Bank of the James Financial Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Financial statements are unaudited. Unless stated otherwise, amounts below are in thousands of dollars.
Business context and financial results
The company is a Virginia bank holding company operating primarily through Bank of the James, a community bank serving Central Virginia. Other activities include mortgage origination, investment services, and insurance. Mortgage loans are generally presold to investors.
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Interest income | $4,545 | $4,537 |
| Interest expense | $591 | $616 |
| Net interest income | $3,954 | $3,921 |
| Provision for loan losses | $55 | $235 |
| Other operating income | $717 | $964 |
| Other operating expenses | $3,609 | $3,531 |
| Net income | $705 | $788 |
| Basic and diluted EPS | $0.21 | $0.24 |
- Net income fell about 11%; management attributed the decline mainly to lower securities-sale gains and mortgage activity, partly offset by a smaller loan-loss provision.
- Net interest margin was 4.01%, versus 4.10% a year earlier. Average yield on earning assets fell to 4.60% from 4.74%; average rate paid on interest-bearing deposits declined to 0.52% from 0.56%.
- Annualized return on average assets was 0.65%, compared with 0.74%; annualized return on equity was 8.90%, compared with 11.02%.
- Cash provided by operating activities was $1,250, versus $1,896. Investing activities used $6,626, principally reflecting net loan growth; financing activities provided $6,620, including a $10,728 increase in deposits and repayment of $4,108 in federal funds purchased. Cash and cash equivalents increased $1,244 to $17,915.
Financial position, credit, debt, and liquidity
- Total assets rose 1.86% to $442,584. Total loans increased 2.68% to $354,417; commercial real estate represented 50.32% of the loan portfolio.
- Deposits increased 2.77% to $398,126, including growth in noninterest-bearing demand deposits. Stockholders’ equity was $31,323, up from $29,772.
- Allowance for loan losses was $5,261, or 1.48% of total loans, compared with $5,186, or 1.50%, at year-end. Q1 charge-offs were $4 and recoveries were $24; management considered the allowance adequate.
- Nonperforming assets increased to $5,021 from $4,517. Nonaccrual loans rose to $3,307 from $3,066, and OREO increased to $1,714 from $1,451. Loans over 90 days past due totaled $3,317; none were accruing interest. Performing troubled debt restructurings totaled $561.
- Liquid assets, including cash and available-for-sale securities, were $63,251; management stated liquidity was adequate. Bank capital ratios were 9.29% leverage, 11.96% Tier 1 risk-based, and 13.21% total risk-based, above the stated well-capitalized benchmarks.
- Borrowings included $2,000 of FHLB advances at a fixed 3.785% rate, maturing April 2015, and $10,000 of 6% capital notes due April 2017. Federal funds purchased were nil at quarter-end. The filing notes that the capital notes do not qualify as consolidated equity capital.
Material changes, outlook, and risks
- Compared with Q1 2013, noninterest income declined mainly because securities-sale results shifted from a $259 gain to a $6 loss; service charges and fees improved, while mortgage fee income declined. Expenses increased 2.21%, including higher personnel and data-processing costs.
- Management said competitive pressure may continue to constrain loan yields and mortgage revenue. It expected home-purchase mortgages to make up a larger share of originations as refinancing activity declines; management anticipated mortgage rates would remain near then-current historic lows through the rest of 2014.
- The Bank was considering additional branches, subject to regulatory approval, but had not set opening dates. Estimated improvements and equipment costs were $900 to $1,500 per location; management generally expected a new branch to become profitable within 12–18 months.
- Off-balance-sheet commitments to extend credit were $72,123 and letters of credit were $762. Actual funding needs may be lower because commitments may expire undrawn.
- Key stated risks include local and general economic conditions, competition, banking regulation, real-estate collateral values, interest-rate movements, customer liquidity, and uncertainty in estimating the allowance for loan losses. Management identified no liquidity trend it believed likely to have a material negative impact.
- Unrealized losses on investment securities totaled $2,519; management did not consider them other-than-temporary, citing expectations of recovering amortized cost. Management’s assessment depends on issuer and market conditions.
- No TDR loan modifications were made during the quarter, and no such modifications from the prior 12 months defaulted during the quarter. The company reported no pending material legal proceedings other than routine litigation.
Important facts for investors to verify
- Reconcile reported net interest income: the income statement reports $3,954, while the average-balance schedule shows $3,979 for Q1 2014 (and $3,956 for Q1 2013 versus $3,921 in the income statement). The filing text does not explain this difference.
- Track whether nonaccrual loans, past-due balances, OREO, and criticized loan categories improve or deteriorate, and assess allowance adequacy against loan growth and credit conditions.
- Assess the sustainability of earnings as securities gains, mortgage origination revenue, funding costs, and net interest margin change.
- Monitor deposit growth, loan funding, liquidity, capital ratios, and repayment or refinancing plans for the 6% notes and FHLB advance.
- Check subsequent filings for branch-opening decisions, related capital spending, and progress toward profitability at new locations.