the rest of 2021, but noted that higher rates could pressure mortgage-segment revenue and that future mortgage rates were uncertain.
- COVID-19 remains a material uncertainty. Management warned of possible adverse effects on borrowers, asset values, credit losses, liquidity, operations, employees and third-party service providers. It identified $81.545 million of loans in selected potentially affected industries, or 13.29% of total loans.
- Since the pandemic began, the bank had modified 191 loans with approximately $90 million in principal outstanding after payoffs. Five loans totaling approximately $6.12 million remained in principal-only deferment, according to the filing. COVID-related short-term modifications were treated as non-TDRs under applicable relief provisions.
- Off-balance-sheet commitments to extend credit were $159.934 million and letters of credit were $4.286 million. These are contractual amounts, not necessarily expected cash requirements, because some commitments may expire undrawn.
- The bank’s $10.029 million capital-note balance, deposit funding, loan quality, interest rates, real-estate collateral values, competition, regulation and pandemic developments are among the relevant risks. Management disclosed no pending material legal proceedings other than routine litigation and no material change in previously disclosed risk factors.
- Management estimated that a potential Timberlake-area branch could require $0.9–$1.5 million in construction and fit-out spending; another potential branch was not expected before mid-2022. Future openings are subject to regulatory approval.
Important facts for investors to verify
- Whether the zero Q1 provision and allowance remain adequate as pandemic relief ends and economic conditions evolve; review loan ratings, delinquencies, industry exposures and collateral values.
- The filing’s modification disclosures contain apparent inconsistencies: one passage says five loans remained deferred “as of March 31, 2020,” although the surrounding discussion refers to March 31, 2021; another says no second deferrals were being evaluated, while MD&A says one relationship of approximately $3 million was under evaluation.
- The effect of PPP runoff, forgiveness and lower-yielding balances on net interest margin, loan growth and earnings.
- Whether unrealized securities losses recover as expected, and the potential impact of interest-rate movements on securities values and accumulated other comprehensive income.
- Liquidity and capital capacity if customers draw committed credit lines, deposit balances shift, or credit losses increase; also confirm the terms and potential repayment of capital notes after September 30, 2021.
- Mortgage origination volumes, gain-on-sale income and sensitivity to interest rates, along with costs and returns from branch expansion and share repurchases.