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 JUNE 30, 1999
[ ] 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 offices)(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 June 30, 1999,
the issuer had 3,742,435 outstanding shares of its $5.00 par value common stock.
<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 six month period ended June 30,
1999 and 1998 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, 1998 Annual Report to Shareholders
on Form 10-K, including the 1998 consolidated financial statements of James
River Bankshares, Inc. ("James River" or the "Company").
NOTE 2. DIVIDENDS PER SHARE
Cash dividends paid in the second quarter of 1999 amounted to $.12
per share compared to $.10 per share in the second quarter of 1998.
NOTE 3. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and displaying
comprehensive income and its components. All of James River's other
comprehensive income relates to net unrealized gains (losses) on
available-for-sale securities.
Comprehensive income consists of the following for the six months ended
June 30.
1999 1998
-------------- -----------
Net income $ 1,456,000 $2,421,000
Other comprehensive income (1,574,000) (329,000)
-------------- -----------
Total comprehensive income (loss) $ (118,000) $2,092,000
============== ===========
<PAGE>
The components of other comprehensive income and related tax effects
for the six months ended June 30 are shown in the following table.
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C>
Unrealized loss on available-for-sale securities $ (2,381,000) $ (65,000)
Reclassification adjustment for gains realized in income 6,000 438,000
-------------- ----------------
Net unrealized loss $ (2,387,000) $ (503,000)
Tax effect (813,000) (174,000)
--------------- -----------
Net of tax amount $ (1,574,000) $ (329,000)
============= ===========
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JAMES RIVER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
------------------------------------- ------------
1999 1998 1998
---- ---- ----
<S> <C>
ASSETS
Cash and due from banks $ 11,244 $ 14,724 $ 14,268
Interest bearing deposits with banks 2,465 7,720 12,031
Federal funds sold 2,976 7,805 10,809
Securities available-for-sale, at fair value (amortized cost of $95,821 on
June 30, 1999, $75,869 on June 30, 1998,
and $78,937 on December 31, 1998) 94,653 76,554 80,155
Securities held-to-maturity, at amortized cost (fair value
of $7,544 on June 30, 1999, $10,402 on June 30, 1998,
and $9,090 on December 31, 1998) 7,485 10,182 8,862
Loans, net of allowance for loan losses 285,416 268,780 271,892
Loans held for sale, net 694 2,930 3,599
Premises and equipment, net 10,062 8,435 10,137
Accrued interest receivable 3,067 3,066 2,970
Intangible assets, net 2,216 2,478 2,342
Other assets 3,570 2,501 2,755
---------- ---------- ----------
Total Assets $ 423,848 $ 405,175 $ 419,820
========== ========== ==========
LIABILITIES
Non-interest bearing deposits 47,738 43,172 46,805
Interest bearing deposits 323,292 316,687 325,967
-------- ---------- ---------
Total deposits 371,030 359,859 372,772
Accrued interest payable 802 789 810
Federal funds purchased and other short-term borrowings 2,645 700 719
Accounts payable and other liabilities 6,617 1,596 1,816
---------- --------- ---------
Total Liabilities 381,094 362,944 376,117
---------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $5 par, 2,000,000 shares authorized,
none issued - - -
Common stock, $5 par, 10,000,000 shares authorized,
3,742,435 issued and outstanding at June 30, 1999, 3,715,747 at June 30,
1998, and 3,721,348 at
December 31, 1998 18,712 18,579 18,607
Additional paid-in capital 3,840 3,850 3,878
Retained earnings 20,972 19,345 20,414
Accumulated other comprehensive income (770) 457 804
---------- --------- ----------
Total Shareholders' Equity 42,754 42,231 43,703
---------- --------- ----------
Total Liabilities and Shareholders' Equity $ 423,848 $ 405,175 $ 419,820
========== ========== ==========
</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 SIX MONTHS ENDED
----------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C>
