UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________
Commission file number 0-26314
JAMES RIVER BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1740210
(State of Incorporation) (I.R.S. Employer Identification No.)
1514 HOLLAND ROAD, SUFFOLK, VIRGINIA 23434
(Address of principal executive officers)(Zip Code)
(757) 934-8100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. At September 30, 1998, the
issuer had 3,720,074 outstanding shares of its $5.00 par value common stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JAMES RIVER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,832 $ 14,086
Interest bearing deposits with banks 9,706 2,720
Federal funds sold 2,268 14,382
Securities available-for-sale, at fair value (amortized cost
of $77,136 on September 30, 1998 and $70,764 on
December 31, 1997) 78,648 71,952
Securities held-to-maturity, at amortized cost (fair value
of $9,956 on September 30, 1998 and $11,244 on
December 31, 1997) 9,664 11,074
Loans, net of allowance for loan losses 269,938 259,687
Loans held for sale, net 3,322 789
Premises and equipment, net 9,650 7,480
Accrued interest receivable 3,456 2,939
Intangible assets, net 2,409 2,504
Other assets 2,324 2,463
-------- --------
Total Assets $406,217 $390,076
======== ========
LIABILITIES
Non-interest bearing deposits 41,974 46,490
Interest bearing deposits 314,942 301,083
-------- --------
Total deposits 356,916 347,573
Accrued interest payable 793 752
Federal funds purchased and other short-term borrowings 2,158 --
Accounts payable and other liabilities 2,891 1,367
-------- --------
Total Liabilities 362,758 349,692
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $5 par, 10,000,000 shares authorized,
3,720,074 issued and outstanding in 1998 and 3,672,557
in 1997 18,600 18,363
Additional paid-in capital 3,867 3,572
Retained earnings 19,994 17,663
Accumulated other comprehensive income 998 786
-------- --------
Total Shareholders' Equity 43,459 40,384
-------- --------
Total Liabilities and Shareholders' Equity $406,217 $390,076
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
JAMES RIVER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 6,129 $ 6,029 $ 18,323 $ 17,386
Investment securities:
Taxable 1,004 1,079 2,892 3,431
Exempt from federal income taxes 307 286 892 894
Federal funds sold and other 251 114 843 326
----------- ----------- ----------- -----------
Total Interest Income 7,691 7,508 22,950 22,037
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 3,710 3,582 10,948 10,575
Federal funds purchased and other borrowings 15 2 30 34
----------- ----------- ----------- -----------
Total Interest Expense 3,725 3,584 10,978 10,609
----------- ----------- ----------- -----------
Net Interest Income 3,966 3,924 11,972 11,428
Provision for Loan Losses 140 119 367 335
----------- ----------- ----------- -----------
Net Interest Income after Provision for Loan Losses 3,826 3,805 11,605 11,093
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts 361 279 991 807
Other fees and commissions 94 107 269 262
Net realized gains (losses) on disposition of securities 17 (1) 455 65
Other income 137 75 438 257
----------- ----------- ----------- -----------
Total Non-Interest Income 609 460 2,153 1,391
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,675 1,583 4,939 4,756
Occupancy 221 201 615 572
Equipment 224 243 671 693
Directors' fees 84 93 260 272
Deposit insurance premiums 28 27 84 78
Other 820 751 2,449 2,283
----------- ----------- ----------- -----------
Total Non-Interest Expense 3,052 2,898 9,018 8,654
----------- ----------- ----------- -----------
Income Before Income Taxes 1,383 1,367 4,740 3,830
Provision for Income Taxes 362 399 1,298 1,078
----------- ----------- ----------- -----------
Net Income $ 1,021 $ 968 $ 3,442 $ 2,752
----------- ----------- ----------- -----------
Net Income per Common Share
Basic $ 0.27 $ 0.26 $ 0.93 $ 0.75
----------- ----------- ----------- -----------
Diluted $ 0.27 $ 0.26 $ 0.91 $ 0.74
----------- ----------- ----------- -----------
Cash Dividends Paid per Common Share $ 0.10 $ 0.09 $ 0.30 $ 0.27
----------- ----------- ----------- -----------
Weighted Average Number of Shares Outstanding
Basic 3,717,941 3,665,387 3,697,707 3,676,356
