Bank of the James Financial Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Financial statements are unaudited and consolidated. The company is a Virginia community bank holding company with community banking and mortgage origination segments.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Prior comparable period / December 31, 2015 |
|---|---|---|
| Interest income | $5.235 million | $4.826 million in Q1 2015 |
| Net interest income | $4.687 million | $4.196 million in Q1 2015 |
| Net interest margin | 3.89% | 3.81% in Q1 2015 |
| Noninterest income | $1.008 million | $0.947 million in Q1 2015 |
| Provision for loan losses | $200,000 | $100,000 in Q1 2015 |
| Noninterest expense | $4.190 million | $3.680 million in Q1 2015 |
| Net income / diluted EPS | $887,000 / $0.20 | $927,000 / $0.27 in Q1 2015 |
| Total assets | $524.611 million | $527.143 million |
| Loans, net of allowance | $433.701 million | $430.445 million |
| Deposits | $473.451 million | $467.610 million |
| Stockholders’ equity | $49.456 million | $48.196 million |
| Cash and cash equivalents | $19.684 million | $28.655 million |
Net cash from operating activities was $178,000; investing activities used $4.727 million and financing activities used $4.422 million. Cash and cash equivalents declined $8.971 million during the quarter. The company reported $57.447 million of liquid assets; $11.789 million of available-for-sale securities were pledged, and its liquidity line had no outstanding balance.
The company retired its $10 million, 6% capital notes on January 5, 2016, using proceeds from a December 2015 common-stock private placement. The Bank reported a 9.37% leverage ratio, 10.93% CET1 and Tier 1 risk-based ratios, and an 11.99% total risk-based capital ratio; each exceeded the stated well-capitalized benchmark. These are Bank-level ratios, not consolidated company ratios.
Material changes and management commentary
- Net income fell about 4% year over year, while EPS declined from $0.27 to $0.20. The filing attributes the earnings pressure principally to higher operating costs associated with expansion into Charlottesville, Harrisonburg, and Roanoke. Outstanding shares increased following the December 2015 stock issuance.
- Net interest income rose about 12%, mainly reflecting loan growth and lower interest expense after debt retirement. The average yield on earning assets declined slightly; management said competition could continue to pressure loan yields. Interest-bearing deposit costs increased.
- Noninterest expense increased about 14%, including higher personnel, occupancy, professional and data-processing, equipment, supplies, and marketing expenses. Management also cited higher credit expense associated with mortgage volume.
- Loans grew about 0.8% from year-end. Commercial real estate represented approximately 49% of the loan portfolio. Total nonperforming assets declined to $4.942 million from $5.371 million, while nonaccrual loans fell to $2.588 million from $3.406 million. OREO increased to $2.355 million from $1.965 million after foreclosure on two properties; the Bank held five OREO properties at quarter-end.
- The allowance for loan losses was $4.750 million, or 1.08% of loans. Charge-offs were $251,000 and recoveries were $118,000. Management considered the allowance adequate, while noting increased risk from loan and commercial real estate concentrations. There were no new TDR modifications in Q1; performing TDRs totaled $642,000.
- Mortgage originations were primarily presold, limiting credit and interest-rate exposure. Purchase originations were 68% of mortgage production, versus 63% a year earlier. Management expected purchase loans to remain the majority as refinancing activity declined, and anticipated mortgage rates would remain near then-current historic lows for the rest of 2016; rising rates could pressure mortgage revenue.
Outlook, risks, and contingencies
- No specific company-wide earnings or revenue guidance was provided. The Bank anticipates additional branch openings, subject to regulatory approval, and estimated $900,000 to $1.5 million in setup costs per location. Management generally expects a new branch to become profitable within 12 to 18 months.
- Management said liquidity was adequate and expected deposits and loan repayments to support funding needs. It cited access to federal funds markets, Federal Home Loan Bank borrowing, and the Federal Reserve discount window as additional sources. The Bank is monitoring liquidity in view of loan growth.
- Off-balance-sheet commitments totaled $97.316 million: $94.089 million to extend credit and $3.227 million in letters of credit. Amounts drawn may affect liquidity and capital needs; many commitments may expire undrawn.
- Key disclosed risks include local and general economic conditions, competition, banking regulation, real estate values securing loans, interest-rate changes, and customers’ liquidity and financial condition. The allowance depends on management estimates and assumptions.
- The company reported no material change in risk factors from its 2015 Form 10-K and no pending legal proceedings other than routine litigation. Management stated disclosure controls were effective and reported no significant changes in internal controls during the quarter.
Important facts for investors to verify
- Whether expansion-related operating costs are producing sufficient loan, deposit, and fee growth, and how new branches perform against management’s 12–18 month profitability expectation.
- Loan portfolio concentration and credit trends, including commercial real estate exposure, past-due loans, foreclosures, OREO carrying values, charge-offs, and allowance adequacy.
- Liquidity and funding under continued loan growth, including deposit mix, pledged securities, and potential draws on the $97.316 million of commitments.
- Capital and shareholder returns following the capital-note repayment and equity issuance, including the effect of the higher share count on per-share earnings.
- Mortgage production and profitability if purchase activity, refinancing demand, or interest rates differ from management’s expectations.