INTEREST INCOME
Loans $ 6,156 $ 6,143 $ 12,218 $ 12,129
Investment securities:
Taxable 1,117 967 2,123 1,888
Exempt from federal income taxes 299 290 602 584
Federal funds sold and other 188 323 404 593
--------- ------- ---------- --------
Total Interest Income 7,760 7,723 15,347 15,194
--------- ------- ---------- --------
INTEREST EXPENSE
Deposits 3,401 3,660 6,901 7,238
Federal funds purchased and other borrowings 65 13 77 15
--------- ------- ---------- --------
Total Interest Expense 3,466 3,673 6,978 7,253
--------- ------- ---------- --------
Net Interest Income 4,294 4,050 8,369 7,941
Provision for Loan Losses 164 84 311 227
--------- ------- ---------- --------
Net Interest Income after Provision for Loan Losses 4,130 3,966 8,058 7,714
--------- ------- ---------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 444 335 839 630
Other fees and commissions 105 119 227 240
Net realized gains (losses) on disposition of securities - (1) 6 438
Other income 165 130 203 301
--------- ------- ---------- --------
Total Non-Interest Income 714 583 1,275 1,609
--------- ------- ---------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,119 1,631 4,235 3,265
Occupancy 276 189 582 393
Equipment 256 218 514 447
Directors' fees 73 89 152 176
Deposit insurance premiums 30 26 57 56
Other 978 831 1,889 1,628
--------- ------- ---------- ---------
Total Non-Interest Expense 3,732 2,984 7,429 5,965
--------- ------- ---------- ---------
Income Before Income Taxes 1,112 1,565 1,904 3,358
Provision for Income Taxes 293 474 448 937
--------- ------- ---------- ---------
Net Income $ 819 $ 1,091 $ 1,456 $ 2,421
========= ======= ========== =========
Net Income per Common Share
Basic $ 0.22 $ 0.30 $ 0.39 $ 0.66
========== ======= ========== =========
Diluted $ 0.22 $ 0.29 $ 0.39 $ 0.64
========== ======= ========== =========
Cash Dividends Paid per Common Share $ 0.12 $ 0.10 $ 0.24 $ 0.20
========== ======= ========== =========
Weighted Average Number of Shares Outstanding
Basic 3,741,920 $3,699,464 3,733,443 3,687,591
========== ========== ========== =========
Diluted 3,770,513 $3,800,085 3,762,036 3,788,211
========== ========== ========== =========
</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 SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF ADDITIONAL OTHER
COMMON COMMON PAID-IN RETAINED COMPREHEN-
STOCK STOCK CAPITAL EARNINGS SIVE INCOME TOTAL
--------- ------ ---------- -------- ----------- -----
<S> <C>
Balance - December 31, 1998 3,721,348 $ 18,607 $ 3,878 $ 20,414 $ 804 $ 43,703
Comprehensive income:
Net income - - - 1,456 - 1,456
Other comprehensive income (loss) - - - - (1,574) (1,574)
Common stock issued 1,161 6 14 - - 20
Stock options exercised 19,926 99 (52) - - 47
Cash dividends declared
($0.24 per share) - - - (898) - (898)
-------- -------- ------- -------- ------ --------
Balance - June 30, 1999 3,742,435 $ 18,712 $ 3,840 $ 20,972 $ (770) $ 42,754
========= ======== ======= ======== ======= ========
</TABLE>
<PAGE>
JAMES RIVER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF ADDITIONAL OTHER
COMMON COMMON PAID-IN RETAINED COMPREHEN-
STOCK STOCK CAPITAL EARNINGS SIVE INCOME TOTAL
--------- ------ ---------- -------- ----------- -----
<S> <C>
Balance - December 31, 1997 3,672,557 $ 18,363 $ 3,572 $ 17,663 $ 786 $ 40,384
Comprehensive income:
Net income - - - 2,421 - 2,421
Other comprehensive income (loss) - - - - (329) (329)
Common stock issued 694 4 12 - - 16
Stock options exercised 42,496 212 266 - - 478
Cash dividends declared
($0.20 per share) - - - (739) - (739)
---------- --------- -------- --------- ------ --------
Balance - June 30, 1998 3,715,747 $ 18,579 $ 3,850 $ 19,345 $ 457 $ 42,231
========== ========= ======== ========= ====== ========
</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>
SIX MONTHS ENDED
--------------------------------------
JUNE 30, JUNE 30,
1999 1998
--------------- ----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,456 $ 2,421
Adjustments to reconcile to net cash provided
by operating activities:
Provision for loan and other real estate losses 311 227
