Bank of the James Financial Group, Inc. — 2015 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise. The company is a Virginia community bank holding company, with community banking and mortgage origination as its reportable business segments.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest income | $5.195 | $4.726 | $15.012 | $13.881 |
| Net interest income | $4.491 | $4.149 | $13.011 | $12.126 |
| Provision for loan losses | $0.120 | $0 | $0.277 | $0.055 |
| Noninterest income | $1.198 | $0.929 | $3.223 | $2.603 |
| Noninterest expense | $4.118 | $3.739 | $11.733 | $11.105 |
| Net income | $0.983 | $0.914 | $2.867 | $2.462 |
| Diluted earnings per share | $0.29 | $0.27 | $0.85 | $0.73 |
- Margins and returns: Net interest margin was 3.76% for Q3 and 3.79% year to date, down from 3.97% and 3.98%, respectively. Annualized return on average assets was 0.79% for Q3 and 0.78% year to date; return on equity was 10.64% for both periods.
- Balance sheet at September 30: Total assets were $507.615, up 10.1% from year-end 2014. Net loans were $426.850, up 8.2%; deposits were $458.656, up 14.8%. Stockholders’ equity was $37.158.
- Funding and liquidity: Cash and due from banks totaled $14.416; available-for-sale securities were $33.122. Management reported $47.538 of liquid assets, including securities, with approximately $11.5 million of securities pledged. The disclosed credit line had no balance. Nine-month operating cash flow was $0.598, versus $3.465 in 2014; investing cash outflow was $42.715 and financing cash inflow was $43.790.
- Debt and capital: The company had $10.0 million of 6% capital notes due April 1, 2017; FHLB borrowings were repaid by September 30. The bank’s reported capital ratios were 9.30% leverage, 10.72% Tier 1 risk-based, and 11.81% total risk-based; management said the bank exceeded well-capitalized regulatory thresholds.
Changes versus comparable periods
- Net income increased 7.5% in Q3 and 16.5% year to date. Management attributed growth mainly to higher interest income from loan growth and increased mortgage fees.
- Interest expense rose as time deposits grew, while the average yield on earning assets and net interest margin declined. Management cited competitive pressure on loan pricing.
- Mortgage income increased to $0.623 in Q3 and $1.759 year to date, with growth attributed in part to the Roanoke mortgage office. Mortgage segment net income was $0.087 in Q3 and $0.298 year to date.
- Noninterest expenses increased 10.1% in Q3 and 5.7% year to date, including higher personnel, credit, FDIC insurance, and mortgage-related costs.
- Asset quality indicators were mixed: nonaccrual loans declined to $1.593 from $3.506 at year-end, while OREO rose to $2.265 from $0.956, following foreclosures. Total nonperforming assets decreased to $3.858 from $4.462.
- Year-to-date provision for loan losses increased to $0.277 from $0.055. The allowance was $4.748, or 1.10% of loans, compared with $4.790, or 1.20%, at year-end. Net charge-offs were $0.319 year to date.
Outlook, risks, and unusual items
- Management said it expected continued competition to pressure loan yields and anticipated mortgage revenue pressure in a rising-rate environment. It expected purchase mortgages to remain the majority of originations and refinancing activity to decline. Management also said mortgage rates were expected to remain near historic lows for the remainder of 2015.
- The bank was monitoring liquidity to support loan growth. Management considered liquidity adequate and cited deposit growth, loan repayments, federal funds, FHLB borrowing capacity, and the Federal Reserve discount window as potential sources.
- The bank was considering additional branches over the next two fiscal years, subject to regulatory approval. Estimated upfit costs were $0.9–$1.5 million per location; management generally anticipated profitability within 12–18 months, while noting outcomes could not be predicted with certainty.
- Key risks identified include economic conditions, competition, banking regulation, real estate values securing loans, interest-rate changes, and changes in customers’ liquidity or financial condition. The allowance for loan losses depends on management estimates and judgments.
- Credit exposure included $89.378 million of commitments to extend credit and $3.520 million of letters of credit; many commitments may expire undrawn. Performing TDRs totaled $0.843 million. No TDRs defaulted in the periods disclosed.
- The company reported no pending legal proceedings other than routine litigation. Management reported effective disclosure controls and no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Whether continued loan and deposit growth can sustain earnings as net interest margin contracts and funding costs rise.
- Credit quality and loss-reserve adequacy, particularly given commercial real estate’s 50.7% share of loans, higher OREO, and increased provision expense.
- The liquidity and earnings effects of time-deposit growth, including the $10 million brokered CD and approximately $34 million raised through an 18-month local CD offering at 1.16% APY.
- Execution, regulatory approval, cost, and profitability assumptions for contemplated branch expansion.
- Repayment or refinancing plans for the $10 million 6% notes due in 2017, and actual utilization of off-balance-sheet credit commitments.