Bank of the James Financial (BOTJ) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the company's unaudited consolidated financial statements for the periods ended September 30, 2023, and December 31, 2022 Consolidated Balance Sheets This section details the company's assets, liabilities, and stockholders' equity as of September 30, 2023, and December 31, 2022 Consolidated Balance Sheet Highlights (in thousands) | Item | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total cash and cash equivalents | $99,529 | $61,762 | | Securities held-to-maturity (amortized cost) | $3,626 | $3,639 | | Securities available-for-sale (fair value) | $181,977 | $185,787 | | Loans, net of allowance for credit losses | $599,585 | $605,366 | | Total assets | $960,887 | $928,571 | | Total deposits | $880,203 | $848,138 | | Total liabilities | $910,758 | $878,345 | | Total stockholders' equity | $50,129 | $50,226 | Consolidated Statements of Income This section outlines the company's revenues, expenses, and net income for the three and nine months ended September 30, 2023 and 2022 Consolidated Statements of Income Highlights (in thousands) | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total interest income | $10,143 | $8,399 | $28,824 | $22,912 | | Total interest expense | $2,779 | $499 | $6,473 | $1,498 | | Net interest income | $7,364 | $7,900 | $22,351 | $21,414 | | Recovery of credit losses | $(164) | $(300) | $(278) | $(900) | | Total noninterest income | $3,201 | $3,854 | $9,689 | $10,519 | | Total noninterest expenses | $8,140 | $8,879 | $24,091 | $24,119 | | Income before income taxes | $2,589 | $3,175 | $8,227 | $8,714 | | Income tax expense | $511 | $601 | $1,631 | $1,709 | | Net Income | $2,078 | $2,574 | $6,596 | $7,005 | | Earnings per common share - basic and diluted | $0.46 | $0.55 | $1.44 | $1.48 | Consolidated Statements of Comprehensive Income (Loss) This section reports the company's net income and other comprehensive income, including unrealized gains and losses on securities Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $2,078 | $2,574 | $6,596 | $7,005 | | Unrealized (loss) on securities available-for-sale | $(5,462) | $(7,368) | $(3,794) | $(32,530) | | Tax effect | $1,147 | $1,548 | $797 | $6,832 | | Other comprehensive loss, net of tax | $(4,315) | $(5,820) | $(2,997) | $(25,698) | | Comprehensive (loss) income | $(2,237) | $(3,246) | $3,599 | $(18,693) | Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30 Consolidated Statements of Cash Flows Highlights (in thousands) | Item | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,969 | $5,363 | | Net cash provided by (used in) investing activities | $2,531 | $(100,452) | | Net cash provided by (used in) financing activities | $29,267 | $(7,044) | | Increase (decrease) in cash and cash equivalents | $37,767 | $(102,133) | | Cash and cash equivalents at end of period | $99,529 | $81,020 | | Fair value adjustment for securities available-for-sale | $(3,793) | $(32,530) | Consolidated Statements of Changes in Stockholders' Equity This section details the changes in the company's equity accounts, including net income, dividends, and stock repurchases - The company's total stockholders' equity decreased slightly from $50,226 thousand at December 31, 2022, to $50,129 thousand at September 30, 2023, influenced by net income, dividends, stock repurchases, and other comprehensive losses[325][331][356] - The adoption of ASU 2016-13 (CECL) on January 1, 2023, resulted in a reduction of retained earnings by $1,599 thousand[331][360] Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies and methodologies used in preparing the financial statements Note 1 – Basis of Presentation - The consolidated financial statements are prepared in accordance with GAAP, requiring management estimates and assumptions, particularly for the allowance for credit losses[29][334] - The Company adopted ASC 326 (CECL) effective January 1, 2023, using a modified retrospective approach, resulting in an approximate $1.6 million reduction to retained earnings after tax[30][359][360] Note 2 – Significant Accounting Policies and Estimates - The Company adopted ASU 2016-13 (CECL) on January 1, 2023, replacing the incurred loss methodology with an expected loss methodology for financial assets[359] - ASU 2022-02, which eliminates accounting guidance for troubled debt restructurings (TDRs) for CECL adopters, was adopted prospectively on January 1, 2023, with no material impact[49] Note 