Bank of the James Financial Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited; dollar amounts below are in millions unless otherwise noted. The company is a Virginia community bank holding company, with community banking and mortgage origination as its reportable segments.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $4.867 | $4.491 | $14.297 | $13.011 |
| Provision for loan losses | $0.145 | $0.120 | $0.595 | $0.277 |
| Noninterest income | $1.281 | $1.198 | $3.605 | $3.223 |
| Noninterest expense | $4.449 | $4.118 | $12.893 | $11.733 |
| Net income | $1.055 | $0.983 | $2.993 | $2.867 |
| Diluted EPS | $0.24 | $0.29 | $0.68 | $0.85 |
| Net interest margin | 3.75% in MD&A | 3.76% in MD&A | 3.80% | 3.79% |
The filing’s average-balance schedule reports Q3 net interest margin of 3.76% for both years, differing from the MD&A figures shown above. Net income rose year over year, while EPS fell because weighted-average shares increased about 30% following the December 2015 stock issuance. Q3 and nine-month net income increased approximately 7% and 4%, respectively.
- Balance sheet: Total assets were $559.952 million at September 30, up 6.2% from $527.143 million at year-end 2015. Net loans were $457.136 million, up 6.2%; total deposits were $507.397 million, up 8.5%. Commercial real estate was 49.5% of loans.
- Liquidity and cash flow: Cash and cash equivalents were $25.931 million, down from $28.655 million at year-end. Management reported $65.853 million in liquid assets, including available-for-sale securities, and considered liquidity adequate. Nine-month operating cash flow was $3.185 million; investing cash outflow was $34.909 million and financing cash inflow was $29.000 million.
- Debt and capital: The $10 million capital notes were repaid in January 2016 using proceeds from the prior-year stock placement; no capital notes remained at September 30. The Bank’s leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.14%, 10.65%, and 11.69%, respectively, above the stated well-capitalized benchmarks.
- Credit quality: Nonperforming assets declined to $4.805 million from $5.371 million at year-end, while OREO rose to $2.370 million from $1.965 million after four foreclosures and one property disposition. Nonaccrual loans fell to $2.435 million from $3.406 million. The allowance for loan losses was $4.953 million, or 1.07% of loans, versus 1.08% at year-end. Nine-month net charge-offs were $0.325 million; provision expense more than doubled year over year.
Material changes and management commentary
- Higher loan balances drove interest-income and net-interest-income growth, despite lower average yields on earning assets and competitive pressure on loan pricing. The retirement of capital notes reduced interest expense, partly offset by increased deposit costs.
- Noninterest income benefited materially from available-for-sale securities gains: $0.209 million in Q3 and $0.437 million year to date, compared with $0.010 million and $0.043 million in the comparable 2015 periods.
- Operating expenses increased with expansion into Charlottesville, Harrisonburg, and Roanoke, including personnel, occupancy, professional/data-processing, and marketing costs. Management said each planned new branch generally is expected to become profitable within 12 to 18 months.
- Management described mortgage loans as generally presold to investors, limiting credit and interest-rate exposure, except in limited circumstances. It expected mortgage rates to remain near then-current historic lows for the rest of 2016, while noting that rising rates could pressure mortgage revenue. The filing provides no formal earnings or financial guidance.
Outlook, risks, and contingencies
- The company anticipated possible additional branches, subject to regulatory approval; listed projects included potential openings in Appomattox, Rustburg, and Lexington. Estimated upfit costs were $0.9 million to $1.5 million per location.
- Liquidity was being monitored in light of loan growth. Additional sources include deposit growth and repayments, federal funds purchases, Federal Home Loan Bank borrowing, and the Federal Reserve discount window.
- Key disclosed risks include local and broader economic conditions, competition, banking regulation, real-estate values, interest-rate changes, and customers’ liquidity or financial condition. Management said risk factors were not materially changed from the 2015 Form 10-K.
- Off-balance-sheet commitments totaled $93.377 million: $90.163 million to extend credit and $3.214 million in letters of credit. The filing notes that commitments may not be fully drawn.
- No TDR modifications occurred in the 2016 periods presented. No material pending legal proceedings were reported, other than routine litigation incidental to the business.
Investor verification priorities
- Reconcile the Q3 net interest margin discrepancy between MD&A and the average-balance schedule.
- Assess whether loan growth, particularly in commercial real estate, is being matched by stable credit performance and adequate reserves.
- Review the impact of branch expansion costs and planned capital spending on future earnings and liquidity.
- Separate recurring operating income from securities-sale gains when evaluating earnings trends.
- Track deposit mix and costs, loan pricing, mortgage volumes, and capital ratios as interest rates and competition change.