Bank of the James Financial Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unless stated otherwise, financial amounts below are in millions of dollars. The company is a Virginia community bank holding company, with community banking and mortgage origination as its reportable segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $7.596 | $6.980 | $22.220 | $19.860 |
| Net interest income | $6.165 | $5.990 | $18.447 | $17.124 |
| Provision for loan losses | $0.108 | $0.190 | $0.434 | $0.527 |
| Noninterest income | $2.161 | $1.319 | $5.039 | $3.946 |
| Noninterest expense | $6.373 | $5.364 | $17.947 | $15.767 |
| Net income | $1.474 | $1.404 | $4.085 | $3.827 |
| Diluted EPS | $0.34 | $0.32 | $0.93 | $0.87 |
| Net interest margin | 3.75% | 3.80% | 3.83% | 3.73% |
- Interest income rose as loan balances and yields increased; average loan yield was 5.00% in Q3 versus 4.83% a year earlier. Deposit costs also rose: average rate paid on interest-bearing deposits was 0.99% versus 0.73% in Q3.
- Noninterest income growth primarily reflected mortgage-loan sale gains: $1.337 million in Q3 and $3.103 million year to date. The company also recorded $0.291 million of securities-sale gains in 2019.
- Annualized return on average assets was 0.83% for Q3 and 0.79% year to date; return on average equity was 9.84% and 9.36%, respectively. The filing attributes lower year-over-year equity returns partly to higher average equity following securities valuation gains.
Financial position, liquidity and capital
- At September 30, 2019, total assets were $708.1 million, up 4.9% from December 31, 2018. Deposits grew 3.4% to $633.0 million; net loans were $551.0 million, up 4.0%. Noninterest-bearing demand deposits edged down to $90.4 million.
- Cash and cash equivalents were $49.5 million. Management reported $103.9 million of liquid assets, including available-for-sale securities, and said liquidity was adequate; the Bank’s line of credit had no outstanding balance. It cited deposit growth, loan repayments and potential borrowing from the FHLB, Federal Reserve or federal funds market as liquidity sources.
- For the first nine months, operating cash flow was $3.0 million, versus $5.9 million in 2018; investing activities used $23.9 million, versus $31.6 million; financing activities provided $20.1 million, versus $39.2 million. Cash declined $0.9 million during the period.
- Bank-only capital ratios were 9.30% leverage, 11.03% Tier 1 risk-based/CET1 and 11.84% total risk-based capital. The filing states these exceeded well-capitalized thresholds. The company was evaluating whether to adopt the community bank leverage ratio framework.
- Liabilities included $5.0 million of capital notes and $6.0 million of lease liabilities ($1.6 million operating and $4.5 million finance leases). The company adopted the new lease standard in 2019.
Material changes and credit quality
- Loan growth was concentrated in commercial real estate, which represented 54.2% of loans at quarter-end. Commercial real estate loans were $301.0 million; commercial loans were $102.2 million.
- Nonperforming assets fell to $4.0 million from $5.4 million at year-end 2018. Nonaccrual loans declined to $1.8 million from $2.9 million; OREO was $2.2 million. Past-due loans totaled $4.8 million, including $1.5 million more than 90 days past due. The allowance was $4.8 million, or 0.86% of loans, compared with $4.6 million, also 0.86%, at year-end.
- Loans rated special mention increased to $13.3 million from $4.3 million at year-end, while substandard loans declined to $5.6 million from $7.1 million. Management considered the allowance adequate. There were no new TDR modifications; performing TDRs totaled $0.413 million.
- Expense growth reflected staff and operating costs associated with expansion into new markets, as well as higher mortgage-related variable costs. Total noninterest expense increased 18.8% in Q3 and 13.8% year to date.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management expected mortgage originations to remain strong through the rest of 2019, with purchase activity continuing to make up a majority of originations. It anticipated mortgage rates would be flat or trend slightly downward, while noting that higher rates could pressure mortgage-segment revenue.
- The Bank planned to open an approved Rustburg branch in Q4 2019 and was considering further expansion, subject to regulatory approval. Management estimated a potential Timberlake-area branch build-out could cost $0.9 million to $1.5 million and generally expected new branches to become profitable within 12 to 18 months.
- Key stated risks include local and broader economic conditions, competition, banking regulation, interest-rate movements, real-estate collateral values and changes in customers’ liquidity or financial condition. The Bank had $135.1 million in commitments to extend credit and letters of credit; actual funding needs may be lower because commitments can expire unused.
- Management was assessing the expected-credit-loss standard (CECL) and had engaged vendors for implementation. The filing identifies loan-loss allowance and OREO valuation as significant estimates subject to management judgment.
- Available-for-sale securities had $0.274 million of unrealized losses at quarter-end. Management did not consider these other-than-temporary, citing issuer quality, market-rate effects and no intent or expected need to sell before recovery.
- The filing reports no material changes to previously disclosed risk factors, no significant control changes and no pending legal proceedings other than routine litigation. The company reported no share repurchases under its existing plan.
Important facts for investors to verify
- Whether deposit pricing continues to rise faster than asset yields, and the resulting effect on net interest margin.
- Credit trends in the commercial real estate portfolio, especially the increase in special-mention balances and past-due loans.
- Whether mortgage gains and originations remain strong, and whether expansion-related costs are matched by revenue growth.
- Liquidity and capital levels as loan growth continues, including any decision to adopt the community bank leverage ratio framework.
- The eventual CECL adoption impact and the assumptions supporting the allowance and OREO valuations.