Depreciation and amortization 639 586
Amortization of bond (discounts) and premiums 16 9
Gain on disposition of securities (6) (438)
Gain on sale of loans (146) (18)
(Gain) loss on sale of fixed assets (7) (84)
Changes in:
Loans held for sale 3,051 (2,123)
Interest receivable (97) (127)
Other assets 17 (50)
Interest payable (8) 37
Other liabilities (199) 229
--------- -------
Net cash provided by operating activities 5,027 669
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of securities -
available-for-sale 12,162 15,773
Proceeds from maturities of securities - held-to-maturity 1,370 887
Purchase of securities - available-for-sale (29,049) (20,445)
Purchases of premises and equipment (436) (1,412)
Proceeds from sale of premises and equipment 29 138
Net increase in loans (13,879) (9,290)
--------- --------
Net cash used in investing activities (29,803) (14,349)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits 933 (3,318)
Net increase (decrease) in interest bearing deposits (2,675) 15,604
Issuance of stock 67 494
Cash dividends paid (898) (739)
Proceeds from short-term borrowings 1,926 700
Proceeds from long-term borrowings 5,000 -
-------- -------
Net cash provided by financing activities 4,353 12,741
-------- -------
Net decrease in cash and cash equivalents $(20,423) $ (939)
CASH AND CASH EQUIVALENTS
Beginning 37,108 31,188
-------- --------
Ending $ 16,685 $ 30,249
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid $ 6,986 $ 7,216
======== ========
Income taxes $ 336 $ 934
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Real estate acquired in settlement of loans $ 44 $ 128
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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,
changes in laws and regulations applicable to James River and its subsidiaries,
and risk related to Year 2000 issues, including the risks associated with
vendors and their suppliers and risks from customers. 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 June 30, 1999 were $423.8 million
compared to $419.8 million at December 31, 1998, an increase of $4.0 million or
0.95%. Net loans increased $10.6 million during the first six months of 1999.
Real estate loans increased $2.5 million to $160.0 million at June 30, 1999, and
business loans increased $9.6 million while loans held for sale decreased $2.9
million for the same period. Investment securities increased $13.1 million, from
$89.0 million at December 31, 1998 to $102.1 million at June 30, 1999. Federal
funds sold decreased $7.8 million to $3.0 million at June 30, 1999, while
interest bearing deposits decreased $9.6 million during the first six months of
1999. Short-term investments, including Federal Funds sold and interest bearing
deposits were reduced and invested in higher yielding investment securities and
loans during the period. Total earning assets increased $6.3 million, or 1.64%,
during the same period.
At June 30, 1999, James River's total assets were $423.8 million,
4.61%, or $18.7 million, more than the comparable 1998 period. Net loans were
$286.1 million at June 30, 1999, an increase of $14.4 million over June 30,
1998. Real estate loans increased 0.14% or $223 thousand and business loans
increased 17.0% or $12.0 million while loans held for sale decreased 76.30% to
$694 thousand for the same period. Investment securities were $102.1 million at
June 30, 1999, up $15.4 million from June 30, 1998. Interest bearing deposits
and federal funds sold decreased $5.3 million and $4.8 million at June 30,1999
over June 30, 1998, respectively.
<PAGE>
Average total assets for the six months ended June 30, 1999 increased
$21.0 million to $419.3 million from $398.3 million for the six months ended
June 30, 1998. Average investment securities increased 12.1% from $82.8 million
for the six months ended June 30, 1998 to $92.8 million for the same period in
1999. Average total loans increased $14.1 million to $283.4 million during the
same period. Average interest bearing deposits increased 4.9% to $9.2 million
while Federal funds sold decreased 39.2% to $7.4 million in the first half of
1999 over the same period of 1998.
