Bank of the James Financial Group, Inc. — FY2016 Form 10-K
Business and reporting period. The company is a Virginia bank holding company whose principal business is community banking through Bank of the James, with mortgage origination, investment services, and insurance activities. This annual report covers the year ended December 31, 2016; comparisons are primarily with FY2015. Financial amounts below are in U.S. dollars, with millions used unless otherwise stated.
Financial performance and condition
| Metric | FY2016 / year-end | FY2015 / comparison |
|---|---|---|
| Net income | $3.286 million | $3.692 million; down 11.0% |
| Basic and diluted EPS | $0.75 | $1.07 |
| Net interest income | $19.224 million | $17.611 million; up 9.2% |
| Net interest margin | 3.77% | 3.78% |
| Total noninterest income | $4.795 million | $4.193 million |
| Noninterest expense | $17.594 million | $16.179 million; up 8.8% |
| Provision for loan losses | $1.612 million | $0.282 million |
| Total assets | $574.195 million | $527.143 million; up 8.9% |
| Net loans | $464.353 million | $430.445 million; up 7.9% |
| Deposits | $523.112 million | $467.610 million; up 11.9% |
| Stockholders’ equity | $49.421 million | $48.196 million |
- Interest income rose to $21.568 million, while interest expense fell to $2.344 million from $2.691 million. Lower expense primarily reflected repayment of $10 million of 6% notes in January 2016; loan growth also supported net interest income.
- Return on average assets was 0.60% versus 0.74%; return on average equity was 6.60% versus 9.78%. Management attributed the lower equity return partly to the 2015 share issuance, which increased average equity.
- The efficiency ratio improved to 73.25% from 74.20%. Net income was pressured by the higher loan-loss provision and operating costs, partly offset by increased net interest and noninterest income.
- Cash and cash equivalents were $28.683 million at year-end, little changed from $28.655 million. FY2016 operating cash flow was $2.785 million; investing activities used $47.209 million and financing activities provided $44.452 million.
- Reported liquid assets totaled $69.459 million. The company reported $177.067 million of available nondeposit funding capacity, including FHLB capacity; full FHLB availability was subject to additional collateral. No borrowings were outstanding under the listed credit facilities at year-end.
- The Bank was categorized as well capitalized. At year-end, its common equity Tier 1 and Tier 1 risk-based ratios were 10.37%, total risk-based capital was 11.54%, and Tier 1 leverage was 8.94%.
- The company paid $0.24 per share in FY2016 dividends. A fourth-quarter dividend of $0.06 per share was declared in January 2017, payable in March.
Material changes versus FY2015
- Net income fell $406,000 despite higher net interest income and noninterest income. The loan-loss provision increased by $1.330 million, and noninterest expense increased by $1.415 million.
- Loans and deposits expanded, with management citing growth in Charlottesville, Harrisonburg, and Roanoke and efforts to attract commercial customers’ primary checking accounts. Commercial real estate was the largest loan category at $237.638 million, about half of total loans.
- Noninterest income benefited from $494,000 in net securities gains, compared with $49,000 in 2015. Mortgage loan originations totaled $84.743 million, versus $78.549 million.
- Nonperforming asset trends were mixed: the MD&A reports nonaccrual loans of $2.550 million versus $3.406 million, while OREO rose to $2.370 million from $1.965 million. The allowance increased to $5.716 million from $4.683 million.
- Available-for-sale securities were $40.776 million, up from $35.996 million. A $1.011 million after-tax other comprehensive loss—primarily reflecting securities valuation changes—reduced reported comprehensive income to $2.275 million.
Outlook, risks, and notable items
- Management expected local economic conditions to continue improving in 2017. It expected loan demand to increase slightly in the second quarter and then remain steady, while noting uncertainty about the effect of interest-rate changes. Management also cited diminished early-2017 small-business loan demand, which it believed was partly seasonal.
- Management anticipated potentially higher short-term rates and noted that higher long-term rates could reduce mortgage refinancing activity. The company identified competition, local economic conditions, real-estate collateral values, interest-rate movements, regulation, and customers’ liquidity and financial condition as risks to results.
- The 2016 provision included a fourth-quarter reserve for two commercial loans totaling about $915,000, which management deemed 100% impaired; the ultimate loss could be lower depending on recovery. Management also increased general reserves for commercial and commercial real estate exposures.
- At December 31, the Bank had $22.044 million of brokered CDs. It reported $93.247 million of commitments to extend credit and $3.466 million of standby letters of credit; management did not anticipate material losses from these commitments.
- On January 25, 2017, after year-end, the holding company issued $5 million of 4% notes due in 2022, with proceeds partly intended to provide additional capital to the Bank.
- The Bank planned further branch expansion subject to regulatory approval; estimated upfit costs for undeveloped locations were $0.9 million to $1.5 million per location. Management generally expected new branches to become profitable within 12–18 months.
- The auditor gave an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an attestation on those controls. No material pending legal proceedings were reported.
Important facts for investors to verify
- Nonaccrual-loan discrepancy: MD&A cites $2.550 million at December 31, 2016, but the detailed note’s “Loans on Non-Accrual Status” table totals $3.465 million. Reconcile this difference and its effect on reported asset-quality ratios and reserve adequacy.
- Assess the $1.612 million provision, the fully reserved $915,000 commercial relationship, the increase in OREO, and the concentration in commercial real estate lending.
- Review deposit composition and pricing, including brokered CDs and large time-deposit maturities, as well as the collateral conditions on stated FHLB borrowing capacity.
- Evaluate whether loan growth, branch expansion, and mortgage activity can offset higher operating costs and support earnings and capital as rates and competition change.
- Confirm the terms and use of proceeds of the January 2017 $5 million note issuance and the Bank’s capacity to continue dividends under regulatory and capital constraints.