Bank of the James Financial Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated statements; dollar amounts below are in thousands unless stated otherwise. The company is a Virginia community-banking holding company operating primarily in the Region 2000/Central Virginia market, with community banking and mortgage origination as its reportable segments.
Financial results and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Interest income | $4,573 | $4,763 | $13,677 | $14,094 |
| Net interest income | $3,967 | $4,027 | $11,845 | $11,729 |
| Provision for loan losses | $0 | $601 | $290 | $1,776 |
| Other operating income | $769 | $1,052 | $2,638 | $2,566 |
| Other operating expenses | $3,568 | $3,783 | $10,770 | $10,626 |
| Net income | $813 | $539 | $2,398 | $1,385 |
| Basic / diluted EPS | $0.24 / $0.24 | $0.16 / $0.16 | $0.72 / $0.71 | $0.41 / $0.41 |
- Net income increased about 51% year over year in Q3 and 73% for the first nine months. Management attributed the improvement mainly to lower loan-loss provisions and interest expense.
- Net interest margin was 4.06% in both Q3 and the nine-month period. Interest income fell as earning-asset yields declined; lower deposit costs helped offset this pressure.
- At September 30, total assets were $435,372, down from $441,381 at December 31, 2012. Total deposits were $393,128, down from $399,015; management attributed much of the reduction to expected withdrawals from year-end settlement accounts. Net loans were $330,472, up from $319,922.
- Cash and cash equivalents were $26,785, down from $40,998. Reported liquid assets, including cash and available-for-sale securities, totaled $73,596; management considered liquidity adequate.
- Nine-month cash flows were $3,994 provided by operations, $12,320 used in investing, and $5,887 used in financing. Cash and cash equivalents declined by $14,213.
- Borrowings totaled $12,000: $2,000 of FHLB advances and $10,000 of 6% capital notes due April 2017. The notes may be prepaid at the company’s discretion under the stated terms.
- Bank-only capital ratios at September 30 were 9.01% leverage, 11.90% Tier 1 risk-based, and 13.15% total risk-based. The Bank exceeded regulatory well-capitalized benchmarks. The filing does not provide consolidated regulatory capital ratios.
- Other comprehensive loss was $2,773 for the first nine months, principally reflecting unrealized losses on available-for-sale securities; stockholders’ equity was $29,238 versus $29,613 at year-end.
Material changes and credit quality
- Total nonperforming assets fell to $5,723 from $8,458 at December 31, 2012. Nonaccrual loans declined to $4,022 from $6,346; OREO decreased to $1,701 from $2,112. The Bank held 23 OREO properties at September 30.
- The allowance for loan losses was $4,983, or 1.49% of total loans, compared with $5,535, or 1.70%, at year-end. Nine-month net charge-offs were $842 versus $1,695 in 2012. Management judged the allowance adequate; its estimate depends on subjective judgments and assumptions.
- Commercial real estate represented 48.96% of the loan portfolio, up from 47.13% at year-end. Loans rated substandard totaled $14,703, down from $22,314. Loans more than 90 days past due totaled $3,606; $718 was still accruing.
- Available-for-sale securities declined to $46,811 from $50,294. Their gross unrealized losses were $3,412 at September 30; management did not consider the losses other-than-temporary and said it expected recovery of amortized cost.
- Mortgage fee income was $295 in Q3 versus $402 a year earlier, reflecting lower mortgage originations and refinancing activity. Nine-month mortgage fee income rose to $954 from $917.
Outlook, risks and contingencies
- No quantified earnings or financial guidance was provided. Management expected interest rates to remain near historic lows through the remainder of 2013, with potential pressure on interest income; it also expected rising mortgage rates to weigh on refinancing and mortgage-segment revenue.
- The Bank was considering additional branches. Timberlake Road and Rustburg openings were not expected before 2014; timing for Appomattox was undetermined. Estimated fit-out costs were $900–$1,500 per location, and management generally expected new branches to become profitable within 12–18 months. Openings require regulatory approval.
- Off-balance-sheet commitments totaled $68,476, including $67,257 of commitments to extend credit and $1,219 of letters of credit. These amounts are not necessarily expected cash requirements because commitments may expire unused.
- Key stated risks include local and broader economic conditions, competition, banking regulation, real estate collateral values, interest-rate movements, and customers’ liquidity and financial condition. The Bank also noted sensitivity to interest-rate changes and potential deposit behavior changes.
- The company reported no pending legal proceedings other than routine litigation incidental to its business, and no material impact from the accounting pronouncements adopted in the period. Management reported effective disclosure controls and no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the decline in nonperforming assets and lower charge-offs persist, and whether the $4,983 allowance remains adequate as loan growth continues.
- Concentration and credit trends in commercial real estate, including substandard, past-due, impaired, and collateral-dependent loans.
- Deposit stability and liquidity after the settlement-account outflows, and the effect of rate changes on deposit costs, asset yields, and net interest margin.
- Unrealized losses and interest-rate sensitivity in the securities portfolio, including the assumptions behind management’s conclusion that losses are temporary.
- Mortgage production and fee income under changing rates, and the costs, approvals, timing, and returns associated with planned branch expansion.
- Cash-flow funding for loan growth and the terms and repayment capacity of the $10,000 capital notes due in 2017.