Bank of the James Financial Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. The company is a Virginia community bank holding company, with community banking and mortgage origination as its reportable segments. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.234; diluted EPS $0.28 | $1.123; diluted EPS $0.26 in Q1 2018 |
| Net interest income | $6.130; net interest margin 3.92% | $5.331; margin 3.65% in Q1 2018 |
| Interest income / expense | $7.234 / $1.104 | $6.155 / $0.824 in Q1 2018 |
| Provision for loan losses | $0.210 | $0.022 in Q1 2018 |
| Noninterest income / expenses | $1.219 / $5.599 | $1.186 / $5.097 in Q1 2018 |
| Total assets | $684.388 | $674.897 at December 31, 2018 |
| Total loans / deposits | $540.632 / $616.744 | $534.597 / $612.043 at December 31, 2018 |
| Cash and cash equivalents | $48.740 | $50.325 at December 31, 2018 |
| Stockholders’ equity | $57.177 | $55.143 at December 31, 2018 |
- Net income rose about 9.9% year over year. Management reported annualized return on average assets of 0.74% and return on average equity of 8.73%, versus 0.72% and 8.62%, respectively, in Q1 2018.
- Operating cash flow was $0.923, compared with $1.007 in Q1 2018. Investing activities used $6.946; financing activities provided $4.438. Cash and cash equivalents declined $1.585 during the quarter.
- The allowance for loan losses was $4.673, or 0.86% of loans, versus $4.581 and 0.86% at year-end. Nonaccrual loans increased to $3.622 from $2.939; total nonperforming assets increased to $5.875 from $5.369. OREO was $2.253, down from $2.430.
- Commercial real estate represented 53.63% of loans. Past-due loans totaled $3.817, including $1.661 more than 90 days past due; none more than 90 days past due were accruing.
- Bank-only regulatory capital ratios were 9.31% leverage, 10.97% CET1 and Tier 1 risk-based, and 11.78% total risk-based. The filing states these exceeded well-capitalized thresholds. The company does not report consolidated regulatory capital ratios.
- Capital notes were $5.000. Adoption of lease accounting resulted in $2.856 of lease liabilities and $2.852 of right-of-use assets at quarter-end; lease cost was $0.161 for the quarter.
Material changes versus comparable periods
- Interest income increased 17.5% year over year, reflecting loan growth and higher yields, while interest expense increased 34.0% as deposit balances and rates paid rose. Average earning-asset yield increased to 4.62% from 4.22%; average rate paid on interest-bearing deposits increased to 0.82% from 0.64%.
- Net interest margin improved to 3.92% from 3.65%. Loan interest income increased, while mortgage-related gain on sale income rose to $0.691 from $0.620 despite lower mortgage origination volume.
- Noninterest expense increased 9.9%, including higher personnel, occupancy, equipment, and OREO costs. The company attributed much of the expense growth to expansion in its Virginia markets.
- The provision for loan losses rose to $0.210 from $0.022. Net charge-offs were $0.118, versus $0.103 in Q1 2018.
- Available-for-sale securities increased in fair value to $53.497 from $52.727 at year-end. Q1 2019 other comprehensive income, net of tax, was $1.036, compared with a loss of $0.850 in Q1 2018.
Outlook, risks, and unusual items
- No numerical earnings or financial guidance is provided. Management expects to pursue market-share growth, additional services, and cost control. It anticipates further branch openings, subject to regulatory approval; the Rustburg branch was not expected before Q4 2019, and relocation of the Charlottesville branch was planned for Q2 2019. Estimated improvement and equipment costs are $0.9–$1.5 million per location, with management generally expecting new branches to become profitable within 12–18 months.
- Management expected mortgage originations to remain strong through the rest of 2019, supported by hiring and market expansion, while noting that higher interest rates could pressure mortgage-segment revenue. It also said liquidity was adequate but that loan growth was being monitored for funding needs.
- Liquidity included $102.237 of cash, bank deposits, and available-for-sale securities. About $20.254 of securities were pledged; a related line of credit had no balance. Additional stated sources include deposit growth, loan repayments, federal funds, FHLB borrowing, and the Federal Reserve discount window.
- Off-balance-sheet commitments to extend credit were $132.545 and standby letters of credit were $2.915. Amounts drawn may affect liquidity and capital needs; commitment totals do not necessarily represent future cash requirements.
- Management identified economic conditions, competition, regulation, real-estate collateral values, interest rates, and customer liquidity as risks. It considered the $1.556 of unrealized securities losses not other-than-temporary, citing issuer quality, interest-rate and market factors, and no intent or expected requirement to sell before recovery.
- The company adopted the new lease standard on January 1, 2019. It was assessing the expected-credit-loss standard (CECL), effective for it in 2020, and said the effect was not yet determinable. Management identified a planned preliminary model test in Q3 2019.
- No material changes to previously disclosed risk factors were reported. The company reported no pending legal proceedings other than routine litigation incidental to business.
Important facts for investors to verify
- Whether rising nonaccrual loans, past-due balances, criticized loan categories, and OREO lead to further provisions, charge-offs, or collateral write-downs.
- Whether deposit pricing and funding costs continue to rise faster than asset yields, affecting net interest margin and earnings.
- Whether branch expansion spending and elevated operating expenses produce the profitability management anticipates.
- Whether liquidity and capital remain adequate if loan commitments are drawn or loan growth accelerates; review the bank-only ratios and applicable distribution constraints.
- How CECL implementation affects the allowance and capital, and whether the securities’ unrealized losses or mortgage business outlook change materially.