----------- ----------- ----------- -----------
Diluted 3,811,556 3,708,345 3,791,322 3,719,315
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
JAMES RIVER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands)
For The Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated
Shares of Additional Other
Common Common Paid-in Retained Comprehen-
Stock Stock Capital Earnings sive Income Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 3,672,557 $ 18,363 $ 3,572 $ 17,663 $ 786 $ 40,384
Comprehensive income -- -- -- 3,442 212 3,654
Common stock issued 1,157 6 19 -- -- 25
Stock options exercised 46,360 231 276 -- -- 507
Cash dividends declared
($0.30 per share) -- -- -- (1,111) -- (1,111)
--------- --------- --------- --------- --------- ---------
Balance - September 30, 1998 3,720,074 $ 18,600 $ 3,867 $ 19,994 $ 998 $ 43,459
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
JAMES RIVER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,442 $ 2,752
Adjustments to reconcile to net cash provided
by operating activities:
Provision for loan and other real estate losses 367 335
Depreciation and amortization 879 896
Amortization of bond (discounts) and premiums 10 29
Gain on disposition of securities (455) (65)
Gain on sale of loans (33) (32)
Gain on sale of fixed assets (84) --
Changes in:
Loans held for sale (2,500) 672
Interest receivable (517) (186)
Other assets (185) (245)
Interest payable 41 162
Other liabilities 1,524 820
--------- -------
Net cash provided by operating activities 2,489 5,138
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from dispositions of securities - available-for-sale 5,517 9,674
Proceeds from maturities of securities - available-for-sale 20,174 8,396
Proceeds from maturities of securities - held-to-maturity 1,403 988
Purchase of securities - available-for-sale (31,612) (2,676)
Purchases of premises and equipment (2,825) (340)
Proceeds from sale of premises and equipment 138 --
Net increase in loans (10,588) (23,475)
--------- -------
Net cash used by investing activities (17,793) (7,433)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in non-interest bearing deposits (4,516) (3,217)
Net increase in interest bearing deposits 13,859 5,959
Issuance of stock 532 80
Cash dividends paid (1,111) (1,004)
Cancellation of shares -- (374)
Proceeds from short-term borrowings 2,158 --
--------- -------
Net cash provided by financing activities 10,922 1,444
--------- -------
Net decrease in cash and cash equivalents $ (4,382) $ (851)
CASH AND CASH EQUIVALENTS
Beginning $ 31,188 $ 20,446
--------- -------
Ending $ 26,806 $ 19,595
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid $ 10,937 $ 10,447
========= ========
Income taxes $ 1,437 $ 993
========= ========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Real estate acquired in settlement of loans $ 128 $ 436
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PART 1 - FINANCIAL INFORMATION
JAMES RIVER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all of the disclosures and notes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three month and nine month
periods ended September 30, 1998 and 1997 are not necessarily indicative of
results that may be expected for the entire year or any interim period. The
interim financial statements should be read in conjunction with the December 31,
1997 Annual Report to Shareholders on Form 10-K, including the 1997 consolidated
financial statements of James River Bankshares, Inc. ("James River").
Note 2. Earnings and Dividends Per Share
On September 25, 1997, the Board of Directors declared a 3-for-2 stock
split effected in the form of a 50% stock dividend, which was distributed
November 7, 1997. Accordingly, the average number of shares outstanding and per
share amounts for earnings, dividends declared, and book value have been
restated for all periods presented to give effect to the split.
James River adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," on December 31, 1997. Accordingly, a dual
presentation of basic and diluted earnings per share is included in the
Consolidated Statements of Income. Earnings per share amounts for prior periods
have been restated to conform with the new presentation. The effect of the new
standard was not material.
