10-Q: Bank of the James Q3 Net Income Jumps 38% on Strong Net Interest Margin

Bank of the James Financial Group reported a 38.3% increase in third-quarter net income, driven by higher net interest income and lower interest expense, despite a slight year-to-date decline.

Summary

• Net income for the three months ended September 30, 2025, increased by 38.3% to $2.752 million ($0.61 EPS) from $1.990 million ($0.44 EPS) in the same period of 2024.
• Year-to-date net income for the nine months ended September 30, 2025, was $6.299 million ($1.39 EPS), a slight decrease of 0.4% from $6.326 million ($1.39 EPS) in the comparable period of 2024.
• Total assets grew by 4.18% to $1.020 billion at September 30, 2025, from $979.244 million at December 31, 2024.
• Total deposits increased by 4.24% to $919.796 million at September 30, 2025, from $882.404 million at December 31, 2024.
• Total loans (excluding held for sale) increased by 2.37% to $659.586 million at September 30, 2025, from $643.596 million at December 31, 2024.
• Net interest income for Q3 2025 rose by 10.5% to $8.300 million, and by 12.6% to $24.269 million for the nine months ended September 30, 2025, compared to the same periods in 2024.
• Net interest margin expanded to 3.44% for Q3 2025 and 3.37% for the nine months, up from 3.16% and 3.07% respectively in 2024.
• Interest expense decreased by 14.4% for Q3 2025 and 9.5% for the nine months ended September 30, 2025, compared to 2024.
• Wealth management fees increased to $1.362 million for Q3 2025 and $3.917 million for the nine months, reflecting growth in assets under management (AUM) to $984.747 million.
• Nonperforming assets increased to $1.895 million at September 30, 2025, from $1.640 million at December 31, 2024.
• The allowance for credit losses (ACL) decreased to $6.298 million (0.95% of total loans) at September 30, 2025, from $7.044 million (1.09% of total loans) at December 31, 2024.
• Stockholders' equity increased by 18.66% to $76.972 million at September 30, 2025, from $64.865 million at December 31, 2024.
• The NBB Note's maturity date was extended to August 31, 2030, and its interest rate increased to 5.65% per annum, effective September 1, 2025.

Sentiment

Score: 7

Explanation: The company demonstrated strong quarterly performance with significant net income growth and net interest margin expansion, driven by effective interest rate management and deposit repricing. Wealth management also showed robust growth. However, year-to-date net income was flat, and nonperforming assets saw a slight increase, indicating some underlying pressures. The projected cost savings from the new core processing contract are a positive for future profitability.

Positives

• Net income for the three months ended September 30, 2025, increased significantly by 38.3% to $2.752 million compared to $1.990 million in the prior year's quarter.
• Net interest income showed strong growth, increasing by 10.5% to $8.300 million for the quarter and 12.6% to $24.269 million year-to-date, driven by higher loan balances and improved yields on earning assets.
• Net interest margin expanded to 3.44% for the quarter and 3.37% year-to-date, reflecting an improved balance between asset sensitivity and funding mix.
• Interest expense decreased by 14.4% for the quarter and 9.5% year-to-date, primarily due to repricing of maturing time deposits and money market accounts at lower rates and disciplined deposit pricing strategies.
• Wealth management fees increased to $1.362 million for the quarter and $3.917 million year-to-date, with Assets Under Management (AUM) growing to $984.747 million at September 30, 2025, from $853.997 million at December 31, 2024.
• Total assets increased by 4.18% to $1.020 billion and total deposits grew by 4.24% to $919.796 million, indicating healthy balance sheet expansion.
• Stockholders' equity increased by 18.66% to $76.972 million, primarily reflecting retained earnings growth and a reduction in accumulated other comprehensive loss.
• The allowance for credit losses to nonperforming loans ratio was strong at 332.35% at September 30, 2025, indicating robust coverage of potential loan losses.
• All Bank-level regulatory capital ratios (Leverage, CET1, Tier 1 risk-based, and Total risk-based) exceeded well-capitalized benchmarks at September 30, 2025.
• Data processing expense decreased for the nine-month period due to lower ongoing fees following the renewal of the core processing system contract and the application of vendor credits.
• The amended core-service provider contract, effective April 1, 2025, is projected to generate significant cost savings of over $40,000 per month over its 65-month term.

