Bank of the James Financial Group, Inc. — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011, with comparisons to 2010. The company is a Virginia bank holding company whose principal business is community and commercial banking through Bank of the James, primarily serving the Lynchburg/Region 2000 area. It also provides mortgage brokerage, investment and insurance services.
Financial performance and condition
Unless otherwise noted, dollar amounts are in millions.
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $15.327 | $15.201 |
| Net income | $0.600 | $1.820 |
| Basic and diluted earnings per share | $0.18 | $0.55 |
| Total assets at year-end | $427.436 | $418.928 |
| Total deposits at year-end | $374.234 | $368.390 |
| Net loans at year-end | $319.188 | $320.715 |
| Cash and cash equivalents at year-end | $23.340 | $18.759 |
| Operating cash flow | $7.124 | $7.721 |
- Interest and dividend income was $19.519 million, down from $21.589 million; interest expense fell to $4.192 million from $6.388 million. Net interest margin declined to 3.89% from 3.94%.
- Noninterest income was $3.680 million, including $1.182 million in securities-sale gains, versus $3.518 million in 2010. Excluding securities gains, noninterest income fell to $2.498 million from $3.160 million.
- The provision for loan losses rose to $4.807 million from $2.783 million. Net charge-offs increased to $4.662 million from $1.604 million.
- Noninterest expense increased to $13.693 million from $13.502 million. OREO-related expense rose to $1.021 million from $0.244 million, while salaries and benefits fell to $5.668 million from $6.686 million. The efficiency ratio improved slightly to 70.74% from 71.08%.
- Year-end nonperforming assets were $13.629 million, or 4.20% of loans, versus $11.806 million, or 3.62%, in 2010. Nonaccrual loans were $10.375 million; OREO was $3.253 million. The allowance for loan losses was $5.612 million, or 1.73% of loans.
- Reported bank-only regulatory capital ratios were 10.53% Tier 1 risk-based, 11.79% total risk-based and 7.82% Tier 1 leverage at year-end; the Bank was classified as well capitalized.
- Year-end liabilities included $10.000 million of FHLB borrowings, $8.379 million in repurchase agreements and $7.000 million in capital notes. The capital notes mature April 1, 2012. Cash dividends were not planned.
Material changes versus 2010
- Net income fell 67% to $0.600 million, principally reflecting higher loan-loss provision and OREO losses. Returns on average equity and assets declined to 2.25% and 0.14%, respectively, from 7.27% and 0.44%.
- Loan charge-offs and nonaccrual loans increased materially, while total loans edged down 0.4%. Commercial real estate loans increased to $150.622 million from $143.428 million; residential loans declined to $42.067 million from $51.679 million.
- Deposits grew 1.6%, supported by a 25.5% increase in noninterest-bearing deposits; interest-bearing deposits declined. Cash and cash equivalents increased by $4.581 million.
- Mortgage originations declined to 290 loans totaling $49.481 million from 374 loans totaling $75.582 million. The Mortgage Division began funding its pre-sold loans on April 1, 2011, then typically transferred them to buyers within two to three business days.
- Available-for-sale securities increased to $48.338 million from $38.586 million. The company recorded $1.182 million in gains on securities sales, compared with $0.358 million in 2010.
Outlook, risks and unusual items
- Management expected weak economic conditions and elevated credit losses and nonperforming assets to persist in 2012. It anticipated short-term rates would remain stable at least through the first two quarters of 2012 and noted that a low-rate environment could pressure spreads; higher long-term rates could reduce mortgage refinancing activity.
- Management identified local economic conditions, commercial real estate values, borrower repayment capacity, interest-rate changes, deposit competition and regulatory change as key risks. Approximately 80% of loans had real estate as a primary or secondary component of collateral, and lending is concentrated in the Region 2000 market.
- Management reported 17 OREO properties at year-end and warned that further property-value declines could lead to additional write-downs. The filing also reports $53.727 million of commitments to extend credit and standby letters of credit; management did not anticipate material losses from them.
- The parent company had $7.000 million of 6% capital notes due April 1, 2012. A replacement private placement of up to $12.000 million was underway; as of March 20, 2012, subscriptions totaling $7.820 million had been accepted. The company intended to use up to $7.000 million of proceeds to repay the maturing notes.
- The company did not participate in TARP. Management said the Bank had sufficient liquidity and capital for its needs, while noting potential effects from regulatory changes and planned branch expansion. New branches were subject to regulatory approval; estimated improvement and equipment costs were $0.9–$1.5 million per location.
- The independent auditor gave an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Track nonaccrual loans, charge-offs, allowance adequacy and OREO sales or write-downs, especially given the local real estate concentration.
- Confirm completion and terms of the 2012 private placement and repayment or refinancing of the $7.000 million notes due April 1, 2012.
- Assess whether earnings can recover without reliance on securities gains, and whether net interest margin holds up in a prolonged low-rate environment.
- Review deposit trends, available borrowing capacity and securities pledged as collateral; the filing says approximately $19.3 million of securities were pledged.
- Reconcile TDR disclosures: one table reports total TDRs of $2.718 million at year-end 2011 versus $4.987 million in 2010, while a note elsewhere reverses those figures. The filing text does not provide a clear, consistent value.
- Verify regulatory-capital disclosures against the underlying schedules: the filing gives 11.37% in one narrative passage for the 2010 total risk-based ratio, while its capital tables report 11.37% for 2010 and 11.79% for 2011.