Bank of the James Financial Group, Inc. — 2014 Form 10-K
Business and reporting period. The company is a Virginia bank holding company whose primary business is community banking through Bank of the James, with mortgage origination as a second reportable segment. It serves the Lynchburg-area Region 2000 market, with additional activity in Charlottesville and Roanoke. This annual report covers the fiscal year ended December 31, 2014; comparisons are with 2013. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Net income | $3.413 | $3.060 | Up 11.5%; basic and diluted EPS rose to $1.01 from $0.91 |
| Net interest income | $16.404 | $15.989 | Up 2.6% |
| Net interest margin | 3.97% | 4.08% | Down 11 basis points |
| Noninterest income | $3.587 | $3.478 | Mortgage income increased; securities gains declined |
| Noninterest expense | $15.235 | $14.825 | Up 2.8%; efficiency ratio increased to 76.21% from 74.89% |
| Total assets | $460.865 | $434.511 | Up 6.1% |
| Net loans | $394.573 | $339.994 | Up 16.1%; commercial real estate was $207.262 |
| Total deposits | $399.497 | $387.398 | Up 3.1%; noninterest-bearing deposits rose 18.1% |
| Stockholders’ equity | $34.776 | $29.772 | Up $5.004 |
Profitability and costs. Return on average assets was 0.76% (0.71% in 2013); return on average equity was 10.28% (10.13%). Lower loan-loss provision, FDIC expense, and OREO expense, plus higher mortgage income and net interest income, contributed to earnings growth. Salary and benefits increased to $7.940 million from $7.161 million.
Cash flow and liquidity. Operating cash flow was $5.625 million, investing cash flow was negative $30.292 million, and financing cash flow was positive $20.739 million. Cash and cash equivalents fell $3.928 million to $12.743 million. Management reported liquid assets of $37.138 million, down from $62.762 million, and considered liquidity adequate. Available nondeposit funding was reported as $108.498 million, including $78.370 million of stated available FHLB capacity; access to the full amount depends on additional collateral.
Funding and debt. Year-end liabilities included $399.497 million of deposits, $3.189 million of federal funds purchased, $12.000 million of FHLB advances, and $10.000 million of capital notes. The notes bear 6% interest and mature April 1, 2017, subject to the company’s prepayment option. The Bank remained classified as well capitalized; its 2014 total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 13.04%, 11.79%, and 9.63%, respectively.
Material changes and notable items
- Loan growth was strong: total loans increased to $399.363 million from $345.180 million. Commercial real estate represented about 51.9% of the loan portfolio.
- The Bank sold $27.708 million of available-for-sale securities during 2014, with proceeds used in part to fund loan growth. Available-for-sale securities declined to $24.395 million from $46.091 million.
- Credit costs improved: provision for loan losses fell to $55,000 from $540,000, and net charge-offs declined to $451,000 from $889,000. The allowance fell to $4.790 million, or 1.20% of loans, from $5.186 million, or 1.50%.
- Nonperforming assets were $4.462 million, slightly below $4.517 million in 2013. Nonaccrual loans increased to $3.506 million from $3.066 million, while OREO declined to $956,000 from $1.451 million.
- Management changed the allowance methodology from a three-year to a four-year historical charge-off look-back period. The filing estimates that the change increased 2014 provision expense by $1.045 million relative to the prior methodology; under that prior calculation, provision would have been a $990,000 credit rather than the reported $55,000 expense.
- Other comprehensive income was $2.032 million, compared with a $2.989 million loss in 2013, primarily reflecting the change in unrealized available-for-sale securities values.
Outlook, commentary, and risks
- Management described the local economy and real estate market as improving but said demand for lending remained constrained by uncertainty among small and midsize businesses and a limited number of qualified borrowers. It anticipated continued difficult conditions and expected to increase deposits in 2015 to support loan growth.
- Management expected short-term interest rates to remain low in the near term, while acknowledging that rates cannot be predicted with confidence. A rise in long-term rates could reduce mortgage refinancing activity and adversely affect the Mortgage Division.
- The Mortgage Division originated 350 loans totaling $62.545 million in 2014, versus 298 loans totaling $52.177 million in 2013. Loans were presold to investors; management cited growth opportunities from new offices but expected a shift toward purchase mortgages if rates rise.
- The Bank received approval to open a Harrisonburg branch/commercial loan office and anticipated opening it within three to nine months after the filing. Other possible branch expansion was contingent on regulatory approval; estimated build-out costs for undeveloped locations were $0.9–$1.5 million per location.
- Key risks include local economic and real estate conditions, commercial real estate and construction credit exposure, competition for loans and deposits, interest-rate and liquidity changes, and evolving banking regulation. Commitments to extend credit were $83.312 million and standby letters of credit were $4.252 million; these contractual amounts are not necessarily expected cash outflows.
- The company paid $0.15 per share in dividends in 2014 and authorized a repurchase of up to 100,000 shares through October 2015; no shares had been repurchased as of March 20, 2015. Future dividends remain subject to board discretion and Bank-level regulatory and capital restrictions.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The independent auditor issued an unqualified opinion on the consolidated financial statements. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether rapid loan growth—particularly commercial real estate growth—has been matched by sound underwriting, stable deposits, and adequate allowance coverage.
- The quality and performance of the $3.506 million of nonaccrual loans, and the assumptions underlying the four-year loss look-back and resulting allowance.
- Whether deposit growth and available, collateral-dependent borrowing capacity can fund planned loan growth while maintaining adequate liquidity.
- Whether margins and efficiency improve, given the 11-basis-point decline in net interest margin and higher personnel and operating costs.
- The results, costs, and timing of the Harrisonburg opening and other expansion plans, along with the sustainability of mortgage income under changing rate conditions.
- The terms and repayment capacity associated with the $10 million of 6% capital notes, which mature in 2017.