Negatives

• Year-to-date net income for the nine months ended September 30, 2025, saw a slight decrease of 0.4% to $6.299 million compared to $6.326 million in the same period of 2024, primarily due to higher operating expenses.
• Nonperforming assets increased to $1.895 million at September 30, 2025, from $1.640 million at December 31, 2024, and $1.295 million at September 30, 2024.
• Nonperforming loans as a percentage of total loans increased to 0.29% at September 30, 2025, from 0.25% at December 31, 2024.
• Net charge-offs for the nine months ended September 30, 2025, were $244,000, an increase from $84,000 in the comparable 2024 period.
• Gains on sale of loans held for sale decreased for the three months ended September 30, 2025, to $1.242 million from $1.326 million in the prior year's quarter.
• Gains on sales of available-for-sale securities decreased for both the three and nine months ended September 30, 2025, compared to the corresponding periods in 2024.
• Other noninterest income decreased for the nine months ended September 30, 2025, reflecting lower miscellaneous gains and fewer one-time income items.
• Noninterest expense increased by 4.4% for the quarter and 11.1% year-to-date, primarily due to higher salaries and benefits and continued investment in technology, data processing, and customer-facing systems.
• Professional and other outside expenses increased significantly for the nine-month period due to one-time consulting fees incurred earlier in the year related to the core processing system contract renewal.
• The interest rate on the NBB Note increased to 5.65% from 3.90% effective September 1, 2025, which will lead to higher interest expense on this debt.
• Unrealized losses on securities available-for-sale totaled $19.928 million pretax and $15.743 million after tax at September 30, 2025, primarily due to market interest rate movements.

Risks

• Problems with technology utilized by the company, including potential exposure to fraud, negligence, computer theft, cyber-crime, cyber-threats, and the ability to maintain the security of its data processing and information technology systems.
• Operating, legal, and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or the company specifically, such as government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its related regulations), and increased competition from other providers of financial services due to such regulations.
• Economic, market, political, and competitive forces affecting the company's banking and other businesses, including changes in interest rates, monetary policy, and general economic conditions, which may impact net interest income, credit quality, loan demand, or overall conditions in the market area.
• Geopolitical risks, including economic and political tensions with China, the ongoing war between Russia and Ukraine and potential expansion of combatants, sanctions on Russia, and the potential impact of tariffs, trade restrictions, or changes in U.S. trade policy on businesses in the market area and business and agricultural borrowers.
• The ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the company's or banking industry's reputation becomes damaged.
• The adequacy of the level of the company's allowance for credit losses, the amount of credit loss provisions required in future periods, and the failure of assumptions underlying the allowance for credit losses.
• Reliance on the management team, including the ability to attract and retain key personnel.
• Changes in the value of real estate securing loans made by the Bank.
• Adoption of new accounting standards or changes in existing standards.
• Compliance or operational risks related to new products, services, ventures, or lines of business, if any, that the company may pursue or implement.
• The risk that the company's analysis of these risks and forces is incorrect or that the strategies developed to address them are unsuccessful.
• The stability of the overall banking industry in the United States.
• Prolonged U.S. federal government shutdowns (lapses in appropriations), which may disrupt economic activity, delay or reduce federal payments and guaranty programs, constrain capital markets or regulatory processes, and reduce the availability of government economic data.
• Developments related to digital assets, including cryptocurrencies and stablecoins, and changes in related laws, supervisory expectations, capital or accounting frameworks, customer adoption, or payment rails.
• The ability to pay dividends, repurchase shares, or otherwise return capital to shareholders, which is subject to capital position and earnings, applicable laws and regulations, regulatory approvals or supervisory actions, and the discretion of the Board of Directors.
• Changes in federal, state, or local tax laws, regulations, rates, or administrative interpretations and the timing of regulatory guidance or implementation that could affect the effective tax rate, deferred tax assets, capital planning, or after-tax earnings.
• Concentration risk in commercial real estate loans, particularly non-owner occupied, which totaled $215.798 million or approximately 32.7% of total loans at September 30, 2025.

Future Outlook

Management anticipates that purchase mortgage originations will continue to represent a significant percentage of mortgage originations in the short term due to a relatively higher mortgage interest rate environment, which could also limit refinancing activity and put pressure on mortgage segment revenue. The amended core-service provider contract, which began April 1, 2025, is projected to generate significant cost savings of over $40,000 per month over its 65-month term. While management does not anticipate needing to raise deposit rates, doing so would adversely impact net interest margin and profitability. A stabilizing interest rate environment is likely to allow for increased net interest margin, but rapid rate decreases could put short-term pressure on the margin as the Bank is currently asset-sensitive. The Company continues to evaluate areas for viable branch locations and may acquire additional suitable sites, with new branches generally expected to become profitable within 12 to 18 months.