Average total assets increased 4.3% to $421 million for the quarter
ended June 30, 1999 from $403.6 million for the same period in 1998. Average
investment securities increased from $83.5 million for the quarter ended June
30, 1998 to $95.7 million for the quarter ended June 30, 1999. Average total
loans increased 5.0% to $285.8 million during the same period. Average interest
bearing deposits decreased $1.5 million and Federal funds sold decreased $5.5
million in the second quarter of 1999 over the same period of 1998,
respectively.
LIABILITIES
- -----------
Total liabilities at June 30, 1999 were $381.1 million compared to
$376.1 million at December 31, 1998, a 1.3%, or $5.0 million, increase. Deposits
of James River at June 30, 1999 were $371.0 million compared to $372.8 million
at December 31, 1998, a decrease of 0.5% or $1.8 million. During the first six
months of 1999, non-interest bearing deposits increased $933 thousand to $47.7
million, while interest bearing checking decreased $2.7 million to $323.3
million.
At June 30, 1999, total liabilities were $18.2 million more than total
liabilities at June 30, 1998. Deposits at June 30, 1999 were $11.2 million more
than the $359.9 million at June 30, 1998. Non-interest bearing deposits and
interest bearing deposits increased $4.6 million and $6.6 million for the same
period, respectively. Long term borrowings increased $5.0 million over the
comparable period in 1998.
Average total liabilities for the six months ended June 30, 1999
increased 5.2% to $375.5 million compared to $356.9 million for the same period
in 1998. Average interest bearing deposits increased 3.8% to $323 million for
the same period, while average non-interest bearing deposits increased 10.6% to
$45.6 million. Average Federal funds purchased increased $44 thousand for the
same period.
Average total liabilities for the quarter ended June 30, 1999 were
$377.3 million compared to $361.8 million for the quarter ended June 30, 1998,
an increase of $15.5 million. Average interest bearing deposits increased $8.9
million for the same period, while average non-interest bearing deposits
increased $583 thousand. Average Federal funds purchased decreased $1 thousand
for 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 $949 thousand on June 30, 1999, compared to $654 thousand on December
31, 1998. On June 30, 1999, non-accrual loans totaled $655 thousand, of which
$559 thousand was secured by real estate. Non-accrual loans totaled $390
<PAGE>
thousand on December 31, 1998, of which $278 thousand was secured by real
estate. Foreclosed real estate accounted for $294 thousand of non-performing
assets at June 30, 1999 compared to $264 thousand at December 31, 1998.
Loans past due 90 days or more and still accruing were $387 thousand
and $427 thousand on June 30, 1999 and December 31, 1998, respectively. Of these
loans, loans secured by real estate totaled $303 thousand on June 30, 1999 and
$307 thousand on December 31, 1998.
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 $1.6 million and $1.4 million at
June 30, 1999, and December 31, 1998, respectively. The portion of the allowance
for loan losses allocated to the impaired loan balance was $172 thousand and
$162 thousand at June 30, 1999, and December 31, 1998, 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.
James River's allowance for loan losses of $4.1 million was 1.4% of
total loans on June 30, 1999 compared with $3.6 million or 1.3% of total loans
on June 30, 1998. On December 31, 1998, the allowance for loan losses of $3.8
million was 1.4% of total loans.
RESULTS OF OPERATIONS
- ---------------------
NET OPERATING RESULTS
- ---------------------
For the quarter ended June 30, 1999, James River's net income was $819
thousand compared to $1.1 million for the same period of 1998, a 24.9% decrease.
Diluted earnings per share in the second quarter decreased 24.1% to $.22 in 1999
from $.29 in 1998. Return on average assets and return on average equity were
0.78% and 7.49%, respectively, in the second quarter of 1999 compared to 1.08%
and 10.45% in the comparable period in 1998. The decrease in net income is
primarily attributable to increased personnel expenses related to the staffing
of several new branch offices and the opening of a mortgage subsidiary in the
third quarter of 1998. This increase in non-interest expense is likely to have a
continuing effect on comparisons with prior year periods throughout the
remainder of 1999.
