Bank of the James Financial Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with fiscal 2016. The company is a Virginia bank holding company whose principal business is community banking through Bank of the James, with mortgage origination as a secondary activity. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets at year-end | $626.3 million | $574.2 million |
| Total deposits at year-end | $567.5 million | $523.1 million |
| Net loans at year-end | $491.0 million | $464.4 million |
| Net interest income | $20.7 million | $19.2 million |
| Net interest margin | 3.67% | 3.77% |
| Net income | $2.9 million | $3.3 million |
| Basic and diluted EPS | $0.67 | $0.75 |
| Return on average assets | 0.49% | 0.60% |
| Return on average equity | 5.64% | 6.60% |
| Efficiency ratio | 74.99% | 73.25% |
- Net interest income rose 7.5%, primarily on loan growth; interest expense also increased, reflecting higher deposit costs and $5 million of 4% capital notes issued in 2017.
- Total noninterest income was $4.7 million, down from $4.8 million; fee and commission income increased, while net securities gains declined. Mortgage loan sales generated $2.4 million of gains in both years.
- Noninterest expense was $19.0 million, versus $17.6 million in 2016, with increases in compensation, occupancy and equipment costs, partly associated with expansion into new markets.
- Income before taxes was $5.36 million. Income tax expense increased to $2.44 million from $1.53 million, including an $871,000 deferred-tax-asset write-down following the Tax Cuts and Jobs Act’s reduction of the federal corporate rate to 21%. The reported effective tax rate was 45.49%.
- Cash and cash equivalents increased to $37.0 million from $28.7 million. Cash flow from operations was $6.7 million; investing activities used $46.7 million and financing activities provided $48.3 million. Net cash increased $8.3 million.
- Year-end stockholders’ equity was $51.7 million. The Bank reported regulatory capital ratios of 12.05% total risk-based, 11.13% common equity Tier 1 and 9.12% leverage, and was classified as well capitalized.
- Year-end liabilities included $5.0 million of capital notes bearing 4% interest and due in January 2022, with optional prepayment beginning January 2018. No year-end balances were outstanding on the Bank’s listed borrowing facilities.
- Management reported liquid assets of $92.3 million and $190.8 million of available nondeposit funding capacity, including FHLB capacity subject to collateral requirements. Deposits included $20.1 million of brokered CDs.
Material changes and credit quality
- Assets grew 9.1%; deposits increased 8.5% and net loans increased 5.7%. Loan growth was supported by expanded market presence and increased lending activity. Commercial real estate loans were $251.8 million, approximately 50.8% of total loans.
- Net charge-offs rose to $2.0 million from $0.6 million; gross charge-offs were $2.1 million versus $0.8 million. The provision for loan losses declined to $1.0 million from $1.6 million. The allowance fell to $4.8 million, or 0.96% of period-end loans, from $5.7 million, or 1.22%.
- Nonperforming assets were reported at $7.0 million, or 1.40% of loans, compared with $4.9 million, or 1.05%, in the detailed table. OREO increased to $2.65 million from $2.37 million. Management attributed substantial 2017 charge-offs to four customer relationships and said the related collateral write-downs were expected to limit further provision needs on those credits.
- The 2016 comparative deposit presentation was restated: $40.5 million of demand deposits was reclassified from noninterest-bearing to interest-bearing. The filing says this correction did not affect 2016 net income or equity.
- Other comprehensive income was $0.37 million, compared with a $1.01 million loss in 2016, principally reflecting changes in unrealized available-for-sale securities gains and losses.
Outlook, commentary and risks
- Management described local real estate values and the regional economy as generally stable or improving. It said small- and medium-business loan demand strengthened in the second half of 2017 and into 2018, and expected demand to increase through the rest of 2018. These are expectations, not quantified earnings or growth guidance.
- Management anticipated favorable economic conditions in 2018, while also expecting increased competition. It said short-term rates might rise or remain stable; higher long-term rates could reduce mortgage refinancing activity.
- The company expected to continue branch expansion, subject to regulatory approval. It was evaluating possible locations and estimated improvements and equipment at undeveloped sites could cost $0.9 million to $1.5 million per location; it generally expected new branches to become profitable within 12 to 18 months.
- Key risks include geographic and real-estate concentration, commercial and construction lending exposure, large individual credit relationships, potential loan losses and allowance-estimation uncertainty, deposit competition and funding-cost increases, interest-rate and securities valuation risk, liquidity, regulatory and capital requirements, cybersecurity and operational disruptions, and the execution and cost of expansion.
- Available-for-sale securities had $1.88 million of gross unrealized losses at year-end; management attributed these principally to higher interest rates and stated it did not intend, and was not more likely than not required, to sell before recovery. The company also warned that a forced sale or inability to hold could affect earnings or capital.
- Off-balance-sheet commitments to extend credit were $115.2 million and standby letters of credit were $2.8 million. Management did not anticipate material losses from these arrangements. There were no material pending legal proceedings reported.
- The company declared a fourth-quarter cash dividend of $0.06 per share, consistent with quarterly dividends during 2016 and 2017. Future dividends remain subject to board discretion, Bank dividend capacity and regulatory limits.
Important facts for investors to verify
- Nonaccrual loan discrepancy: The MD&A narrative gives the December 2016 nonaccrual balance as $3.465 million, while the detailed nonperforming-assets table and loan note show $2.550 million. Confirm the correct comparison and whether the difference reflects a classification or transcription issue.
- Expense comparison: The audited income statement reports 2016 noninterest expense of $17.594 million; one MD&A passage gives $17.954 million. The audited statement supports the $17.594 million figure used above.
- Assess the effect of sharply higher 2017 charge-offs and nonperforming assets on future credit costs, particularly for the four customer relationships and the commercial real estate portfolio.
- Review deposit mix, brokered-CD reliance, maturity concentrations and the collateral conditions behind stated FHLB funding availability and liquidity capacity.
- Evaluate whether loan growth and new branches can offset rising funding and operating costs while preserving capital, asset quality and the reported net interest margin.
- Consider the one-time $871,000 tax-related deferred-asset write-down separately from recurring earnings, and monitor the effect of the lower tax rate in subsequent periods.