Management Comments

• The improvement in profitability during the third quarter of 2025 reflects continued balance sheet growth, disciplined funding cost management, and stable asset quality, while year-to-date results were tempered by higher operating expenses associated with technology initiatives and regulatory compliance investments.
• Management believes this operating strategy [providing varied banking services with prompt response time and community bank service] has particular appeal in the Bank's market areas.
• Management anticipates that PWW will continue to contribute meaningfully to the Company's consolidated net income.
• The Company remains focused on managing expenses efficiently while investing in strategic initiatives to support long-term growth, technology advancement, and customer engagement.
• Management believes the current allowance is appropriate to absorb expected losses inherent in the loan portfolio.
• Management believes that liquid assets were adequate at September 30, 2025 and anticipates additional liquidity from deposit growth and loan repayments.

Industry Context

The banking industry continues to navigate a dynamic interest rate environment. Bank of the James's ability to expand its net interest margin through disciplined funding cost management and improved loan yields, despite stabilizing or declining rates, positions it favorably. The growth in wealth management fees and assets under management reflects a broader trend of financial institutions diversifying revenue streams beyond traditional lending. The challenges in mortgage origination volume due to elevated interest rates are consistent with industry-wide trends, impacting many mortgage-focused segments. The focus on technology investments and cost savings through core processing contracts aligns with industry efforts to enhance efficiency and customer experience.

Comparison to Industry Standards

• The Bank's capital ratios (Leverage ratio 9.05%, CET1 ratio 11.45%, Tier 1 risk-based capital ratio 11.45%, Total risk-based capital ratio 12.25%) all exceed the 'well-capitalized' regulatory benchmarks (5.00%, 6.50%, 8.00%, 10.00% respectively), indicating a strong capital position relative to regulatory standards for smaller, less complex financial institutions.
• The allowance for credit losses to nonperforming loans ratio of 332.35% at September 30, 2025, suggests a robust coverage of potential loan losses, which is a positive indicator compared to industry peers.
• The increase in nonperforming assets to 0.29% of total loans, while still low, warrants monitoring as it slightly increased from 0.25% at December 31, 2024. This trend should be compared against regional and national bank averages to assess relative performance.
• The growth in Assets Under Management (AUM) for the Investment Advisory segment to $984.747 million from $853.997 million reflects strong performance in a competitive wealth management market, potentially outperforming some regional peers in asset gathering.

Legal Proceedings

• The Company is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.

Stakeholder Impact

• Shareholders: Positive impact from increased net income for the quarter, improved EPS, and higher stockholders' equity. Potential for continued dividends, though subject to capital position and regulatory approvals.
• Customers: Benefit from expanded branch network and continued provision of varied banking services. Wealth management clients benefit from AUM growth.
• Employees: Impacted by staffing additions to support commercial and retail growth, and accruals for anticipated year-end employee compensation.
• Creditors: The repayment of $10.050 million in 2020 Notes and the extension of the NBB Note maturity provide clarity on debt management. Strong capital ratios indicate financial stability.

Next Steps

• Continue to monitor sources and uses of funds to meet cash flow requirements while seeking to maximize profits.
• Evaluate areas within service areas to identify viable branch locations.
• Acquire additional suitable sites for branch expansion.
• Open additional branches during the next two fiscal years, subject to regulatory approval.
• Upfit the real property at 1925 Atherholt Road, Lynchburg, Virginia, for a potential branch location (no specific timeline mentioned).
• Monitor concentrations within the commercial real estate loan portfolio monthly.
• Adopt ASU 2024-03 (Expense Disaggregation Disclosures) for annual reporting periods beginning after December 15, 2026, and interim periods within annual periods beginning after December 15, 2027.

Key Dates

Recommendation

While the third quarter showed strong net income growth and significant net interest margin expansion, the year-to-date net income remained relatively flat. The increase in nonperforming assets, though still low, warrants careful monitoring. The company demonstrates solid capital adequacy and effective cost management with the new core processing contract. However, the mixed year-to-date performance and slight uptick in credit risk indicators suggest a 'hold' position, awaiting consistent positive trends across all key metrics before a more aggressive stance.

Keywords

Community Banking, Mortgage Banking, Investment Advisory, Financial Results, Net Interest Income, Earnings Per Share, Assets Under Management, Loan Growth, Deposit Growth, Credit Quality, Nonperforming Loans, Capital Ratios, SEC Filing, Regional Bank, Virginia Banking, Wealth Management, Interest Rates, Liquidity, Shareholder Equity