Potomac Bancshares, Inc.

What they do

Bank of Charles Town has operated since 1871 and provides commercial, real estate, and retail lending plus deposit accounts, trust, and brokerage services. The bank runs five offices in West Virginia (Charles Town, Harpers Ferry, Kearneysville, Martinsburg, Hedgesville) and offers online banking through BCT NetTeller. Potomac Bancshares was formed in 1994 and its only activity is ownership of the bank.

Revenue drivers

• Real estate lending — About 93% of the loan portfolio is secured by real estate; at December 31, 2011 the largest categories were 1-4 family residential ($92.9M), owner-occupied commercial real estate ($61.1M), and construction/land development ($19.2M).
• Net interest income — Interest earned on loans and securities less interest paid on deposits and borrowings. Management noted continued strength in net interest income in 2011, though specific period figures were not disclosed in the excerpt.
• Noninterest income — Fees from deposit services, trust and investment management through One Financial Center, and BCT Investments brokerage services. Management said noninterest income remained consistent with prior-year levels.
• Deposits — Funding base of $265.0M in total deposits at March 31, 2012, split between noninterest-bearing ($43.3M) and interest-bearing ($221.7M) accounts.

Recent performance

Annual net income swung from $1.8M in 2010 to a net loss of $1.0M in 2011, with diluted EPS of $0.53 in 2010 and $-0.30 in 2011. The 2011 loss was driven by credit costs: loan loss provisions were $1.7M above 2010 and foreclosed property expenses were $2.6M above 2010, including a third-quarter $1.85M write-down on foreclosed property and a $2.1M addition to the loan loss reserve. At March 31, 2012, total assets were $298.3M, total liabilities $272.4M, and shareholder equity $25.9M. For the first quarter of 2012, total assets rose to $298.3M from $287.4M at year-end 2011, with no bottom-line results disclosed in the excerpt.

Strategy

Management said 2012 priorities are asset quality, capital management, reducing interest cost, efficiency improvements, and moderate loan growth using current liquidity, with minimal overall asset growth expected. The bank changed its historical loss factor methodology in August 2011 from a 36-month to a 12-month rolling average, which increased the allowance by $476K at December 31, 2011. Management is also focused on reducing the inventory of foreclosed properties and marketing those assets. Capital levels at year-end 2011 were in excess of required minimum regulatory levels.

Risks

• Real estate concentration — About 93% of loans are real estate-secured, and the bank's market continues to experience weak demand and declining values, evidenced by a 3.86% delinquency rate and 1.82% loss rate in 2011.
• Foreclosed property exposure — Other real estate owned was $6.8M net of a $2.0M valuation allowance at March 31, 2012, and further appraisal declines could require additional write-downs.
• Loan loss provisions — The 2011 loss included a $2.1M addition to the loan loss reserve as businesses and consumers struggled; continued credit weakness could require more provisioning.
• Regulatory and economic uncertainty — The company cited the U.S. government securities downgrade, Dodd-Frank rulemakings, the possibility of future FDIC assessments, and a weak economy as factors that could materially affect operations.

Outlook

Management expects economic growth to be slow and does not expect the real estate market to return to pre-recession levels. Near-term focus remains on asset quality, capital levels, interest cost reduction, efficiency, and moderate loan growth with minimal overall asset growth in 2012. The company ended 2011 hopeful that sustainable growth is closer but acknowledged the pace will continue to be slow.