Bank of the James Financial Group, Inc. — 2017 Q3 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods and, for balance-sheet figures, December 31, 2016. The Virginia-based company operates a community bank and a mortgage-lending business, primarily in Central Virginia, with newer markets in Charlottesville, Roanoke, and Harrisonburg. Dollar amounts below are in millions unless otherwise indicated.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $6.070 | $5.477 | $17.430 | $16.005 |
| Net interest income | $5.284 | $4.867 | $15.262 | $14.297 |
| Net interest margin | 3.65% | 3.76% | 3.68% | 3.80% |
| Noninterest income | $1.319 | $1.281 | $3.454 | $3.605 |
| Provision for loan losses | $0.200 | $0.145 | $0.745 | $0.595 |
| Noninterest expense | $4.914 | $4.449 | $14.237 | $12.893 |
| Net income | $1.015 | $1.055 | $2.562 | $2.993 |
| Diluted earnings per share | $0.23 | $0.24 | $0.59 | $0.68 |
- Quarterly and year-to-date net income declined approximately 3.8% and 14.4%, respectively. The filing reports annualized return on average assets of 0.66% for Q3 and 0.58% year to date, versus 0.76% and 0.75% in 2016; return on average equity was 7.75% and 6.65%, versus 8.34% and 8.10%.
- Interest expense increased 28.9% for the quarter and 26.9% year to date, reflecting higher deposit costs and interest on the new notes. Net interest income grew, but margin narrowed 11 basis points for the quarter and 12 basis points year to date.
- Operating cash flow was $6.364 million for the first nine months, versus $3.185 million in 2016. Investing used $40.322 million and financing provided $41.615 million; cash and cash equivalents ended at $36.340 million, up from $28.683 million at year-end 2016.
Financial condition, debt, and liquidity
- Total assets were $619.336 million, up 7.9% from year-end 2016. Total loans were $499.784 million, up 6.3%; net loans were $493.764 million. Commercial real estate represented about 49.9% of total loans.
- Deposits increased 7.2% to $560.515 million. Noninterest-bearing demand deposits rose to $122.201 million from $102.654 million; time deposits increased to $182.530 million from $165.029 million.
- Stockholders’ equity was $51.792 million, compared with $49.421 million at year-end. The company issued $5 million of 4% capital notes in January 2017, due January 2022 and optionally prepayable beginning January 2018. The company contributed $3 million of proceeds to the Bank; the remaining $2 million was expected to support debt service and general corporate purposes.
- Management reported $86.004 million of liquid assets, including cash and available-for-sale securities. About $12.592 million of available-for-sale securities were pledged; a related line of credit had no balance. Management considered liquidity adequate, while monitoring funding needs associated with loan growth.
- Bank-only regulatory capital ratios were 9.25% leverage, 11.02% Tier 1 risk-based and CET1, and 12.19% total risk-based. The Bank exceeded the filing’s well-capitalized benchmarks.
Material changes, outlook, and risks
- Growth in interest income and net interest income was driven mainly by larger loan and investment balances; Q3 asset yields also benefited from higher short-term rates. The nine-month average earning-asset yield declined to 4.20% from 4.26%.
- Expansion into Charlottesville, Harrisonburg, and Roanoke contributed to higher personnel, occupancy, marketing, equipment, and other operating costs. The company was constructing a permanent Appomattox branch for a planned Q4 2017 opening and was considering additional locations. Management estimated $0.9–$1.5 million in fit-out costs per branch and generally expected new branches to become profitable within 12–18 months.
- Mortgage-loan gains were $0.694 million for Q3, up from $0.593 million, but $1.663 million year to date, down from $1.765 million. Management expected purchase mortgages to remain the majority of originations and anticipated strong originations through the rest of 2017, citing market expansion and additional originators. It cautioned that rising rates could pressure mortgage-segment revenue.
- Nonperforming loans declined to $2.334 million from $3.465 million at year-end, while OREO rose to $2.639 million from $2.370 million. Total nonperforming assets declined to $4.973 million from $5.835 million. The Bank foreclosed on seven properties and disposed of six during the first nine months. The allowance for loan losses was $6.020 million, or 1.20% of loans, versus $5.716 million, or 1.22%, at year-end. Net charge-offs were $0.441 million year to date, compared with $0.325 million in 2016. Management said the allowance was adequate, while noting increased industry and commercial-real-estate concentration risks.
- The filing identifies key exposures including local economic conditions, real-estate collateral values, commercial and CRE concentration, interest-rate and deposit-cost changes, competition, expansion execution, liquidity, cybersecurity, and regulatory requirements. Management’s forward-looking statements are not guarantees; no specific earnings or financial guidance is provided.
- The company reported no pending material legal proceedings other than routine litigation, and management concluded disclosure controls were effective at period end. The filing also notes accounting standards under evaluation, including the expected-credit-loss standard (CECL), effective for the company after December 15, 2019.
Important facts for investors to verify
- Whether loan growth and deposit growth can continue without further margin compression or materially higher funding costs.
- Credit quality by loan class, including the commercial real-estate concentration, past-due loans, charge-offs, impaired loans, and adequacy of the allowance.
- OREO disposition progress and whether new branch costs and openings meet management’s timing and profitability expectations.
- Mortgage originations, gain-on-sale income, and sensitivity of that business to interest-rate changes.
- Liquidity and capital capacity to support planned growth, regulatory buffers, dividends, and debt service.