Cash dividends paid in the first, second, and third quarters of 1998
amounted to $.10 per share per quarter. For the first, second, and third
quarters ended September 30, 1997, cash dividends paid amounted to $.09 per
share per quarter.
Note 3. Comprehensive Income
On January 1, 1998, James River adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components. The adoption of SFAS No.
130 did not have a material impact on the Company. All of James River's other
comprehensive income relates to net unrealized gains (losses) on
available-for-sale securities.
<PAGE>
Comprehensive income consists of the following for the nine months ended
September 30, 1998.
Net income $ 3,442,000
Other comprehensive income 212,000
-----------
Total comprehensive income $ 3,654,000
-----------
Amounts reclassified to net income from unrealized gains (losses) on
securities available-for-sale are shown in the following table.
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------- ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains arising
during the period $ 779,000 $(270,000) $ 509,000
Less: adjustment for gains
included in net income (455,000) 158,000 (297,000)
---------- ----------- ----------
Net unrealized gains $ 324,000 $(112,000) $ 212,000
----------- --------- ----------
Note 4. Reclassifications
Certain amounts in the consolidated Statements of Income for 1997 have
been reclassified to conform with classifications used for 1998. These changes
in classification had no effect on net income or retained earnings.
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Information contained in this Form 10-Q may contain forward looking
statements with respect to James River Bankshares, Inc.'s ("James River" or the
"Company") financial condition and results of operations. These forward looking
statements may involve certain risks and uncertainties that may cause actual
results to differ materially from those contemplated by such forward looking
statements. Risks and uncertainties that may affect the financial condition and
results of operations of James River include, but are not limited to, general
economic and business conditions, interest rate fluctuations, competition from
banks and other financial service providers, new financial products and
services, risks inherent in making loans including repayment risks and changing
collateral values, changing trends in customer profiles, technological changes,
and changes in laws and regulations applicable to James River and its
subsidiaries. Although James River believes that its expectations with respect
to any forward looking statements are based upon reasonable assumptions within
the limits of its knowledge of its business and operations, there can be no
assurance that actual results will not differ materially from any future results
that may be expressed or implied by forward looking statements.
FINANCIAL CONDITION
Assets
Total assets of James River at September 30, 1998 were $406.2 million
compared to $390.1 million at December 31, 1997, an increase of $16.1 million or
4.1%. Net loans increased $12.8 million during the first nine months of 1998.
Real estate loans increased $2.1 million to $158.5 million at September 30,
1998, and loans held for sale increased $2.5 million for the same period.
Investment securities increased $5.3 million, from $83.0 million at December 31,
1997 to $88.3 million at September 30, 1998. Federal funds sold decreased $12.1
million to $2.3 million at September 30, 1998, while interest bearing deposits
increased $7.0 million during the first nine months of 1998. Total earning
assets increased $13.2 million, or 3.6%, during the same period.
Average total assets for the three months ended September 30, 1998
increased $21.1 million to $407.3 million from $386.2 million for the three
months ended September 30, 1997. In the first nine months of 1998, average total
assets increased 4.5%, or $17.3 million, to $401.4 million from $384.1 million
in the first nine months of 1997. Average investment securities decreased from
$89.1 million for the quarter ended September 30, 1997 to $88.2 million for the
quarter ended September 30, 1998. Average total loans increased $10.9 million
during the same period. In the first nine months of 1998, average investment
securities decreased $9.3 million from $93.9 million in the first nine months of
1997, and average total loans increased $14.7 million during the same period.
Average interest bearing deposits and Federal funds sold increased $7.6 million
and $2.3 million in the third quarter of 1998 over the same period of 1997,
respectively. In the nine months ended September 30, 1998, average interest
bearing deposits and Federal funds sold increased $7.3 million and $5.4 million,
respectively.
<PAGE>
Liabilities
Total liabilities at September 30, 1998 were $362.8 million compared to
$349.7 million at December 31, 1997, a 3.8%, or $13.1 million, increase.
