Bank of the James Financial Group, Inc. — Q2 2017 Form 10-Q
Business context and period. Community banking and mortgage origination in Central Virginia, with expansion into Charlottesville, Roanoke and Harrisonburg. This unaudited filing covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $5.851 | $5.293 | $11.360 | $10.528 |
| Net interest income | $5.140 | $4.743 | $9.978 | $9.430 |
| Provision for loan losses | $0.445 | $0.250 | $0.545 | $0.450 |
| Noninterest income | $1.254 | $1.316 | $2.135 | $2.324 |
| Noninterest expense | $4.806 | $4.254 | $9.323 | $8.444 |
| Net income | $0.787 | $1.051 | $1.547 | $1.938 |
| Diluted EPS | $0.18 | $0.24 | $0.35 | $0.44 |
| Net interest margin | 3.74% | 3.80% | 3.70% | 3.85% |
- Q2 total interest and noninterest income was $7.105 million, versus $6.609 million a year earlier; first-half total was $13.495 million, versus $12.852 million.
- Annualized return on average assets was 0.54% for both Q2 and the first half, compared with 0.79% and 0.74%, respectively, in 2016. Annualized return on average equity was 6.13% for Q2 and 6.09% for the first half, versus 8.54% and 7.93%.
- At June 30, assets were $595.637 million, up 3.73% from year-end; net loans were $483.248 million, up 4.07%; deposits were $532.862 million, up 1.86%. Available-for-sale securities were $49.315 million, up from $40.776 million.
- Cash and cash equivalents were $23.232 million, down from $28.683 million. First-half operating cash flow was $3.902 million, investing cash outflow $28.578 million, and financing cash inflow $19.225 million; cash declined $5.451 million overall.
- The allowance for loan losses was $6.132 million, or 1.25% of loans, versus $5.716 million, or 1.22%, at year-end. Nonperforming assets declined to $5.424 million from $5.835 million; nonaccrual loans fell to $2.649 million from $3.465 million, while OREO rose to $2.775 million from $2.370 million.
- Bank-level capital ratios were 9.42% leverage, 10.88% CET1 and Tier 1 risk-based, and 12.08% total risk-based. The Bank reported exceeding well-capitalized thresholds.
- Funding included $5 million of 4% capital notes due January 2022 and a $5 million repurchase agreement. The notes are optionally prepayable on or after January 24, 2018. The Bank had $72.547 million in liquid assets, including cash and available-for-sale investments; management said liquidity was adequate. A credit line available for liquidity had no balance.
Changes, outlook and risks
- Net income declined year over year despite higher interest income and net interest income. Management attributed the decline primarily to higher loan-loss provision, interest expense and operating costs, and lower noninterest income. Expansion-related staffing, occupancy and marketing contributed to expense growth.
- Interest expense rose 29.27% in Q2 and 25.87% in the first half, reflecting deposit pricing and balances and interest on the new notes. Net interest margin compressed year over year, although Q2 earning-asset yields edged higher.
- Noninterest income fell as mortgage-loan sale gains and securities gains declined, partly offset by higher service fees, commissions and bank-owned life insurance income. Management expected mortgage originations to remain strong through the rest of 2017, with purchase mortgages representing a majority; it also noted that rising rates could pressure mortgage-segment revenue. No overall earnings guidance was provided.
- Expansion plans included additional branches, subject to regulatory approval. Appomattox construction begun in April 2017 was expected to finish in late 2017 or early 2018; other contemplated locations were not expected to open before 2018. Estimated improvement and equipment costs were $0.9–$1.5 million per location; management generally expected new branches to become profitable within 12–18 months.
- Credit risk remains important: commercial real estate represented 49.29% of loans, and the portfolio is concentrated in the company’s Virginia markets. Six properties were foreclosed during the first half; OREO increased despite property sales. Management considered the allowance adequate, but its estimate depends on judgments about collateral, borrower performance and local conditions.
- Unrealized losses on securities totaled $1.622 million at June 30; management did not deem them other-than-temporary and expected recovery of amortized cost. Interest-rate changes, local economic and real-estate conditions, deposit competition, regulatory requirements, cybersecurity and execution of branch expansion were identified as risks.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $98.742 million. Management stated that mortgage rate-lock commitments were matched by investor commitments to purchase loans. The filing reported no material pending legal proceedings other than routine litigation, and disclosure controls were considered effective.
Investor verification priorities
- Track credit quality, including commercial real-estate concentrations, past-due and risk-rated loans, foreclosures, OREO dispositions and adequacy of the allowance.
- Assess whether loan growth and deposit funding can sustain earnings as funding costs rise and net interest margin remains below the prior-year level.
- Verify branch-expansion costs, deposit and loan growth, and progress toward management’s stated profitability timeline.
- Monitor liquidity, the use and terms of repurchase funding, capital-note servicing and prepayment terms, and the Bank’s capital cushion relative to regulatory buffers.
- Evaluate mortgage production and sale gains against rate movements, housing inventory and the company’s stated expectations; confirm whether investment-securities losses remain temporary.