For the six months ended June 30, 1999, net income was $1.5 million
compared to $2.4 million for the same period in 1998, a 39.9% decrease. Diluted
earnings per share in the first half of 1999 decreased 39.1% to $0.39 from $0.64
in the comparable 1998 period. In the first half of 1998, the Company had
non-recurring income resulting from gains on the sale of securities and from
mortgage servicing rights totaling $567 thousand before taxes. After tax, these
non-recurring items added approximately $352 thousand, or $.09 per fully diluted
share, to net income in the first half of 1998. Return on average assets and
return on average equity for the first half of 1999 were 0.69% and 6.65%
respectively, compared to 1.22% and 11.70% in the comparable period of 1998.
<PAGE>
NET INTEREST INCOME
- -------------------
Net interest income during the quarter ended June 30, 1999 increased
$244 thousand to $4.3 million, up 6.0% from the $4.1 million for the quarter
ended June 30, 1998. During the second quarter of 1999, income on investment
securities increased $159 thousand, or 12.65%, to $1.4 million, compared to the
second quarter of 1998. Interest expense on deposits decreased 7.1% in the
second quarter from $3.7 million in 1998 to $3.4 million for the same period in
1999. The net interest margin in the second quarter of 1999 and 1998 was 4.48%.
At the end of the second quarter of 1999, the Federal Reserve raised
its benchmark for short-term interest rates 25 basis points. That change was
reflected in the market with a comparable change in the prime lending rate. In
the short-run higher short-term rates are expected to have a beneficial effect
on interest income and a lesser, or delayed, effect on interest expense,
depending upon competitive factors. Long-term interest rates, particularly
mortgage loan rates, have been trending upward throughout 1999. This trend has
reduced the volume of mortgage loan originations and refinances.
Net interest income during the six months ended June 30, 1999 increased
$428 thousand to $8.4 million, up 5.39% from $7.9 million in the same period of
1998. Interest and fee income on loans increased less than one percent to $12.2
million in the first half of 1999, an increase of $89 thousand over the
comparable period in 1998. During the first half of 1999, income on investment
securities decreased $253 thousand or 10.2% to $2.2 million compared to the
first half of 1998. Interest expense on deposits decreased 4.7% from $7.2
million in the first six months of 1998 to $6.9 million in 1999. The net
interest margin was 4.41% in the first half of 1999 compared to 4.46% in the
first half of 1998.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses during the quarter ended June 30, 1999
was $164 thousand, up $80 thousand, or 95.2%, from the respective period in
1998.
The provision for loan losses during the first six months of 1999 was
$311 thousand, up $84 thousand or 37.0% from the respective period in 1998. This
increase was due primarily to an increase in total loans for the first half of
1999 of $14.9 million, or 5.4%, to $290.2 million compared to $275.3 million
during the first half of 1998. The increase also reflected an increase in
non-performing assets and the deterioration of certain impaired loans.
NON-INTEREST INCOME
- -------------------
For the three months ending June 30, 1999, non-interest income was $714
thousand, up $131 thousand, or 22.5%, compared to the respective period in 1998.
This increase was primarily attributable to $124 thousand from gain on sale of
loans originated in the new mortgage subsidiary. This increase also reflects a
32.5% increase in service charges on deposit accounts.
For the six months ending June 30, 1999, non-interest income was $1.3
million, down 20.8% compared the same period of 1998. The decrease was
predominately attributable to non-recurring income in the first half of 1998
<PAGE>
from gains on the sale of securities and mortgage servicing rights totaling $567
thousand. Excluding the non-recurring items in 1998, non-interest income
increased 22.4% in the first half of 1999.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense during the second quarter of 1999 increased $748
thousand, or 25.1%, to $3.7 million compared with the 1998 quarter. This
increase reflects a 29.9% increase in personnel expenses attributable to the
staffing of new branch offices and a mortgage subsidiary that opened in the
fourth quarter of 1998, and a 46.0% increase in occupancy expense attributable
to a new administrative building opened in the third quarter of 1998. Management
has instituted expense control initiatives that are intended to reduce expense
increases in future quarters. However, expenses associated with the merger of
State Bank of Remington will increase third quarter non-interest expense.
Non-interest expense during the first six months of 1999 increased $1.5
million, or 24.5%, to $7.4 million compared with the same period of 1998. The
increase was primarily attributable to the factors that affected second quarter
non-interest expense discussed above.
