Bank of the James Financial Group, Inc. — Q3 2011 Form 10-Q
Business and period: Community banking and related mortgage, investment, and insurance businesses serving Central Virginia. This unaudited report covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2011 / September 30, 2011 | Comparable period / prior year-end |
|---|---|---|
| Net income | $0.064 Q3; $0.818 nine months | $0.506 Q3; $1.642 nine months in 2010 |
| EPS | $0.02 Q3; $0.25 nine months | $0.15 Q3; $0.50 basic and $0.49 diluted nine months in 2010 |
| Net interest income | $3.846 Q3; $11.359 nine months | $3.938 Q3; $11.205 nine months in 2010 |
| Net interest margin | About 3.84–3.85% Q3; 3.84% nine months | 3.91% Q3 and nine months in 2010 |
| Total assets | $429.440 | $418.928 at December 31, 2010 |
| Deposits | $375.547 | $368.390 at December 31, 2010 |
| Loans, gross / net | $324.776 / $319.315 | $326.182 / $320.715 at December 31, 2010 |
| Allowance for loan losses | $5.461, or 1.68% of loans | $5.467, or 1.68%, at December 31, 2010 |
| Stockholders’ equity | $27.359 | $25.495 at December 31, 2010 |
| Cash and cash equivalents | $26.170 | $18.759 at December 31, 2010 |
For the first nine months, operating cash flow was $4.975 million, investing cash flow was negative $5.783 million, and financing cash flow was positive $8.219 million. Bank-only regulatory capital ratios were 7.75% leverage, 10.55% Tier 1 risk-based, and 11.80% total risk-based; the filing says the Bank exceeded well-capitalized benchmarks. The company also had $10 million in FHLB borrowings, $8.392 million in repurchase agreements, and $7 million of 6% capital notes due April 1, 2012.
Changes and operating drivers
- Net income fell 87% in Q3 and 50% for the first nine months year over year. The main stated driver was a higher loan-loss provision: $1.272 million for Q3 and $2.757 million year to date, versus $0.600 million and $1.435 million in 2010.
- Interest income declined 10.3% in Q3 and 9.6% year to date, while interest expense declined 31.9% and 34.1%. Lower funding costs supported year-to-date net interest income, but Q3 net interest income declined as earning-asset yields repriced down faster than funding costs.
- Noninterest income excluding securities gains declined to $0.634 million in Q3 and $1.864 million year to date. Securities gains rose to $0.566 million and $0.766 million, respectively.
- Noninterest expense increased 4.2% in Q3 and 0.6% year to date. Lower personnel and FDIC expenses partly offset higher outside costs and OREO-related losses and expenses.
- Loans were nearly flat overall, but residential loans declined to $44.855 million from $51.679 million. Commercial real estate was 45% of the loan portfolio.
Credit, liquidity, outlook, and contingencies
- Nonperforming assets rose to $16.005 million from $11.806 million at year-end, principally reflecting higher nonaccrual loans and OREO. OREO increased to $5.216 million; the Bank held 22 properties at quarter-end.
- Net charge-offs were $2.763 million year to date, versus $0.768 million in 2010, driven primarily by two commercial relationships deemed uncollectible. Management considered the allowance adequate, but its estimate relies on judgments about collateral, borrower conditions, and local economic conditions.
- Management reported $71.323 million of liquid assets and considered liquidity adequate. It expected deposits and loan repayments to provide additional liquidity and cited access to federal funds and the Federal Reserve discount window if needed.
- Management expected interest rates to remain near historic lows through the remainder of 2011, potentially pressuring interest income. It anticipated mortgage rates would also remain low and said this could support mortgage revenue; no quantified earnings guidance was provided.
- The Bank reported $48.773 million of off-balance-sheet commitments: $47.859 million to extend credit and $0.914 million in letters of credit. Actual funding depends on customer draws.
- A Virginia State Corporation Commission settlement required the Bank’s inactive Investment Group subsidiary to pay $218,000 in restitution. The company recorded a $218,000 pretax write-off in Q3. The filing states neither the parent nor the Bank was accused of wrongdoing or was a party to the order.
- Management identified economic conditions, competition, banking regulation, real estate collateral values, interest rates, and customer liquidity as risks. The filing reports no material change to previously disclosed risk factors and no pending legal proceedings other than routine business litigation.
- The Bank anticipated possible new branches, subject to regulatory approval: the Timberlake Road site was not expected to open before 2012, and Rustburg not before Q1 2013. Estimated upfit cost was $0.9–$1.5 million per location.
Important facts for investors to verify
- Reconcile nonaccrual loan figures: the detailed table reports $10.879 million, while MD&A states $10.789 million; the reported $16.005 million of nonperforming assets aligns with the latter plus OREO.
- Track credit performance, particularly commercial development and construction exposures, collateral values, charge-offs, nonaccrual loans, and OREO dispositions.
- Assess the company’s plan to repay or refinance the $7 million capital notes due April 2012 and the effect on liquidity and funding costs.
- Evaluate whether recurring operating results can improve without relying on securities gains, given the sharp Q3 earnings decline and continuing provision expense.
- Confirm the subsidiary’s completion of the $218,000 restitution payment and monitor planned branch spending and regulatory approvals.