Business context and reporting period
Bank of the James Financial Group, Inc. is a Virginia bank holding company operating a community bank and mortgage business principally in the Lynchburg-area Region 2000. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012; income comparisons are against the same periods in 2011, while balance-sheet comparisons are against December 31, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $4.027 | $3.846 | $11.729 | $11.359 |
| Provision for loan losses | $0.601 | $1.272 | $1.776 | $2.757 |
| Other operating income | $1.052 | $1.200 | $2.566 | $2.630 |
| Other operating expenses | $3.783 | $3.706 | $10.626 | $10.080 |
| Net income | $0.539 | $0.064 | $1.385 | $0.818 |
| Diluted EPS | $0.16 | $0.02 | $0.41 | $0.25 |
| Net interest margin, as stated in MD&A | 4.06% | 3.85% | 3.98% | 3.84% |
- Balance sheet at September 30: Assets were $426.1 million, down 0.3% from year-end 2011. Deposits rose 2.7% to $384.3 million; total loans were nearly unchanged at $324.4 million. Stockholders’ equity was $29.0 million, versus $26.8 million at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $21.0 million, down from $23.3 million at year-end. Management reported $73.3 million of liquid assets, including available-for-sale securities, and considered liquidity adequate. Nine-month operating cash flow was $0.4 million, compared with $5.0 million in 2011; investing activities provided $0.6 million, while financing activities used $3.3 million. Cash declined by $2.3 million.
- Borrowings: At September 30, the balance sheet showed $2.0 million of FHLB borrowings and $10.0 million of capital notes, with no repurchase agreements. The company issued $10 million of 6% notes due April 1, 2017, and used $7 million to repay notes that matured in April 2012. The new notes may be prepaid, at the company’s option, beginning April 1, 2013.
- Bank capital: The Bank reported an 8.17% leverage ratio, 10.97% Tier 1 risk-based ratio, and 12.23% total risk-based ratio, each above the stated well-capitalized benchmarks. These are Bank-only ratios, not consolidated holding-company ratios.
Material changes versus the prior comparable period
- Net income rose to $0.539 million for Q3 and $1.385 million year to date. Management attributed the improvement principally to lower loan-loss provisions and reduced interest expense.
- Net interest income increased despite lower interest income, as interest expense fell 25.7% in Q3 and 28.7% year to date. The average rate paid on deposits also declined.
- Provision expense fell year over year, reflecting management’s assessment of improved asset quality and lower consumer-loan historical charge-offs. Noninterest expenses increased 2.1% for Q3 and 5.4% year to date, including higher personnel and OREO costs.
- Nonaccrual loans declined to $5.8 million from $10.4 million at year-end 2011; total nonperforming assets fell to $8.0 million from $13.6 million. OREO decreased to $2.3 million from $3.3 million, after $2.1 million of transfers into OREO, $0.7 million of writedowns, and $2.3 million of sale proceeds during the first nine months.
- Total past-due loans were $8.5 million, down from $15.5 million at year-end. Loans more than 90 days past due were $4.9 million, with none reported as still accruing. Performing TDRs were $0.2 million, versus $0.8 million at year-end; four TDRs totaling $0.8 million subsequently defaulted during the nine-month period.
Outlook, commentary, risks and unusual items
- Management expected interest rates to remain near historic lows through the remainder of 2012, potentially pressuring interest income. It expected low mortgage rates and programs such as HARP to support mortgage revenue. The filing provides no numerical earnings or revenue guidance and cautions that interim results may not indicate full-year results.
- The Bank considered additional branches in the Timberlake Road and Rustburg areas, with no opening anticipated before 2013. Management estimated upfit costs of $0.9 million to $1.5 million per location and generally expected new branches to become profitable within 12 to 18 months. Openings are subject to regulatory approval.
- Credit quality and the adequacy of the allowance remain important uncertainties. The allowance was $5.7 million, or 1.75% of total loans; nine-month net charge-offs were $1.7 million. Management’s allowance estimate depends on subjective judgments about collateral, borrowers, local economic conditions, and expected losses.
- Off-balance-sheet commitments totaled $58.7 million, including $57.0 million of commitments to extend credit and $1.7 million of letters of credit. Amounts drawn may affect liquidity and capital needs.
- Other risks cited include local and general economic conditions, competition, regulation, real-estate values, interest-rate changes, and customers’ liquidity and financial condition. Management reported no material change in previously disclosed risk factors, no significant change in internal control over financial reporting, and no pending material legal proceedings beyond routine litigation.
- Unusual items include $0.7 million of OREO writedowns during the nine months and the private placement/refinancing of capital notes. Management did not consider securities’ unrealized losses of $0.061 million at September 30 to be other-than-temporary.
Important facts for investors to verify
- Whether the decline in nonaccrual loans and nonperforming assets is sustained, and whether subsequent TDR defaults or collateral liquidations cause additional losses.
- Whether the $5.7 million allowance remains adequate relative to loan performance, charge-offs, and commercial real-estate exposure.
- How mortgage-fee activity, deposit pricing, and persistently low rates affect net interest income and margins in subsequent quarters.
- The terms, cash proceeds, and ongoing interest burden of the $10 million 6% capital notes, including the company’s ability and intention to prepay them.
- Whether liquidity, capital ratios, and the ability to meet potential draws on $58.7 million of commitments remain adequate.
- Actual costs, regulatory approvals, timing, and returns for the proposed branch openings; the filing does not provide a firm opening schedule or quantified return forecast.