First Quarter Operational Review
Total interest income was $7.23 million in the first quarter of 2019, up from $6.16 million a year earlier, primarily reflecting loan growth and adjustable rate loans that repriced to reflect rising interest rates. Interest expense increased year-over-year, which reflected a larger deposit base and rate increases in demand and time deposits. Interest rates paid on total interest-bearing deposits in the first quarter of 2019 were 0.82% compared with 0.64% a year earlier.
“While growing our deposit base has resulted in higher interest expense, customer deposits continue to represent the most cost-effective source of funding for loans, particularly as the cost of borrowed funds has risen during the past year,” noted Chapman. “As in past quarters, we funded a growing loan portfolio without the use of borrowed funds. Our plan this year includes adding new offices with an emphasis on gathering deposits. In 2019, the Company anticipates opening three new full-service locations and relocating a full-service office to a more accessible location.”
Net interest income in the first quarter of 2019 was $6.13 million, up 15% compared with the first quarter of 2018. Net interest income after provision for loan losses in the first quarter of 2019 was $5.92 million compared with $5.31 million in the first quarter of 2018, reflecting a modest year-over-year increase in the Company’s loan loss provision to reflect loan growth.
Commercial lending growth, increased rates, and an expanded interest rate spread contributed to the net interest margin increasing to 3.92% in the first quarter of 2019 compared with 3.65% a year earlier. The average rate spread for the three months ended March 31, 2019 was 3.77%, up from 3.54% for the three months ended March 31, 2018. Average rates on total earning assets rose to 4.62% compared with 4.22% for the three months ended March 31, 2018.
Noninterest income, including gains from the sale of residential mortgages to the secondary market, revenue contributions from BOTJ Investment Services, and income from the Bank’s line of treasury management services for commercial customers was $1.22 million in the first quarter of 2019 compared with $1.19 million in the first quarter of 2018.
Noninterest expense for the three months ended March 31, 2019 was $5.60 million compared with $5.10 million a year earlier. The increase primarily reflected increased personnel expenses from an expanded team of producing individuals, and higher occupancy costs related to new offices to support expanded business activity. Other real estate owned (OREO) expenses also increased slightly as a result of a write-down related to one of the properties in the OREO portfolio.
“Consistent with prior quarters, the strategic investments made are focused on generating growth, productivity and efficient delivery of services to customers,” explained Chapman. “Even with growth initiatives that impact performance in the short term, we are focused on continual productivity and efficiency improvement.”
In first quarter 2019, Return on Average Assets (ROAA) improved to 0.74% from 0.72% a year earlier, and Return on Average Equity (ROAE) was 8.73%, up from 8.62% a year earlier. The Company’s efficiency ratio improved to 76.19% in the first quarter of 2019 compared with 78.21% a year earlier.
Balance Sheet Review: Steady Growth, Sound Quality
Total assets were $684.39 million at March 31, 2019. The primary driver of asset growth continues to be loans held for -investment, net of the allowance for loan losses, which totaled $535.96 million. Loansheld-for-sale were $2.60 million. Fair value of securitiesavailable-for-sale was $53.50 million compared with $52.73 million at December 31, 2018.
The Company’s commercial loan portfolio continued to provide balanced performance and year-over-year growth.Non-owner occupied commercial real estate (primarily commercial and investment property), was $80.12 million at March 31 compared with $58.95 million a year earlier. Owner-occupied commercial real estate was $107.70 million, up 9% from a year ago. Residential mortgages were $114.32 million at March 31, 2019, up 3% from a year earlier, with most of the growth coming from jumbo adjustable rate mortgages. Construction and land loans and home equity were slightly down year-over-year. Consumer loans and farm and agriculture loans, while relatively small segments of the portfolio, increased by double digits.
Total deposits at March 31, 2019 were a Company-record $616.74. During the past year, the majority of deposit growth has been core deposits, and particularly noninterest bearing demand deposits, which were $93.62 million at March 31, 2019, up 12% from $83.96 million at March 31, 2018.
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