Business context and reporting period
Bank of the James Financial Group, Inc. is a Virginia bank holding company whose principal business is community retail and commercial banking through Bank of the James. It also operates mortgage, investment-services and insurance activities. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 | Comparable 2010 period |
|---|---|---|---|
| Interest and dividend income | $4.896 | $9.838 | $5.473 / $10.841 |
| Net interest income | $3.806 | $7.513 | $3.978 / $7.267 |
| Provision for loan losses | $0.906 | $1.485 | $0.448 / $0.835 |
| Other operating income | $0.758 | $1.430 | $0.912 / $1.712 |
| Other operating expenses | $3.204 | $6.374 | $3.307 / $6.465 |
| Net income | $0.319 | $0.754 | $0.770 / $1.136 |
| Basic and diluted EPS | $0.10 | $0.23 | $0.23 / $0.34 |
| Net interest margin | 3.85% | 3.84% | 4.24% / 3.81% |
Total assets were $429.625 million, up 2.55% from year-end; deposits rose 2.22% to $376.551 million. Total loans were $324.571 million versus $326.182 million, and net loans were $319.601 million versus $320.715 million. Cash and cash equivalents increased to $24.785 million from $18.759 million; available-for-sale securities increased to $49.171 million from $38.586 million. Stockholders’ equity was $26.973 million, compared with $25.495 million.
Six-month operating cash flow was $3.000 million, investing cash flow was negative $6.335 million, and financing cash flow was positive $9.381 million. Cash and cash equivalents increased $6.026 million during the half. At June 30, liabilities included $10.000 million of FHLB borrowings, $8.550 million in repurchase agreements, and $7.000 million of 6% capital notes. The notes mature April 1, 2012, when principal and accrued interest are due.
Management reported $73.956 million in liquid assets, comprising cash, bank deposits, federal funds sold and available-for-sale investments, and considered liquidity adequate. Bank-only regulatory capital ratios were 7.71% leverage, 10.53% Tier 1 risk-based and 11.78% total risk-based, each above the stated well-capitalized thresholds. The filing does not provide consolidated regulatory capital ratios.
Material changes versus comparable periods
- Second-quarter net income fell 59% year over year; first-half net income declined 34%. Higher loan-loss provisions were a principal factor. First-half net interest income nevertheless increased 3.4%, as lower funding costs more than offset lower interest income.
- Quarterly net interest margin declined to 3.85% from 4.24%; the first-half margin edged up to 3.84% from 3.81%. Management attributed quarterly pressure to earning assets repricing downward faster than interest-bearing liabilities.
- Non-accrual loans increased 46.1% to $12.222 million from $8.366 million at year-end, largely because two real-estate-development relationships were reclassified. Total nonperforming assets rose to $16.503 million from $11.806 million, including $4.281 million of other real estate owned (OREO).
- First-half net charge-offs rose to $1.982 million from $0.415 million in 2010, primarily due to two commercial relationships deemed uncollectible. The allowance declined to $4.970 million, or 1.53% of loans, from $5.467 million, or 1.68%, after charge-offs.
- Noninterest income fell, primarily from lower service charges and mortgage fees. Personnel costs declined, partly reflecting department restructuring and reduced staffing. Securities-sale gains contributed $0.169 million in the quarter and $0.200 million in the half.
Outlook, commentary and risks
Management expected interest rates to remain near historic lows for the rest of 2011, which could pressure interest income. It also expected low mortgage rates and the mortgage division’s local reputation to support revenue, while anticipating investment-services and insurance contributions would remain immaterial. No earnings or other quantitative financial guidance was provided.
The bank had $50.112 million in off-balance-sheet commitments to extend credit and letters of credit; actual funding needs may be lower because commitments can expire unused. Management identified economic conditions, competition, banking regulation, real-estate collateral values, interest-rate changes and customers’ liquidity and financial condition as risks. It said the allowance was adequate, but noted estimates depend on judgment and could differ materially from actual losses. The filing states that no material risk-factor changes had occurred since the 2010 Form 10-K; there were no pending legal proceedings other than routine litigation.
The bank reported 20 OREO properties at June 30, compared with 15 at year-end, with 15 additions and 10 disposals during the half. It recorded a $0.215 million loss on OREO sales or write-downs in the first half. Management did not consider investment-security unrealized losses to be other-than-temporary; all 16 securities under evaluation were rated AA or AAA, according to the filing. The company was assessing the effects of several newly issued accounting standards, including guidance on troubled debt restructurings.
Most important facts for investors to verify
- Whether elevated non-accrual loans, nonperforming assets and net charge-offs lead to further provisions or credit losses; review the two reclassified development relationships and collateral assumptions.
- Whether the $4.970 million allowance remains adequate relative to portfolio risk, given its decline after charge-offs and the increase in non-accrual loans.
- How the April 2012 maturity of the $7.000 million capital notes will be funded or refinanced.
- Whether deposit growth and liquidity remain sufficient if lending commitments are drawn or economic conditions weaken.
- Whether low rates continue to reduce asset yields and margins, and whether mortgage-fee and service-charge trends improve.
- Execution costs and timing for planned branch expansion; management estimated $0.9–$1.5 million per location and expected profitability within 12–18 months, subject to approvals and other factors.