Bank of the James Financial Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statement amounts are in thousands of dollars unless otherwise indicated. The company operates community banking and mortgage origination businesses, primarily in Central Virginia, with expansion into Roanoke, Charlottesville, and Harrisonburg.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1,051 for Q2; $1,938 for first six months | $957 Q2 2015; $1,884 first six months 2015 |
| Basic and diluted EPS | $0.24 Q2; $0.44 first six months | $0.28 Q2 2015; $0.56 first six months 2015 |
| Net interest income | $4,743 Q2; $9,430 first six months | $4,324 Q2 2015; $8,520 first six months 2015 |
| Net interest margin | 3.80% Q2; 3.85% first six months | 3.79% Q2 2015; 3.80% first six months 2015 |
| Noninterest income / expense | $1,316 / $4,254 Q2; $2,324 / $8,444 first six months | $1,078 / $3,935 Q2 2015; $2,025 / $7,615 first six months 2015 |
| Total assets | $545,730 | $527,143 at Dec. 31, 2015 |
| Total deposits | $493,535 | $467,610 at Dec. 31, 2015 |
| Net loans | $452,044; gross loans $456,931 | $430,445 net; gross loans $435,128 at Dec. 31, 2015 |
| Cash and cash equivalents | $24,433 | $28,655 at Dec. 31, 2015 |
| Stockholders’ equity | $50,553 | $48,196 at Dec. 31, 2015 |
- Q2 net income rose about 10% year over year; first-half net income rose about 3%. EPS declined because the share count increased following the December 2015 common-stock placement: weighted-average shares were 4.378 million versus 3.372 million in 2015.
- First-half operating cash flow was $222; investing cash flow was $(19,844), financing cash flow was $15,400, and cash declined by $4,222.
- The company retired $10 million of 6% capital notes on January 5, 2016 using proceeds from its stock placement. No capital notes remained outstanding at June 30; deposits were its principal funding source.
- Bank-level regulatory capital ratios were 9.34% leverage, 10.75% Tier 1 risk-based and CET1, and 11.80% total risk-based. The filing says the Bank exceeded “well-capitalized” benchmarks. These are Bank-only figures.
- Available liquidity was reported as $58.242 million, including cash and available-for-sale securities. $10.793 million of those securities were pledged; the related line of credit had no balance.
Material changes versus comparable periods
- First-half interest income increased to $10.528 million from $9.817 million, primarily on loan growth; net interest income increased to $9.430 million from $8.520 million. Loan yields were pressured by competition, while the reported six-month margin improved to 3.85% from 3.80%.
- Interest expense fell to $1.098 million from $1.297 million, chiefly because the capital notes were retired, partly offset by higher deposit costs and balances.
- First-half noninterest income rose to $2.324 million from $2.025 million, including higher mortgage-loan gains and securities-sale gains ($228 versus $33). Noninterest expense increased to $8.444 million from $7.615 million, with expansion-related personnel, professional/data-processing, and marketing costs among the drivers.
- Assets increased 3.5% from year-end 2015, deposits 5.5%, and net loans 5.0%. Time deposits grew to $160.554 million from $143.421 million.
- Nonperforming assets declined to $4.960 million from $5.371 million at year-end. Nonaccrual loans fell to $2.540 million from $3.406 million, while other real estate owned rose to $2.420 million from $1.965 million after four foreclosures and one property disposition during the half.
Outlook, risks, and unusual items
- No quantified earnings or financial guidance is provided. Management expected deposit growth and loan repayments to support liquidity, while monitoring liquidity in light of loan growth.
- Management anticipated further branch expansion, subject to regulatory approval. Potential locations included Appomattox, Rustburg, Lexington, and the Timberlake Road area; estimated fit-out costs were $900,000–$1.5 million per site, with new branches generally expected to become profitable within 12–18 months.
- Management expected purchase mortgages to make up most mortgage originations, with refinancing activity continuing to decline. It noted that higher interest rates could pressure mortgage-segment revenue; near-term mortgage revenue expectations also depended on originator hiring and market presence.
- The loan-loss provision was $250 in Q2 and $450 for the first half, versus $57 and $157, respectively, in 2015. The allowance was $4.887 million, or 1.07% of loans. Management considered it adequate, but cited increased industry and commercial-real-estate concentration risk; commercial real estate represented about 49% of gross loans.
- Past-due loans totaled $4.530 million, including $2.460 million more than 90 days past due; none more than 90 days past due were accruing. OREO included six properties at quarter-end. Performing troubled debt restructurings were $639,000; there were no new TDR modifications in the first half of 2016.
- Off-balance-sheet commitments to extend credit were $95.945 million and letters of credit were $2.984 million. Actual funding needs depend on whether customers draw on commitments.
- Management identified economic conditions, competition, regulation, real-estate collateral values, interest rates, and customers’ liquidity and financial condition as risks. The company reported no material change in previously disclosed risk factors, no pending material legal proceedings beyond routine litigation, and effective disclosure controls.
- Unrealized gains on available-for-sale securities contributed to first-half other comprehensive income of $944. The company reported one U.S. government-sponsored security under impairment evaluation but concluded its unrealized loss was not other-than-temporary.
Important facts for investors to verify
- Whether loan growth and deposit funding continue without weakening underwriting or liquidity, particularly given commercial-real-estate concentration.
- Subsequent trends in nonaccruals, past-due loans, foreclosures, OREO sales, charge-offs, and the adequacy of the loan-loss allowance.
- Whether expansion costs and planned branch openings produce the expected growth and profitability, and whether regulatory approvals are obtained.
- How changes in loan competition, deposit pricing, interest rates, and mortgage purchase/refinance mix affect margins and fee income.
- The impact of the substantially higher share count on per-share earnings and returns, and the sustainability of the dividend and capital ratios.
- The filing notes that results for the six months are not necessarily indicative of full-year results; it provides no formal full-year earnings guidance.