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, 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 June 30, 1999, James River had $54.2 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 $102.1 million in investment securities.
Of this amount, only $7.5 million is classified as held-to-maturity and is not
readily available for sale. Of the $94.6 million classified as
available-for-sale, $5.4 million matures in less than one year, and an
additional $41.8 million matures between 1 and 5 years.
James River has $5.0 million in long-term debt. Almost the entire
deposit base is made up of core deposits, with only 9.3% of total deposits
composed of certificates of deposit of $100,000 and over.
<PAGE>
CAPITAL RESOURCES
- -----------------
Total shareholders' equity amounted to $42.8 million at June 30, 1999
compared to $43.7 million at December 31, 1998. Reference is made to the
Consolidated Statements of Changes in Shareholders' Equity, included elsewhere
in this 10-Q. The decrease in shareholders' equity is attributable primarily to
a decrease in the valuation of securities held for sale and secondarily to
normal cash dividends paid to shareholders. James River's leverage ratio was
9.88%, with a tier 1 risk-based capital ratio of 15.24% and a total risk-based
capital ratio of 16.49%. Each of these ratios is above the level required to be
classified for regulatory purposes as "well capitalized".
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.
YEAR 2000 PROJECT
- -----------------
State of Readiness
In 1997 James River's board of directors established a Year 2000 Plan
to assess internal and external risks posed by the date change issue and to
develop corrective actions and contingency plans as may be determined prudent
by the assessment. The plan covers 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. The Company's
management, its board of directors, and the management and boards of the
Company's subsidiary banks receive updates at least quarterly, and more
frequently as needed, regarding progress and activities related to the Year 2000
Plan. The five phases of the plan and the progress towards completion of each
phase are described below.
Awareness Phase - Completed third quarter 1997;
Assessment Phase - Completed first quarter 1998;
Renovation Phase - No significant renovation to existing systems (principal
hardware and software systems were compliant when purchased);
Validation Phase - Completed first quarter 1999; and
Implementation Phase - Completed second quarter 1999 for mission critical
systems.
Testing has been completed on the hardware and software for "mission
critical" systems and for all other software applications and hardware as well.
<PAGE>
In addition, testing has been performed on all environmental systems, including
security systems, heating and air conditioning units, and vault timers, among
others. Testing has been completed on all personal computers and software
applications that are not deemed critical. Such software testing included
software for processing new deposit accounts and loans, as well as merchant
credit card terminals. The testing did not result in any determinable Year 2000
difficulties. A review of vault mechanisms has been completed. The review
determined that vault timers do not have embedded chips and are not dependent on
electrical or other sources of power. Consequently, the Company's management
does not expect to experience difficulty with the vaults. Reviews of security
systems reveal that such systems have battery back-up capabilities in the event
of power failure. Battery testing will be undertaken near year-end. In addition,
ATM hardware has been evaluated for Year 2000 readiness. Because of the age of
some of the equipment, vendors have been contacted to determine readiness.
The Federal Reserve Bank of Richmond provides several significant
outside systems that James River is dependent upon. Testing of these systems,
which was completed in the first quarter of 1999, revealed no difficulties with
processing in Year 2000.
In addition, James River relies upon outside sources for investment
securities accounting and custodial services, stock transfer services, and
disaster recovery services. In each case, James River has been provided with
information indicating that all vendors have completed Year 2000 testing and
upgraded all non-compliant equipment.
In 1998, James River's subsidiary banks completed an assessment of
large commercial loan customers for compliance with Year 2000 issues and are
preparing another written communication to all customers regarding the status of
the Company's Year 2000 efforts. In addition, the Company initiated a
communications program directed at employees and customers that will provide
written information regarding Year 2000 issues and Company contact information
at each of the Company's locations.