Deposits of James River at September 30, 1998 were $356.9 million compared to
$347.6 million at December 31, 1997, an increase of 2.7% or $9.3 million. During
the first nine months of 1998, non-interest bearing deposits decreased $4.5
million to $42.0 million, while interest bearing checking increased $15.9
million to $53.3 million.
Average total liabilities for the quarter ended September 30, 1998 were
$364.4 million compared to $347.0 million for the quarter ended September 30,
1997, an increase of $17.4 million. Average interest bearing deposits increased
$11.4 million in the same period, while average non-interest bearing deposits
increased $4.3 million. For the nine months ended September 30, 1998, average
total liabilities increased $13.7 million from $345.8 million for the nine
months ended September 30, 1997. In the same period, average interest bearing
deposits and average non-interest bearing deposits increased $9.7 million and
$2.9 million, respectively. Average Federal funds purchased decreased $619,000
in the same period.
Non-performing Assets
Non-performing assets of James River consist of non-accrual loans and
property acquired through foreclosure or repossession. Non-performing assets
totaled $311,000 on September 30, 1998, compared to $1.5 million on December 31,
1997. On September 30, 1998, non-accrual loans totaled $173,000, of which
$100,000 was secured by real estate. Non-accrual loans totaled $897,000 on
December 31, 1997, of which $647,000 was secured by real estate. Foreclosed real
estate accounted for $138,000 of non-performing assets at September 30, 1998
compared to $573,000 at December 31, 1997. Management does not anticipate any
material loss relating to non-performing assets.
Loans past due 90 days or more and still accruing were $416,000 and
$431,000 on September 30, 1998 and December 31, 1997, respectively. Of these
loans, loans secured by real estate totaled $255,000 on September 30, 1998 and
$233,000 on December 31, 1997.
The recorded investment in impaired loans requiring an allowance for loan
losses as determined in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," was $1.8 million and $2.0 million at
September 30, 1998, and December 31, 1997, respectively. The portion of the
allowance for loan losses allocated to the impaired loan balance was $254,000
and $423,000 at September 30, 1998, and December 31, 1997, respectively.
The allowance for loan losses is maintained by James River at what
management considers to be a realistic level consistent with the level and type
of loans, and taking into consideration the non-accrual and past due loans
detailed above. No additional provisions, other than ordinary provisions, are
being made to the allowance for loan losses.
James River's allowance for loan losses of $3.7 million was 1.34% of total
loans on September 30, 1998. On December 31, 1997, the allowance for loan losses
of $3.5 million was 1.31% of total loans.
<PAGE>
RESULTS OF OPERATIONS
Net Operating Results
For the quarter ended September 30, 1998, James River's net income was
$1,021,000 compared to $968,000 for the same period of 1997, a 5.5% increase.
Diluted earnings per share in the third quarter increased 3.9% to $.27 in 1998
from $.26 in 1997. The increases in net income and earnings per share were
attributable to a 1.1% increase in net interest income and a 32.4% increase in
non-interest income. Return on average assets and return on average equity were
1.00% and 9.53%, respectively, in the third quarter of 1998 compared to 1.00%
and 9.87% in the comparable period in 1997.
For the nine months ended September 30, 1998, James River's net income was
$3,442,000 compared to $2,752,000 for the same period of 1997, a 25.1% increase.
Diluted earnings per share in the first nine months of 1998 increased 23.0% to
$.91 from $.74 in the comparable 1997 period. The increases in net income and
earnings per share were attributable to a 4.8% increase in net interest income
and a 54.8% increase in non-interest income. Return on average assets and return
on average equity for the first nine months of 1998 were 1.14% and 10.96%,
respectively, compared to .96% and 9.57% in the comparable period in 1997.
