Bank of the James Financial Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; financial statements are unaudited. Dollar amounts are in thousands unless otherwise stated. The company is a Virginia community bank holding company, with community banking as its core business and mortgage lending as a material fee-based activity.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $4,324 | $4,023 | $8,520 | $7,977 |
| Provision for loan losses | $57 | $0 | $157 | $55 |
| Noninterest income | $1,078 | $957 | $2,025 | $1,674 |
| Noninterest expense | $3,935 | $3,757 | $7,615 | $7,366 |
| Net income | $957 | $843 | $1,884 | $1,548 |
| Diluted EPS | $0.28 | $0.25 | $0.56 | $0.46 |
- Reported net interest margin was 3.79% for Q2 and 3.80% for the first half, down from 3.96% and 3.98%, respectively, a year earlier. Average yield on earning assets declined while funding costs rose.
- Annualized return on assets was 0.79% and return on equity was 10.71% for both reported 2015 periods; both measures improved from the comparable 2014 periods.
- Mortgage income was $613 in Q2 and $1,136 year to date, compared with $407 and $696. Management attributed the increase largely to production from the Roanoke mortgage office.
Financial condition, cash flow and capital
- At June 30, 2015, total assets were $492,836, up 6.9% from year-end 2014. Net loans were $412,425, up 4.5%; total deposits were $445,386, up 11.5%.
- Deposit growth was concentrated in time deposits, which rose to $141,466 from $97,054. Management cited a $10 million brokered certificate of deposit and approximately $34 million raised through a local 18-month CD offer. Noninterest-bearing demand deposits increased to $83,828; NOW, money market and savings balances declined.
- Cash and cash equivalents were $18,837, versus $12,743 at year-end. Available-for-sale securities were $29,448, up from $24,395, as management sought to increase on-balance-sheet liquidity. Management reported liquid assets of $48,285 and considered liquidity adequate, while noting it was monitoring funding needs associated with loan growth.
- For the first half, operating cash flow was $272, investing cash outflow was $24,541, and financing cash inflow was $30,363. Deposit growth funded much of the investing outflow, which included net loan originations and securities activity.
- At June 30, the Bank had $10,000 of 6% capital notes due April 1, 2017. Federal funds purchased and FHLB borrowings were both zero at period-end; the company repaid $12,000 of FHLB advances during the half. The Bank’s reported leverage, Tier 1 risk-based and total risk-based capital ratios were 9.40%, 10.80% and 11.89%, respectively, above the stated well-capitalized benchmarks.
Material changes and credit quality
- Loan growth was led by commercial real estate, which represented 51.7% of total loans. Commercial real estate loans were $215,755 at June 30, compared with $207,262 at year-end.
- Nonperforming assets fell to $3,974 from $4,462, although OREO rose to $2,065 from $956 after foreclosure of a previously nonperforming loan. Nonaccrual loans declined to $1,909 from $3,506. Total past-due loans were $4,725, compared with $4,340 at year-end.
- The allowance for loan losses declined to $4,586 from $4,790, or 1.10% of loans versus 1.20% at year-end. First-half net charge-offs were $361, compared with $64 in the first half of 2014; the filing says $175 of first-half 2015 charge-offs related to one borrowing relationship. Management considered the allowance adequate and said the higher charge-offs did not indicate an ongoing negative trend.
- Loans classified as substandard were $11,716, up from $11,338 at year-end; special-mention loans were $8,005, up from $5,667. Performing troubled debt restructurings totaled $847, versus $376 at year-end. Two commercial real estate TDRs totaling $454 were reported for Q2; modifications were maturity extensions.
- Available-for-sale securities had $1,146 of gross unrealized losses at June 30. Management did not consider these losses other-than-temporary, citing its expectation of recovering amortized cost and the credit quality of the securities.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management said competition was pressuring loan yields and could weigh on interest income; growth in time deposits also increased interest expense.
- Management expected purchase mortgages to remain the majority of mortgage originations, with refinancing activity likely to decline. It anticipated mortgage revenue pressure in a rising-rate environment, while also noting expectations for mortgage rates to remain near historic lows for the rest of 2015 and for the division to maintain or increase revenue. These are management expectations, not guarantees.
- The Bank anticipated opening a full-service Harrisonburg branch in Q4 2015, subject to regulatory approval, and was considering additional branches. Management generally expected new branches to become profitable within 12–18 months; estimated upfit costs were $900–$1,500 per location.
- Key disclosed risks include local and broader economic conditions, competition, banking regulation, real estate values, interest-rate changes, and changes in customers’ liquidity or financial condition. The allowance for loan losses depends on estimates and subjective judgments.
- Off-balance-sheet commitments at June 30 totaled $93,019: $88,886 of commitments to extend credit and $4,133 of letters of credit. Actual funding needs may differ because commitments may expire undrawn.
- The company reported no pending material legal proceedings other than routine litigation incidental to its business, and marked risk factors “not applicable.” Management stated disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the higher charge-offs, substandard and special-mention balances, and increased OREO lead to further credit losses or allowance changes.
- The sustainability and cost of deposit growth, including the brokered CD and local promotional certificates, and the effect on net interest margin and liquidity.
- Actual performance of the Roanoke mortgage operation and progress, costs and regulatory approvals for planned branch expansion.
- Whether management’s statements about liquidity, allowance adequacy, securities impairment and expected 2015 mortgage activity are borne out by subsequent results.