Business context and reporting period
Bank of the James Financial Group, Inc. is a Virginia community bank holding company operating primarily in Central Virginia’s Region 2000. Its business includes community banking and mortgage origination, with smaller investment and insurance activities. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest income | $4.726 | $4.573 | $13.881 | $13.677 |
| Net interest income | $4.149 | $3.967 | $12.126 | $11.845 |
| Provision for loan losses | — | — | $0.055 | $0.290 |
| Other operating income | $0.929 | $0.769 | $2.603 | $2.638 |
| Operating expenses | $3.739 | $3.568 | $11.105 | $10.770 |
| Net income | $0.914 | $0.813 | $2.462 | $2.398 |
| Diluted earnings per share | $0.27 | $0.24 | $0.73 | $0.71 |
- Net interest margin was 3.97% for Q3 and 3.98% year to date, down from 4.06% in both comparable 2013 periods. The average yield on earning assets fell, while the cost of interest-bearing deposits also declined.
- Management reported annualized return on average assets of 0.80% for Q3 and 0.74% year to date; annualized return on equity was 10.82% and 10.02%, respectively.
- Net cash provided by operations was $3.465 million for the nine months, versus $3.994 million a year earlier. Investing activities used $18.251 million, primarily reflecting net loan growth; financing provided $12.965 million. Cash and cash equivalents ended at $14.850 million.
- At September 30, total assets were $451.686 million, up 3.95% from year-end; deposits were $398.831 million, up 2.95%. Net loans were $373.390 million, up 9.82%. Commercial real estate represented 50.4% of total loans.
- Stockholders’ equity was $33.436 million, compared with $29.772 million at year-end. The Bank’s capital ratios were 9.43% leverage, 12.07% Tier 1 risk-based, and 13.32% total risk-based; each exceeded the stated well-capitalized benchmark. These are Bank-level, not consolidated-company, ratios.
- Borrowings included $5.976 million federal funds purchased, $2.0 million of FHLB advances, and $10.0 million of 6% capital notes due April 2017. The FHLB advance bears 3.785% and matures April 2015. Management reported $48.790 million in liquid assets and considered liquidity adequate, while monitoring funding needs amid loan growth.
Material changes versus comparable periods
- Net income rose 12.4% in Q3 and 2.7% for the first nine months. Higher interest income, lower loan-loss provisions, and higher mortgage fees contributed; increased operating expenses partly offset these gains.
- Q3 interest income increased 3.35% and nine-month interest income 1.49%; net interest income increased 4.6% and 2.4%, respectively. Management attributed the increase mainly to growth in earning assets, while loan yields faced competitive pressure.
- Mortgage fee income rose to $0.518 million in Q3 and $1.214 million year to date, from $0.295 million and $0.954 million. Management attributed the increase to production from the Roanoke mortgage office. Securities-sale gains declined to $0.006 million and $0.086 million, respectively, versus $0.011 million and $0.405 million.
- Operating expenses rose 4.79% in Q3 and 3.11% year to date, including higher compensation, data processing, equipment, and marketing costs associated primarily with expansion into Roanoke and Charlottesville.
- Available-for-sale securities declined to $33.940 million from $46.091 million; management said securities were liquidated in part to fund loan growth and anticipated lending needs. Accumulated other comprehensive loss improved to $0.883 million from $2.421 million.
Outlook, risks, contingencies, and unusual items
- Management expected loan-rate competition to continue pressuring asset yields. It also expected mortgage revenue to face pressure as refinancing activity declined, with home-purchase lending making up a greater share of originations. Mortgage loans were presold to investors, which management said limited credit and interest-rate risk in that business.
- The Bank was considering additional branches, subject to regulatory approval, and anticipated possible openings during the next two fiscal years. Management estimated upfit costs of $0.9 million to $1.5 million per location and generally expected new branches to become profitable within 12 to 18 months; opening dates were undetermined.
- Credit risks include changes in local economic conditions, real-estate collateral values, borrower performance, and interest rates. Management identified allowance-for-loan-loss estimates as a critical accounting judgment. The allowance was $4.874 million, or 1.29% of loans, versus $5.186 million, or 1.50%, at year-end. Management considered it adequate.
- Nonperforming assets were $4.423 million, down slightly from $4.518 million at year-end. Nonaccrual loans increased to $3.263 million from $3.066 million, while OREO fell to $1.160 million from $1.451 million. Nine-month net charge-offs were $0.367 million, compared with $0.842 million in 2013.
- Loans past due more than 90 days totaled $3.172 million; none were reported as still accruing. Performing TDRs totaled $0.556 million at quarter-end. The filing reported no new TDR modifications during the three- or nine-month periods.
- Off-balance-sheet commitments to extend credit were $76.907 million and standby letters of credit were $1.905 million. Amounts drawn could affect liquidity and capital, although many commitments may expire unused.
- The $10 million capital notes bear 6% interest and are prepayable at the company’s discretion under the note terms. Management said it was evaluating forthcoming Basel III capital requirements; the phase-in was scheduled to begin in January 2015.
- The filing identifies general economic conditions, competition, banking regulation, real-estate values, interest-rate movements, and customers’ liquidity and financial condition as risks to forward-looking results. Management reported effective disclosure controls, no significant changes in internal controls, and no pending legal proceedings other than routine litigation.
Important facts for investors to verify
- Reconcile net interest income and margin figures: the income statement reports $4.149 million for Q3 and $12.126 million year to date, while the average-balance schedules show $4.156 million and $12.177 million. The filing text does not explain these differences.
- Review the loan portfolio’s credit migration and concentration, particularly commercial real estate, rising nonaccrual loans, past-due balances, and the adequacy of the lower allowance ratio.
- Assess whether loan growth can be funded sustainably using deposits and available liquidity, and consider the timing and terms of near-term FHLB maturity and other borrowings.
- Track whether mortgage-fee growth and lower provisions can offset expense growth, yield pressure, and reduced refinancing activity.
- Verify the costs, approvals, timing, and expected returns of planned branch expansion, and the effect of new capital standards.