Net Interest Income
Net interest income during the quarter ended September 30, 1998 increased
$42,000 to $4.0 million, up 1.1% from the $3.9 million for the quarter ended
September 30, 1997. The increase in net interest income was due largely to an
increase in loans of $10.6 million from September 30, 1997 to September 30,
1998. With increased volume, interest and fee income on loans increased 1.7% in
the third quarter of 1998 to $6.1 million, $99,000 more than the $6.0 million
earned in the same period of 1997. During the third quarter of 1998, income on
investment securities decreased $53,000, or 3.9%, to $1.3 million, compared to
the third quarter of 1997. Interest expense on deposits increased 3.6% in the
third quarter from $3.6 million in 1997 to $3.7 million for the same period in
1998. The net interest margin in the third quarter of 1998 was 4.34% compared to
4.51% in the third quarter of 1997.
Net interest income during the nine months ended September 30, 1998
increased $544,000 to $12.0 million, up 4.8% from the $11.4 million for the nine
months ended September 30, 1997. Interest and fee income on loans increased 5.4%
in the first nine months of 1998 to $18.3 million, $937,000 more than the $17.4
million earned in the same period of 1997. During the first nine months of 1998,
income on investment securities decreased $541,000, or 12.5%, to $3.8 million,
compared to the first nine months of 1997. Interest expense on deposits
increased 3.5% in the first nine months from $10.6 million in 1997 to $10.9
million for the same period in 1998. The net interest margin in the first nine
months of 1998 was 4.42% compared to 4.44% in the first nine months of 1997.
<PAGE>
Provision for Loan Losses
The provision for loan losses during the quarter ended September 30, 1998
was $140,000, up $21,000, or 17.7%, from the respective period in 1997.
The provision for loan losses during the nine months ended September 30,
1998 was $367,000, up $32,000, or 10.0%, from the respective period in 1997.
This increase was due primarily to an increase in total loans of $10.6 million,
or 4.0%, to $277.0 million at September 30, 1998, compared to $266.4 million at
September 30, 1997.
Non-Interest Income
For the three months ending September 30, 1998, non-interest income was
$609,000, up $149,000, or 32.4%, compared to the respective period in 1997. The
increase was predominately attributable to service charges on deposit accounts.
For the nine months ending September 30, 1998, non-interest income was
$2.2 million, up $762,000, or 54.8%, compared to the respective period in 1997.
The increase was predominately attributable to gains recognized from the sale of
equity securities of $439,000 and income recorded from mortgage servicing rights
of $128,000 in the first quarter of 1998. In addition, in the second quarter of
1998 income recorded from gains on the sale of real estate contributed $84,000
to the increase in non-interest income.
Non-Interest Expense
Non-interest expense during the third quarter of 1998 increased $154,000,
or 5.3%, to $3.0 million compared with the 1997 quarter. The increase was
primarily attributable to a 5.8% increase in personnel expenses due in part to
staffing branch offices scheduled to open in the fourth quarter of 1998, and a
9.1% increase in other expenses. The increase in non-interest expense is
partially attributable to costs associated with the opening of James River's
administrative office building and the scheduled openings of four branch banking
offices during the fourth quarter of 1998. It is expected that non-interest
expense will continue to increase at above normal levels as a result of these
factors, as well as start-up costs associated with the formation of a new
mortgage subsidiary.
Non-interest expense during the first nine months of 1998 increased
$364,000, or 4.2%, to $9.0 million compared with the first nine months of 1997.
The increase was primarily attributable to a 3.9% increase in personnel
expenses, and a 7.2% increase in other expenses, due in part to higher
professional fees.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Interest Sensitivity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
<PAGE>
investments, and loans maturing within one year. As a result of James River's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that James River maintains overall
liquidity sufficient to satisfy its depositors' requirements and meet its
customers' credit needs.
At September 30, 1998, James River had $57.7 million in undisbursed loan
commitments and expects to have sufficient funds available to meet current loan
origination commitments. Funding is expected to be in the normal course of
business primarily through loan repayments, prepayments, and deposit growth. As
additional funding, James River holds $88.3 million in investment securities. Of
this amount, only $9.7 million is classified as held-to-maturity and is not
readily available for sale. Of the $78.6 million classified as
available-for-sale, $8.3 million matures in less than one year, and an
additional $44.5 million matures between 1 and 5 years.
