Bank of the James Financial Group, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2016. The company is a Virginia bank holding company whose principal business is community banking, with a mortgage origination and sale segment. Its primary market is Central Virginia, with expansion into Charlottesville, Roanoke, and Harrisonburg. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Profit: Net income was $0.760 million, down 14.3% from $0.887 million. Basic and diluted EPS were $0.17 versus $0.20. Annualized return on average assets was 0.53% (0.68% in Q1 2016) and return on average equity was 6.05% (7.30%).
- Income and margins: Interest income rose 5.2% to $5.509 million; interest expense increased 22.4% to $0.671 million. Net interest income increased 3.2% to $4.838 million, while net interest margin fell to 3.65% from 3.89%. Noninterest income declined to $0.881 million from $1.008 million. Noninterest expense rose 7.8% to $4.517 million. Provision for loan losses was $0.100 million, versus $0.200 million.
- Cash flow: Operating activities provided $3.765 million; investing activities used $10.013 million; financing activities provided $2.824 million. Cash and cash equivalents declined $3.424 million during the quarter to $25.259 million.
- Balance sheet and funding: Total assets were $578.433 million, up 0.7% from year-end. Gross loans were $471.960 million, up 0.4%; commercial real estate represented 50.75% of loans. Deposits were $521.199 million, down 0.4%. Available-for-sale securities increased to $48.220 million from $40.776 million.
- Liquidity and capital: Management reported $73.479 million of liquid assets, including $13.798 million of pledged available-for-sale securities; the related line of credit had no balance. The Bank’s leverage ratio was 9.53%, CET1 and Tier 1 risk-based ratios were 11.02%, and total risk-based capital was 12.17%. The Bank exceeded regulatory well-capitalized benchmarks.
- Debt and equity: The company issued $5.0 million of 4% capital notes, due January 24, 2022, with optional prepayment beginning January 24, 2018. It contributed $3.0 million of proceeds to the Bank as equity capital. Stockholders’ equity was $50.191 million at quarter-end; the company paid a $0.06-per-share dividend.
Material changes versus comparable periods
- Net income and EPS declined despite higher interest income and net interest income. Higher funding costs, lower noninterest income, and increased operating expenses more than offset the revenue growth.
- Lower gains on mortgage loan sales ($0.371 million versus $0.491 million) and securities sales ($0.010 million versus $0.065 million) contributed to the decline in noninterest income.
- Expenses increased in part from staffing and operating costs associated with expansion into Charlottesville, Harrisonburg, and Roanoke. Salaries and employee benefits rose to $2.380 million from $2.237 million.
- Compared with year-end, nonperforming assets increased to $5.897 million from $4.920 million. Nonaccrual loans rose to $3.147 million from $2.550 million, and other real estate owned (OREO) increased to $2.750 million from $2.370 million.
Outlook, risks, and unusual items
- Management expects competition to continue pressuring loan yields. It anticipates mortgage originations may increase during the remainder of 2017, citing seasonal housing inventory and additional originators, while warning that rising rates could pressure mortgage-segment revenue. No quantified earnings or revenue guidance is provided.
- The company is considering additional branch locations. Construction began in April 2017 on a permanent Appomattox branch, with completion anticipated in late 2017 or early 2018; other potential locations are not expected to open before 2018. Estimated improvements and equipment costs are $0.9 million to $1.5 million per location. Openings are subject to regulatory approval.
- Credit risk includes a sizable commercial real estate concentration and higher nonperforming assets. The allowance for loan losses remained $5.716 million, or 1.21% of loans; management stated it believed the allowance was adequate. Q1 net charge-offs were $0.100 million. OREO rose following foreclosures, and management’s loan-loss and OREO valuations depend on estimates and collateral appraisals.
- Off-balance-sheet commitments to extend credit were $94.654 million and letters of credit were $3.377 million. These are contractual amounts, not expected cash outflows; commitments may be drawn.
- Management identified economic conditions, competition, regulation, real-estate values, interest-rate changes, and customer liquidity or financial condition as factors that could cause actual results to differ from forward-looking statements. Management reported effective disclosure controls and no significant changes in internal controls over financial reporting. No material pending legal proceedings were reported other than routine litigation.
Important facts for investors to verify
- Whether loan delinquencies, nonaccrual balances, foreclosures, and OREO continue to increase, and whether collateral values support the reported allowance.
- How the commercial real estate concentration and expansion into new markets affect credit quality, deposit growth, expenses, and profitability.
- Whether net interest margin stabilizes as loan yields face competitive pressure and deposit and note funding costs rise.
- Actual performance of the mortgage segment against management’s qualitative 2017 expectations, including sensitivity to interest-rate and housing-market changes.
- The filing’s average-balance net-interest schedule reports net interest income of $4.843 million, while the income statement and MD&A report $4.838 million; verify the source presentation and reconciliation.