Bank of the James Financial Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; financial statements are unaudited. Unless noted otherwise, dollar amounts below are in millions. The company is a Virginia community banking holding company, with banking and mortgage origination as its principal operating businesses.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $6.980 | $6.070 | $19.860 | $17.430 |
| Net interest income | $5.990 | $5.284 | $17.124 | $15.262 |
| Noninterest income | $1.420 | $1.319 | $4.047 | $3.454 |
| Provision for loan losses | $0.190 | $0.200 | $0.527 | $0.745 |
| Noninterest expense | $5.465 | $4.914 | $15.868 | $14.237 |
| Net income | $1.404 | $1.015 | $3.827 | $2.562 |
| Diluted earnings per share | $0.32 | $0.23 | $0.87 | $0.59 |
| Net interest margin | 3.80% | 3.65% | 3.73% | 3.68% |
- Growth and funding: At September 30, total assets were $668.4 million, up 6.7% from year-end 2017. Loans were $528.7 million, up 6.6%; commercial real estate represented 53.7% of loans. Deposits grew 7.0% to $607.4 million, led by noninterest-bearing demand and NOW, money market and savings accounts.
- Liquidity and cash flow: Cash and cash equivalents were $50.5 million, versus $37.0 million at December 31, 2017. For the nine months, operating cash flow was $5.9 million, investing cash outflow was $31.6 million, and financing cash flow was $39.2 million. Management reported $102.8 million of liquid assets and considered liquidity adequate, while monitoring funding capacity amid loan growth.
- Credit quality: Nonperforming assets fell to $4.8 million from $7.0 million at year-end 2017; nonaccrual loans declined to $2.3 million from $4.3 million. The allowance was $4.6 million, or 0.86% of loans, compared with $4.8 million, or 0.96%, at year-end. Nine-month net charge-offs were $0.7 million. Management considered the allowance adequate.
- Capital and debt: Bank-only capital ratios were 9.20% leverage, 11.36% Tier 1 risk-based and CET1, and 12.22% total risk-based; the Bank exceeded the stated well-capitalized benchmarks. The parent had $5.0 million of 4% capital notes due January 2022, with specified prepayment rights.
- Other balance-sheet items: Available-for-sale securities were $52.3 million, down from $55.3 million at year-end. Their unrealized losses were $3.9 million; accumulated other comprehensive loss was $3.1 million. Management attributed much of the decline to interest-rate and market changes and did not consider the losses other-than-temporary.
Material changes versus the prior comparable period
- Net income rose 38% in the quarter and 49% for the nine-month period. Management attributed the improvement primarily to higher interest and noninterest income and lower effective income taxes, partly offset by increased funding and operating costs.
- Net interest income increased 13% in Q3 and 12% year to date, reflecting loan growth and higher yields, including floating-rate loan repricing. Interest expense increased 26% year to date as deposit balances and rates rose.
- Noninterest expense increased 11% year to date, including higher personnel, professional, data-processing, outside-service and OREO costs, associated in part with expansion into Charlottesville, Harrisonburg and Roanoke.
- Mortgage-loan sale gains increased to $2.3 million for the nine months from $1.7 million. The company reported stronger purchase mortgage originations and expansion into additional Virginia markets.
- The effective tax rate decreased to 19.87% for the nine months from 31.39%, primarily following the 2017 Tax Cuts and Jobs Act reduction in the applicable corporate rate.
- Comprehensive income was $2.2 million for the nine months, down from $3.2 million, as net income growth was more than offset by a $1.6 million after-tax other comprehensive loss, largely associated with securities valuation.
Outlook, commentary and risks
- No quantified earnings or financial guidance was provided. Management expected purchase mortgages to remain the majority of originations, anticipated mortgage rates to continue trending upward through the remainder of 2018, and expected strong mortgage originations based on market presence, staffing and housing inventory. Management cautioned that rising rates could pressure mortgage-segment revenue.
- The Bank anticipated possible branch openings over the next two fiscal years, subject to regulatory approval. It described planned locations and estimated improvement, furniture, fixture and equipment costs of $0.9 million to $1.5 million per site; management generally expected new branches to become profitable within 12 to 18 months.
- Key stated risks include economic conditions in its markets, competition, banking regulation, real-estate values securing loans, interest-rate changes, and customers’ liquidity and financial condition. The company highlighted the allowance for loan losses and OREO valuation as significant estimates requiring judgment.
- Off-balance-sheet commitments to extend credit were $117.4 million and standby letters of credit were $2.6 million. Actual funding needs may be lower because some commitments expire unused; drawdowns could affect liquidity and capital.
- Management was assessing the impact of the new lease standard and the expected-credit-loss standard. Adoption of revenue-recognition guidance had no material impact. The filing reported no pending material legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth—particularly in commercial real estate, which was 53.7% of the portfolio—continues without deterioration in delinquencies, nonaccrual loans or charge-offs.
- Whether the $4.6 million allowance remains adequate as the loan book expands, given management’s reliance on estimates and the decline in the allowance-to-loans ratio.
- How deposit pricing and competition affect funding costs and net interest margin as rates change.
- Whether the securities portfolio’s unrealized losses recover, and the potential effects on reported equity and liquidity if securities must be sold.
- Whether mortgage volumes, gain-on-sale income and new-branch economics meet management’s expectations, while accounting for expansion costs and rate sensitivity.
- The timing and balance-sheet effect of adopting the expected-credit-loss and lease accounting standards.