James River has no long-term debt. Almost the entire deposit base is made
up of core deposits, with only 9.0% of total deposits composed of certificates
of deposit of $100,000 and over.
Capital Resources
Total shareholders' equity amounted to $43.5 million at September 30, 1998
compared to $40.4 million at December 31, 1997. James River's leverage ratio was
9.92%, with a tier 1 risk-based capital ratio of 15.84% and a total risk-based
capital ratio of 17.10%.
RECENT ACCOUNTING CHANGES
Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued in June 1998.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative information embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters or fiscal
years beginning after June 15, 1999. Although management is currently studying
this Statement, James River does not expect this Statement to materially affect
its financial condition or results of operations.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities", in April
1998. The SOP requires such costs to be expensed as incurred instead of being
capitalized and amortized. It applies to start-up activities and costs of
organization of both development stage and established operating entities, and
it changes existing practice for some industries. The SOP broadly defines
start-up activities as those one-time activities that relate to the opening of a
new facility, introduction of a new product or service, doing business in a new
territory, initiating a new process in an existing facility, doing business with
a new class of customer or beneficiary, or commencing some new operation. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. This SOP is not expected to materially affect James River's
financial condition or results of operations.
<PAGE>
YEAR 2000 PROJECT
State of Readiness
In its evaluation of Year 2000 readiness, James River and its subsidiaries
have examined their internal information technology systems, environmental
systems, and other non-information technology products and date sensitive
issues. In addition, James River has communicated with suppliers and significant
customers to determine their state of readiness.
James River's Year 2000 Plan, which was approved in the fall of 1997 by
the Board of Directors, detailed the phases involved in the management of the
Year 2000 project, and James River is on target with the original dates
projected for each phase of the project. The phases and timetable for completion
of each remaining phase is described below.
Awareness Phase - Completed third quarter 1997;
Assessment Phase - Completed first quarter 1998;
Renovation Phase - No significant renovation to existing systems (hardware
and software systems were Year 2000 compliant when purchased);
Validation Phase - Testing currently on-going, to be completed by year
end 1998; and
Implementation Phase - Completion no later than first quarter 1999.
In the third quarter of 1998, James River entered into an agreement with
SBS Data Services, Inc. under which SBS will perform the data processing
function for James River. The decision to outsource this function was a business
decision and was not driven by Year 2000 issues or concerns about the Company's
ability to process in the new century. SBS provides data processing services to
many other banking companies and is subject to examination by Federal banking
authorities. SBS utilizes the same computer hardware and software currently used
by James River and has provided Year 2000 compliance certifications.
In the validation phase currently in progress, testing has been performed
or is scheduled to be performed on the hardware and software for "mission
critical" systems and for all other software applications and hardware as well.
Also, testing is scheduled to be performed on all environmental systems
including security systems, heating and air conditioning units, and vault timers
among others, during the fourth quarter of this year.
Several significant outside systems that James River is dependent upon are
provided by the Federal Reserve Bank of Richmond. Testing of these systems will
occur in the fourth quarter of 1998 and, potentially, into early 1999. The
schedule for testing these systems was delayed as the result of an internal
reorganization of the accounting and operations functions within the company.
James River decided to delay the testing until the reorganization was completed
in order to provide adequate testing of the systems that will be in place at
Year 2000. In addition, James River relies upon outside sources for investment
securities accounting and custodial services and stock transfer services. In
each case, James River has been provided with information regarding Year 2000
readiness and plans testing of these services in the first quarter of 1999.
James River also relies upon SBS Corporation for disaster recovery services for
its data processing. Upon transfer of data processing to SBS, disaster recovery
will continue to be provided by SBS at a back-up facility. SBS is subject to
examination by the Federal Financial Institutions Examination Council (FFIEC)
Task Force on Year 2000. James River plans to conduct its own testing of the
disaster recovery capabilities in the fourth quarter of 1998 or the first
quarter of 1999.