3 – Earnings Per Common Share (EPS) Earnings Per Common Share (in thousands, except per share amounts) | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $2,078 | $2,574 | $6,596 | $7,005 | | Weighted average shares outstanding - basic and diluted | 4,543,338 | 4,683,581 | 4,568,789 | 4,721,423 | | Earnings per common share - basic and diluted | $0.46 | $0.55 | $1.44 | $1.48 | - No potentially dilutive shares were outstanding in 2023 and 2022, resulting in identical weighted average basic and diluted shares[51] Note 4 – Stock Based Compensation - The Company's 2018 Equity Incentive Plan permits the issuance of up to 250,000 shares of common stock for awards to key employees[71] - All restricted stock units (RSUs) granted in 2019 vested by January 2, 2022, resulting in $0 stock-based compensation expense for the reported 2023 and 2022 periods[51][72][73] Note 5 – Fair Value Measurements - The Company uses a three-level hierarchy for fair value measurements: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[52][53][77] - All of the Company's available-for-sale securities are classified as Level 2, while Interest Rate Lock Commitments (IRLCs) are classified as Level 3[54][79][101] - Loans held for sale are carried at cost, which approximates fair value (Level 2), due to their short duration between origination and sale[58][105] Note 6 – Securities Securities Holdings (in thousands) | Type | Amortized Cost (Sep 30, 2023) | Fair Value (Sep 30, 2023) | Amortized Cost (Dec 31, 2022) | Fair Value (Dec 31, 2022) | | :--- | :--- | :--- | :--- | :--- | | Held-to-maturity | $3,626 | $3,028 | $3,639 | $3,135 | | Available-for-sale | $219,671 | $181,977 | $219,688 | $185,787 | | Total | $223,297 | $185,005 | $223,327 | $188,922 | Unrealized Losses on Available-for-Sale Securities (in thousands) | Period | Total Unrealized Losses | | :--- | :--- | | September 30, 2023 | $(37,694) | | December 31, 2022 | $(33,901) | - The Company evaluated available-for-sale securities in an unrealized loss position and concluded no credit impairment existed as of September 30, 2023[117] Note 7 – Business Segments - The Company operates three reportable business segments: community banking, mortgage loan origination, and wealth management[95] - The community banking segment's primary revenue is net interest income, while the mortgage and investment advisory businesses are driven by gain-on-sale and fee-for-service models, respectively[145] Net Income by Business Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Community Banking | $1,636 | $2,023 | $5,156 | $5,317 | | Mortgage | $(67) | $152 | $284 | $621 | | Advisory Services | $509 | $399 | $1,156 | $1,067 | | Total Net Income | $2,078 | $2,574 | $6,596 | $7,005 | Note 8 – Loans, allowance for credit losses and OREO - The Company adopted CECL on January 1, 2023, changing its methodology for estimating the allowance for credit losses[123][148] Loan Portfolio Composition (in thousands) | Loan Segment | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Commercial | $65,827 | $95,885 | | Commercial Real Estate | $329,464 | $354,025 | | Consumer | $77,931 | $97,959 | | Residential | $133,683 | $63,756 | | Total loans | $606,905 | $611,625 | | Less allowance for credit losses | $7,320 | $6,259 | | Net loans | $599,585 | $605,366 | Allowance for Credit Losses Activity (in thousands) | Item | 9 Months Ended Sep 30, 2023 | | :--- | :--- | | Beginning Balance, December 31, 2022 | $6,259 | | Adoption of ASU 2016-13 (CECL) | $1,245 | | Charge-Offs | $(196) | | Recoveries | $200 | | Provision (Recovery of) | $(188) | | Ending Balance, September 30, 2023 | $7,320 | - Total nonperforming assets decreased to $585 thousand on September 30, 2023, from $1,199 thousand on December 31, 2022, with no OREO[7][183] - The Company adopted ASU 2022-02 on January 1, 2023, eliminating accounting guidance for Troubled Debt Restructurings (TDRs)[168][186][187][188] - The allowance for credit losses for unfunded commitments was $690 thousand at September 30, 2023, an increase from $0 at December 31, 2022, due to the adoption of CECL[189][190] Note 9 – Revenue Recognition - Service charges on deposit accounts are recognized over the service period for monthly fees and at a point in time for transactional fees[172] - Fees, exchange, and other service charges are recognized when services are rendered or upon completion[194] - Wealth management fees are primarily earned over time, charged quarterly based on the