James River's efforts to address Year 2000 issues are subject to
guidelines established by the Federal Financial Institutions Examination Council
("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 costs of approximately $21,000
related to year 2000. This figure represents the software upgrade to two (2)
Proof Department Reader/Sorter machines, statement stuffers on Year 2000 scams
for all accounts, and the re-ordering of ATM cards due to expiration dates of
December 31, 1999. The Company is currently investigating the advisability of
hiring security guards for its branch banking offices during a period of time
around the millennium date change. A final decision regarding this possible
expenditure has not been made. The projections for expenses related to Year 2000
range from $50,000 to $100,000, which is an increase from Company's previous
estimate due primarily to the possibility of hiring security guards. In
addition, a non-cash charge of approximately $61,000 will 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
<PAGE>
also is subject to difficulties experienced by local governments and businesses
and those on a state or national level that could have ramifications upon the
Company and/or that of significant customers or suppliers.
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 Company's subsidiary banks. To assess that risk, James River
recently completed a survey of large commercial loan customers to determine
their ability to operate 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.
In addition, the Company has risk that its internal assessment of Year
2000 issues did not identify or adequately prepare the Company for all Year 2000
issues.
The Company's Contingency Plans
James River continues to evaluate contingency plans with respect to the
Year 2000. The Company has outlined its needs for a short-term emergency and are
working on a more detailed plan for a longer-term business disruption, should
that be necessary. The manual processing of teller work as well as other
transactions such as loan payments, general ledger entries, etc. is the focus of
the Company's contingency plan. The utilization of back-office personnel to meet
customer requests for year-end statements is also a vital part of that plan.
During the third quarter of 1999, the Company will evaluate the need for
training to implement these aspects of the contingency plan. In addition, the
disaster recovery plans of each subsidiary have been reviewed during the second
quarter of 1999 with respect to Year 2000 issues. Also, in conjunction with its
decision to enter into a data processing agreement with SBS Data Services, Inc.,
James River decided to retain its mainframe computer as part of its contingency
back-up plan. Upgrades to the operating system, Unix, and any other ancillary
equipment pertaining to the mainframe could be implemented within 48 hours
during an emergency situation. The mainframe would be activated only if SBS Data
Services, Inc.'s disaster recovery plan failed.
Another issue that the subsidiary banks have addressed is the adequacy
of liquidity and related security concerns. Through various media, the public
has been cautioned to maintain above normal levels of cash. To meet expected
cash requirements and other liquidity needs, the subsidiary banks and their
Boards of Directors have established borrowing privileges at the Federal
Reserve. Analysis of cash flow over the past year for each bank and branch has
been performed in an effort to establish cash needs during the last quarter of
1999.
In conjunction with the above normal cash needs, the Company and its
subsidiaries have reviewed insurance coverage and needs and security measures
that may be necessary. An analysis of the use of security guards has been
performed as well as an inventory taken of dual-control facilities for cash
storage.
The Company expects on-going reviews of all contingency plans and is
committed to updating the overall plan as necessary to ensure continued
operation in the new century.
<PAGE>
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 during the second quarter of 1999. James
River is monitoring its interest rate risk in view of increases in both short
and long-term interest rates. Based on current assessments and the level of
changes in interest rates, the effects are not expected to be material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings to which James River or its
subsidiaries are involved in 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
On February 17, 1999, James River entered into an Agreement and Plan of
Merger ("Merger Agreement") with the State Bank of Remington, Inc. ("State
Bank"). Under the terms of the Merger Agreement , State Bank will become a
wholly owned banking subsidiary of James River and will conduct operations
as a free standing banking subsidiary. The Merger Agreement provides that
shareholders of State Bank will receive 2.9 shares of James River common
stock for each outstanding share of State Bank common stock. State Bank has
approximately 291,000 shares of common stock outstanding. The proposed
merger has received requisite regulatory and shareholder approval. James
River expects the transaction to close August 16, 1999 and to be accounted
for as a pooling of interests.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - Agreement and Plan of Merger dated February 17, 1999,
between James River Bankshares, Inc. and State Bank of
Remington, Inc. (incorporated by reference from the
Company's Registration Statement on Form S-4, Commission
File No. 333-78331, as filed May 12, 1999),
Exhibit 2.4. 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: August 13, 1999 /s/ Donald W. Fulton, Jr.
---------------- ------------------------------------
Donald W. Fulton, Jr., Sr. Vice President
and Chief Financial Officer
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