<PAGE>
In the quarter just ended, James River's subsidiary banks completed an
assessment of large commercial loan customers for compliance with Year 2000
issues, and are preparing a second written communication to all customers
regarding the status of the Company's Year 2000 efforts. James River is
committed to customer awareness and internal employee awareness for Year 2000.
The company newsletter, as well as training sessions, are utilized to keep
employees informed.
James River's efforts to address Year 2000 issues are subject to
guidelines established by the FFIEC. Consequently, the Company's plan, and its
progress in implementing that plan, are subject to periodic examination by the
Federal Reserve Bank of Richmond.
The Costs to Address the Company's Year 2000 Issues
At this stage, James River has incurred no material incremental costs
related to Year 2000. Research still supports the belief that any costs for
meeting the Year 2000 requirements will be insignificant. The Company's
projections for this project stand at $50,000, which is unchanged from the
Company's initial estimates. In addition, a non-cash charge of approximately
$61,000 may be incurred in 1999 to maintain back-up computer capabilities.
The Risks of the Company's Year 2000 Issues
James River is subject to a variety of Year 2000 risks for which there are
no means to measure, test, or control. One such risk is that suppliers or
vendors upon whom James River depends will not be Year 2000 ready. James River
also is subject to difficulties experienced by local governments and businesses
and those on a state or national level that could have ramifications upon this
business and/or that of significant customers.
Another significant risk to the Company for Year 2000 is the failure of
one or more business entities that have considerable loan volume with one or
more of the subsidiary banks. To assess that risk, James River recently
completed a survey of large commercial loan customers in an effort to assess the
ability of such customers to continue successfully past the century date change.
Preliminary results of this process showed no significant risks. James River
will continue to analyze those customers and their efforts to comply with the
requirements of Year 2000 for their business systems. Loan agreements allow the
Company to monitor these businesses and their financial performance to ensure
their on-going preparedness for Year 2000.
The Company's Contingency Plans
James River continues to evaluate contingency plans with respect to the
Year 2000 issue. The manual processing of teller work as well as other
transactions such as loan payments, general ledger entries, etc. will be the
focus of the Company's contingency plan. Also, in conjunction with its decision
to enter into the data processing agreement with SBS, James River decided to
retain and maintain its current mainframe computer as part of the contingency
back-up plan.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
James River's primary market risk is exposure to interest rate risk.
Fluctuations in interest rates will impact both the level of interest income and
interest expense and the market value of James River's interest-earning assets
and interest-bearing liabilities. There were no material changes in James
River's market risk management strategy, as stated in James River's 1997 annual
report, during the first three quarters of 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None of James River or its subsidiaries is involved in any pending legal
proceedings other than nonmaterial legal proceedings occurring in the
ordinary course of business.
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other Information
The Securities and Exchange Commission ("SEC") recently amended its proxy
rules to provide that a registrant, such as James River, may specify, in
its proxy statement or form of proxy for its annual meeting of
shareholders, that proxies solicited by the registrant will confer
discretionary authority to vote with regard to matters that may be raised
at the meeting, including matters to be raised by shareholders that were
not properly submitted to the registrant as shareholder proposals in
accordance with SEC Rule 14a-8, if the registrant did not have notice of
such matters at least 45 days before the date on which the registrant
first mailed its proxy materials for the prior year's annual meeting of
shareholders. James River first mailed its proxy materials for its 1998
Annual Meeting of Shareholders on March 30, 1998. Under the SEC's amended
proxy rules, the 45-day deadline for notice to James River of non-rule
14a-8 matters to be raised at James River's 1999 Annual Meeting of
Shareholders is February 14, 1999.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - Financial Data Schedule, Exhibit 27
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JAMES RIVER BANKSHARES, INC.
Date: November 10, 1998 /s/ Donald W. Fulton, Jr.
- ----------------------------- -----------------------------------------
Donald W. Fulton, Jr., Sr. Vice President
and Chief Financial Officer
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