Bank of the James Financial Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company is a Virginia community bank holding company operating Bank of the James, a mortgage division, and smaller investment and insurance activities. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $7.390 | $6.725 | $14.624 | $12.880 |
| Net interest income | $6.152 | $5.803 | $12.282 | $11.134 |
| Net interest margin | 3.82% | 3.74% | 3.87% | 3.69% |
| Net income | $1.377 | $1.300 | $2.611 | $2.423 |
| Diluted EPS | $0.31 | $0.30 | $0.60 | $0.55 |
| Noninterest income | $1.659 | $1.441 | $2.878 | $2.627 |
| Noninterest expense | $5.975 | $5.306 | $11.574 | $10.403 |
| Provision for loan losses | $0.116 | $0.315 | $0.326 | $0.337 |
- Net income rose about 5.9% year over year in Q2 and 7.8% for the first half. Management attributed the improvement mainly to higher interest and noninterest income, partly offset by higher funding and operating costs.
- Net interest income increased 6.0% in Q2 and 10.3% year to date. Loan growth and higher loan yields contributed; the average loan yield rose to 4.97% in Q2 and 4.98% for the first half.
- Interest expense increased 34.3% in Q2 and 34.1% year to date, primarily from higher deposit rates and balances. Average rates paid on interest-bearing deposits were 0.90% for Q2 and 0.86% for the first half.
- Mortgage-loan sale gains increased to $1.075 million in Q2 and $1.766 million year to date, from $0.873 million and $1.493 million, respectively. Mortgage loans are generally presold to investors.
- Noninterest expense increased 12.6% in Q2 and 11.3% year to date. Salaries and benefits, occupancy, equipment, marketing, credit, and other costs rose amid geographic expansion.
- Annualized return on average assets was 0.80% for Q2 and 0.77% for the first half; return on average equity was 9.47% and 9.11%, respectively.
Financial condition, cash flow, and liquidity
- At June 30, total assets were $690.1 million, up 2.3% from December 31, 2018. Total loans were $556.7 million, up 4.1%; commercial real estate represented 53.6% of loans.
- Deposits were $617.2 million, up 0.8%. Growth in NOW, money-market, and savings accounts was partly offset by declines in noninterest-bearing and time deposits. Management used surplus cash to repay a $10.044 million brokered certificate of deposit.
- Cash and cash equivalents declined to $32.1 million from $50.3 million, mainly as cash funded loan growth and the brokered-CD repayment. First-half operating cash flow was $1.321 million, compared with $0.087 million in 2018; investing cash use was $24.131 million and financing cash inflow was $4.615 million.
- Management reported $85.9 million of liquid assets, including cash and available-for-sale securities. Approximately $20.2 million of those securities were pledged; a secured credit line had no outstanding balance. Management considered liquidity adequate, while monitoring funding needs associated with loan growth.
- Bank capital ratios at June 30 were 9.29% leverage, 10.87% Tier 1 risk-based and CET1, and 11.67% total risk-based. The Bank exceeded applicable well-capitalized benchmarks.
- Capital notes remained $5.0 million; there were no FHLB borrowings at period-end. Lease liabilities totaled $6.14 million ($1.59 million operating and $4.55 million finance), following adoption of the new lease standard.
Credit quality, material changes, and outlook
- Nonperforming assets increased to $5.898 million from $5.369 million at year-end. Nonaccrual loans rose to $3.485 million from $2.939 million; OREO was $2.413 million, slightly below year-end. Loans past due more than 90 days totaled $1.353 million, with none still accruing.
- The allowance for loan losses was $4.724 million, or 0.85% of loans, versus $4.581 million, or 0.86%, at year-end. First-half net charge-offs were $0.183 million versus $0.401 million in the prior-year period. Management said the allowance was adequate; estimates depend on judgments about borrower conditions, collateral, and local economic factors.
- Special-mention loans increased to $13.310 million from $4.317 million at year-end, while substandard loans were $7.235 million versus $7.071 million. The filing reports no new troubled debt restructurings in the periods presented; performing TDRs were $0.418 million at June 30.
- Available-for-sale securities increased in fair value to $53.818 million from $52.727 million, contributing $1.968 million of after-tax other comprehensive income for the first half. The portfolio had $0.668 million of gross unrealized losses at June 30, all on securities in a loss position for more than 12 months; management did not consider them other-than-temporarily impaired.
- Management expected mortgage originations to remain strong through the rest of 2019, citing market presence and additional originators. It expected mortgage rates to remain flat or trend slightly upward, while noting that lower rates could increase refinancing and rising rates could pressure mortgage revenue. No formal earnings or financial guidance was provided.
- The Bank continued expansion in Virginia. Management said a Rustburg branch was not expected to open before Q4 2019; potential branch projects were estimated to require $0.9–$1.5 million each, with profitability generally expected within 12–18 months. Further openings are subject to regulatory approval.
- Off-balance-sheet commitments at June 30 included $126.776 million to extend credit and $2.924 million of letters of credit. Actual funding needs may be lower because commitments can expire undrawn.
- Key risks cited include economic conditions, competition, banking regulation, real-estate values, interest-rate changes, customer liquidity, and credit-loss estimates. The company was assessing the impact of the expected-credit-loss standard (CECL); timing could change. It reported no material risk-factor changes from its 2018 Form 10-K, no pending material legal proceedings beyond routine litigation, and effective disclosure controls.
Important facts for investors to verify
- Whether elevated special-mention and nonperforming loans lead to higher provisions, charge-offs, or additional OREO valuation losses.
- Whether loan growth can continue without further pressure on liquidity or deposit costs, and how deposit mix and brokered funding evolve.
- Whether net interest margin holds up as deposit rates and other funding costs adjust.
- How sustainable mortgage gains and originations are under changing interest-rate and housing-market conditions.
- The capital, cash-flow, and expense impact of branch expansion, lease obligations, and CECL implementation.