market value of client assets under management[174][222] Note 10 – Acquisitions - Financial acquired Pettyjohn, Wood & White, Inc (PWW), an investment advisory firm, on December 31, 2021, for $10.5 million in cash[175][223][224] - The acquisition resulted in approximately $3.0 million in goodwill and $8.4 million in amortizable intangible assets[224] - Goodwill was adjusted in 2022 due to a working capital payment and an IRC 338(h)(10) election, reducing it by $1.8 million[197] Note 11 – Recent accounting pronouncements and other authoritative guidance - ASU 2023-03 (Presentation of Financial Statements) was issued in July 2023; the Company does not expect a material impact[199] - ASU 2022-06 (Reference Rate Reform) was issued in December 2022, deferring the sunset date of Topic 848 to December 31, 2024; the Company has minimal exposure[200][228] - ASU 2023-01 (Leases: Common Control Arrangements) was issued in March 2023; the Company does not expect a material impact[227] - ASU 2023-06 (Disclosure Improvements) was issued in October 2023; the Company does not expect a material impact[226] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the reported periods CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS - The report contains forward-looking statements subject to risks and uncertainties, including economic, market, and regulatory factors[202][230] - Shareholders are cautioned that actual results could differ materially from projections, and the Company disclaims any obligation to update these statements[202][203][230] GENERAL - Bank of the James Financial Group, Inc is a bank holding company primarily engaged in retail banking, mortgage banking, and investment advisory services[208] - The Company's operating results depend primarily on net interest income, provision for credit losses, noninterest income, and noninterest expenses[211] - The Bank aims to enhance profitability by increasing market share, providing additional services, and controlling costs[236][239][241] - Off-balance sheet arrangements include $180,365 thousand in commitments to extend credit and $3,208 thousand in letters of credit as of September 30, 2023[215][216][270][271] SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section summarizes key changes in the company's financial condition and operational results Financial Condition Summary - Total assets increased by 3.48% to $960,887 thousand on September 30, 2023, from $928,571 thousand at December 31, 2022[245] - Total loans decreased to $606,905 thousand on September 30, 2023, from $611,625 thousand at year-end 2022, mainly due to decreased loan demand[246] - Nonperforming assets decreased to $585 thousand on September 30, 2023, from $1,199 thousand on December 31, 2022[7][248] - Securities available-for-sale decreased slightly to $181,977 thousand on September 30, 2023, from $185,787 thousand at December 31, 2022[249] - Cash and cash equivalents increased to $99,529 thousand on September 30, 2023, from $61,762 thousand on December 31, 2022[1] - Total deposits increased by 3.78% to $880,203 thousand on September 30, 2023, driven by an increase in time deposits[273] Bank Level Capital Ratios | Ratio | Sep 30, 2023 | Dec 31, 2022 | Regulatory Minimum | Well Capitalized Minimum | | :--- | :--- | :--- | :--- | :--- | | Tier 1 capital to average total assets | 9.48% | 8.98% | 4.000% | 5.000% | | Common Equity Tier 1 capital | 12.11% | 11.15% | 7.000% | 6.500% | | Tier 1 risk-based capital ratio | 12.11% | 11.15% | 8.500% | 8.000% | | Total risk-based capital ratio | 13.11% | 11.98% | 10.500% | 10.000% | - The Bank's regulatory capital levels exceeded those established for well-capitalized institutions at both September 30, 2023, and December 31, 2022[281] Results of Operations - Net income decreased for the three and nine months ended September 30, 2023, compared to prior year periods, primarily due to a significant increase in interest expense[258] Key Performance Indicators | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in thousands) | $2,078 | $2,574 | $6,596 | $7,005 | | Basic and diluted EPS | $0.46 | $0.55 | $1.44 | $1.48 | | Annualized Return on Average Stockholders' Equity | 15.68% | 19.47% | 17.20% | 15.45% | | Annualized Return on Average Assets | 0.86% | 1.05% | 0.93% | 0.95% | - Net interest income for the three months ended September 30, 2023, decreased to $7,364 thousand from $7,900 thousand in 2022[259] - The net interest margin decreased to 3.21% for the