Bank of the James Financial Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated financial statements; amounts below are in thousands of dollars unless stated otherwise. The company operates community banking and mortgage origination businesses in Virginia.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $5,803 | $5,140 | $11,134 | $9,978 |
| Provision for loan losses | $315 | $445 | $337 | $545 |
| Noninterest income | $1,441 | $1,204 | $2,627 | $2,065 |
| Noninterest expense | $5,306 | $4,756 | $10,403 | $9,253 |
| Net income | $1,300 | $787 | $2,423 | $1,547 |
| Diluted EPS | $0.30 | $0.18 | $0.55 | $0.35 |
| Net interest margin | 3.74% | 3.74% | 3.69% | 3.70% |
- For Q2, interest income increased 14.9% and net interest income increased 12.9% year over year. Management attributed growth chiefly to larger loan balances and higher rates on floating-rate loans.
- Noninterest income growth was driven mainly by mortgage loan sale gains: $873 in Q2 and $1,493 for the first half, versus $598 and $969, respectively, in 2017.
- Noninterest expense rose 11.6% in Q2 and 12.4% for the first half, reflecting expansion-related personnel, professional, data-processing and other costs. Lower income taxes also supported earnings: the effective rate was 19.9% for Q2 and 19.8% for the first half, compared with about 31% in 2017, primarily following the reduction in the federal corporate tax rate.
Financial position, liquidity and capital
- Total assets were $655.9 million at June 30, up 4.7% from year-end 2017. Net loans were $523.7 million, up 6.7%; commercial real estate represented 52.7% of total loans.
- Deposits totaled $596.1 million, up 5.0% from year-end. Noninterest-bearing demand deposits increased to $86.8 million; time deposits declined to $181.2 million.
- Cash and cash equivalents were $33.8 million, down from $37.0 million at year-end. Management reported $87.5 million in liquid assets, including cash and available-for-sale securities; $16.6 million of those securities were pledged. The line of credit secured by pledged securities had no balance.
- First-half cash flows were $87 thousand provided by operations, $31.3 million used in investing, and $28.1 million provided by financing. Cash declined by $3.2 million. Investing outflows chiefly reflected net loan originations; deposit growth provided financing.
- The allowance for loan losses was $4.7 million, or 0.89% of loans, down from $4.8 million and 0.96% at year-end. Nonperforming assets declined to $5.8 million from $7.0 million; nonaccrual loans were $3.2 million and OREO was $2.6 million.
- Bank capital ratios at June 30 were 9.08% leverage, 11.24% Tier 1 risk-based/CET1, and 12.13% total risk-based capital. The filing states the Bank exceeded well-capitalized regulatory thresholds.
- The company had $5.0 million of 4% capital notes due January 2022. The Bank repaid a $10.0 million FHLB advance in April 2018.
Material changes, outlook and risks
- Profitability improved year over year, while the first-half net interest margin edged down to 3.69% from 3.70%. Average funding costs rose as deposit rates and balances increased.
- Management cited ongoing expansion in Charlottesville, Harrisonburg and Roanoke, with additional branches under consideration. It anticipates possible openings in Rustburg and Lexington no earlier than 2019; estimated setup costs are $0.9–$1.5 million per location, and management generally expects a new branch to become profitable within 12–18 months. Openings are subject to regulatory approval.
- Management expects purchase mortgages to remain the majority of mortgage originations and residential mortgage rates to remain stable or trend upward through the rest of 2018. It expects strong mortgage originations, but noted that rising rates could pressure mortgage-segment revenue. No quantified company-wide earnings guidance is provided.
- Credit measures improved overall, but $4.3 million of loans were past due, including $1.5 million over 90 days; none of the over-90-day loans were accruing. The allowance declined despite loan growth, and management said it considered the reserve adequate. These estimates depend on borrower, collateral and local economic conditions.
- The securities portfolio had $3.2 million of gross unrealized losses at June 30, up from $1.9 million at year-end. Management attributed declines mainly to interest rates and market conditions and did not consider them other-than-temporary.
- Off-balance-sheet commitments included $127.0 million to extend credit and $3.0 million in letters of credit; actual funding needs depend on customer drawdowns. The filing reports no material change to previously disclosed risk factors, no pending material legal proceedings beyond routine business litigation, and effective disclosure controls.
- The company adopted the customer revenue-recognition standard on January 1, 2018 with no material impact. It was assessing the effects of upcoming lease-accounting and expected-credit-loss standards.
Key facts for investors to verify
- Whether loan growth and deposit funding continue without materially reducing net interest margin or liquidity.
- Credit quality trends, particularly commercial real estate concentration, past-due and nonaccrual loans, OREO valuations, charge-offs and allowance adequacy.
- Whether expansion and staffing costs are matched by revenue and whether proposed branches meet management’s profitability expectations.
- The sensitivity of mortgage gains, securities values and funding costs to further interest-rate changes.
- Potential cash requirements from credit commitments and the company’s capacity to service the $5.0 million capital notes.