BANK OF THE JAMES FINANCIAL GROUP INC quarterly report, Q2 FY2013

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Bank of the James Financial Group, Inc. — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013; unaudited consolidated statements. The company is a Virginia community bank holding company serving the Region 2000 area, with community banking and mortgage origination as its reportable segments.

Financial performance and position

  • Q2 earnings: Net income was $797,000, or $0.24 per basic and diluted share, versus $486,000, or $0.15 per share, in Q2 2012. Six-month net income was $1.585 million versus $846,000; EPS was $0.47 versus $0.25.
  • Interest income and margin: Q2 interest income was $4.567 million, down 1.7% year over year; net interest income was $3.957 million, up 3.2%. For the first half, interest income was $9.104 million and net interest income was $7.878 million. Reported net interest margin was 4.10% in both Q2 and the first half, compared with 3.91% and 3.95%, respectively, in 2012.
  • Noninterest income and expenses: Q2 noninterest income was $905,000, including $135,000 of securities-sale gains; first-half noninterest income was $1.869 million, including $394,000 of gains. Operating expenses were $3.671 million for Q2 and $7.202 million for the first half, rising 3.2% and 5.3% year over year. Salaries and benefits increased to $1.726 million for Q2 and $3.502 million for the first half.
  • Credit costs: The loan-loss provision was $55,000 in Q2 and $290,000 in the first half, down from $425,000 and $1.175 million, respectively, in 2012. Six-month net charge-offs were $350,000 versus $1.094 million. The allowance was $5.475 million, or 1.62% of loans, at June 30.
  • Balance sheet: Total assets were $430.871 million, down from $441.381 million at year-end 2012. Net loans were $331.703 million, up 3.7%; deposits were $388.788 million, down 2.6%. Management attributed much of the asset and deposit decline to expected withdrawals from temporary year-end settlement accounts; loan growth was partly funded by securities sales.
  • Liquidity and funding: Cash and cash equivalents were $25.467 million, down from $40.998 million at year-end. Management reported $68.489 million of liquid assets, comprising cash and available-for-sale securities, and considered liquidity adequate. The first-half cash-flow statement shows $2.672 million provided by operations, $7.976 million used in investing, and $10.227 million used in financing; cash declined $15.531 million.
  • Debt and capital: Borrowings totaled $12 million: a $2 million FHLB advance and $10 million of 6% capital notes due April 2017. Bank-only capital ratios were 8.88% leverage, 11.58% Tier 1 risk-based, and 12.83% total risk-based; the Bank exceeded well-capitalized thresholds.
  • Other comprehensive income: First-half other comprehensive loss was $2.145 million, mainly reflecting unrealized losses on available-for-sale securities; comprehensive loss was $560,000 despite positive net income. Accumulated other comprehensive loss was $1.577 million at June 30.

Material changes versus comparable periods

  • Net income improved in Q2 and the first half, primarily because provisions for loan losses and interest expense fell. Lower interest income and higher operating expenses partly offset the improvement.
  • Average deposit costs declined: the average rate paid on interest-bearing deposits was 0.55% in both Q2 and the first half, versus 0.74% and 0.76% in 2012. Management linked this to efforts to control funding costs.
  • Nonperforming assets decreased to $6.831 million from $8.458 million at year-end; nonaccrual loans fell to $5.014 million from $6.346 million. OREO declined to $1.817 million from $2.112 million, although the company recorded $284,000 of OREO write-downs during the first half.
  • Loans rated substandard totaled $17.077 million, down from $22.314 million at year-end, while pass-rated loans increased. Commercial real estate represented 47.9% of total loans at June 30.

Outlook, risks, and unusual items

  • No formal earnings or financial guidance is provided. Management expected interest rates to remain near historic lows for the remainder of 2013, potentially pressuring interest income. It expected mortgage refinancing activity to decline as rates rose, with home-purchase mortgages becoming a larger share of originations.
  • The company presells mortgage loans to investors and said this limits its credit and interest-rate risk in that business. It anticipated mortgage revenue could be supported by low rates, HARP programs, and its regional position; management also cited possible market-share gains if regulatory pressure reduces competitors.
  • The Bank was considering branch openings in the Timberlake Road area and Rustburg no earlier than 2014, and had purchased property in Appomattox in July 2013. Estimated improvements and equipment costs were $900,000–$1.5 million per branch; openings are subject to regulatory approval. Management generally expected new branches to become profitable within 12–18 months.
  • Key stated risks include economic conditions, competition, banking regulation, real-estate collateral values, interest-rate changes, and changes in customers’ liquidity or financial condition. The filing says actual results may differ from forward-looking statements and that the company undertakes no obligation to update them.
  • At June 30, available-for-sale securities had $2.471 million of gross unrealized losses, all reported as less than 12 months old. Management did not consider them other-than-temporary and said it expected recovery of amortized cost. These valuations and the allowance for loan losses depend on estimates and judgment.
  • Off-balance-sheet commitments totaled $64.459 million, including $62.229 million of commitments to extend credit and $2.230 million of letters of credit; actual funding needs may be lower because commitments can expire undrawn. The company reported no pending legal proceedings other than routine litigation and stated that risk factors were not applicable.

Important facts for investors to verify

  • Track whether loan growth, deposit stability, and liquidity remain adequate after the year-end settlement-account outflows.
  • Review subsequent asset quality, criticized and impaired loans, charge-offs, OREO valuations, and the adequacy of the $5.475 million allowance.
  • Assess whether lower funding costs can continue to offset pressure on asset yields and whether operating-cost growth moderates.
  • Monitor the value and duration exposure of available-for-sale securities, given the large unrealized loss and the decline in accumulated other comprehensive income.
  • Confirm branch-opening timing, regulatory approvals, and capital spending, and assess whether new locations achieve the projected path to profitability.
  • Reconcile reported net interest income: the consolidated income statement gives $3.957 million for Q2 and $7.878 million for the first half, while the MD&A average-balance schedules show $3.989 million and $7.946 million. The filing does not explain these differences.