three-month period but increased to 3.33% for the nine-month period[259] - Noninterest income decreased for both three and nine-month periods ended September 30, 2023, primarily due to lower gains on loan sales[316] - Noninterest expense decreased for both three and nine-month periods ended September 30, 2023, mainly due to decreases in equipment and OREO expenses[292] - The allowance for credit losses increased to 1.21% of total loans outstanding at September 30, 2023, from 1.02% at December 31, 2022, driven by the adoption of CECL[293] - The effective tax rate for the nine months ended September 30, 2023, was 19.82%, lower than the statutory rate due to tax benefits[294][266] Net Interest Margin Analysis and Average Balance Sheets This section provides a detailed analysis of the company's net interest margin and average balance sheet components Average Balance Sheets and Net Interest Margin (in thousands, except rates) | Item | Average Balance (2023) | Interest Income/Expense (2023) | Average Rates (2023) | Average Balance (2022) | Interest Income/Expense (2022) | Average Rates (2022) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total earning assets | $897,364 | $28,839 | 4.30% | $927,482 | $22,927 | 3.31% | | Total interest-bearing liabilities | $733,343 | $6,473 | 1.18% | $749,545 | $1,498 | 0.27% | | Net interest earnings | | $22,366 | | | $21,429 | | | Net interest margin | | | 3.33% | | | 3.09% | | Interest spread | | | 3.12% | | | 3.04% | - The average rate on loans increased to 4.99% for the nine months ended September 30, 2023, from 4.18% in the same period of 2022[6][287] - The average rate paid on interest-bearing deposits significantly increased to 1.10% for the nine months ended September 30, 2023, from 0.16% in 2022[6][312] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section indicates no specific disclosures about market risk are provided in this report - The section on Quantitative and Qualitative Disclosures About Market Risk is marked as 'Not applicable' in this report[311] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and notes no significant changes in internal controls - Financial's management concluded that disclosure controls and procedures were effective as of September 30, 2023[374] - There have been no significant changes in the Company's internal controls over financial reporting during the quarter ended September 30, 2023[369] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section states the company is only involved in routine litigation incidental to its business - The Company is not involved in any pending legal proceedings, aside from routine litigation incidental to its business[370] Item 1A. Risk Factors This section refers to the Annual Report for risk factors and confirms no material changes - For information regarding the Company's risk factors, refer to Part I, Item 1A 'Risk Factors' in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[375] - There have been no material changes from risk factors as previously disclosed in the Company's Form 10-K for the year ended December 31, 2022[375] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This section details the company's stock repurchase activities during the period - On February 6, 2023, the Company's board approved a stock repurchase plan to purchase up to $998,000 of common stock[367] - The Company purchased 85,319 shares between the adoption date and April 6, 2023, under the plan[367] - The repurchase plan was terminated on April 18, 2023, and no shares were repurchased during the quarter ended September 30, 2023[367] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - The section on Defaults Upon Senior Securities is marked as 'Not applicable' in this report[372] Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures to report - The section on Mine Safety Disclosures is marked as 'Not applicable' in this report[363] Item 5. Other Information This section states that there is no other information to report - The section on Other Information is marked as 'Not applicable' in this report[368] Item 6. Exhibits This section lists the exhibits filed with the report, including financial data and officer certifications - Exhibit 101 includes XBRL formatted Consolidated Balance Sheets, Statements of Income, Comprehensive Income (Loss), Cash Flows, and Changes in Stockholders' Equity[364] - Certifications from the President and Treasurer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[366][373][378]